IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT D ECEllVK INTERCOLLEGIATE BROADCAST SYSTEM, et al.,

Petitioners OFFICE OF THE GENERAL COUNSEL No. 02-1220

JAMES H. BILLINGTON, Librarian RIh@QLt'pp+D of Congress, NOltt

Respondent.

GEiitERAL C00838. QF COPVRl6%'OTION

OF THE RESPONDENT, THE LIBRARIAN OF CONGRESS, TO DISMISS THE PETITION FOR REVIEW FOR LACK OF STANDING

Pursuant to Rule 27 of the Federal Rules of Appellate Procedure and Local Rule 27(g), the respondent, James H. Billington, Librarian of Congress ("the Librarian"), hereby respectfully moves this Court to dismiss the petition for review jointly filed on July 8, 2002, by

Intercollegiate Broadcasting System, Inc. ("Intercollegiate") and by Harvard Radio Broadcasting

Co., Inc. ("Harvard"), on grounds that neither Intercollegiate nor Harvard has standing to seek judicial review of the decision of the Librarian challenged in their petition. That petition was filed under 17 U.S.C. 802(g), which provides this Court with jurisdiction only over petitions filed by an "aggrieved party" to those proceedings. Here, neither Intercollegiate nor Harvard was a party in the administrative proceedings. Thus, neither has standing under Section 802(g) to seek judicial review. Apart from Section 802(g), there is no other jurisdictional basis to entertain the

petition filed by Intercollegiate and Harvard. Dismissal is thus required. STATEMENT

l. Intercollegiate and Harvard seek judicial review ofthe Librarian's order of June 20,

2002, as published in July 8, 2002 Federal Register, 67 FED. REG. 45240 (July 8, 2002). In that order, the Librarian announced his determination of the reasonable rates and terms for compulsory licenses for certain digital performances of sound recordings and the making of ephemeral recordings. These rates are for the compulsory licences granted by 17 U.S.C. 112(e) and 17 U.S.C. 114 ofthe Copyright Act, as amended by the Digital Millennium Copyright Act of

1998, P.L. 105-304. See generally, RIAL v. Librarian ofCongress, 176 F.3d 528, 530 (D.C. Cir.

1999).

Administrative proceedings for the establishment ofsuch rates are governed by the

Copyright Royalty Tribunal Reform Act of 1993, Pub. L. 103-198, 107 Stat. 2304 ("Reform Act" or "Act"). Under that Act, in cases where the parties are unable to agree on rates, the Librarian will appoint an ad hoc Copyright Arbitration Royalty Panel ("CARP" or "Panel"). See 17 U.S.C.

801-803. In a rate adjustment proceeding, the Panel is charged with the initial responsibility for formulating a rate schedule and establishing terms. 17 U.S.C. 801-802. Under Section 802(c),

17 U;S.C. 802(c), any person entitled to a compulsory license has the right to become a party to proceedings before the panel by submitting "relevant information and proposals" to the Panel; such parties to the panel proceedings "shall bear the entire cost thereof in such manner and proportion as the arbitration panels shall direct." The Panel has 180 days to hear evidence, develop a schedule of rates and terms and prepare a report to the Librarian of Congress. 17

U.S.C. 802(e). The Reform Act provides that the Panel act on the basis of a written record, prior decisions of the Tribunal, prior Panel decisions and prior rulings of the Librarian of Congress.

17 U.S.C. 801(c).

Section 802(f) of the Reform Act directs that the Librarian of Congress, within 60 days of receiving the Panel's report and upon the recommendation of the Register of Copyrights, "adopt

or reject the determination of the arbitration panel." 17 U.S.C. 802(f). The Librarian adopts "the determination of the arbitration panel unless the Librarian finds that the determination is arbitrary or contrary to the applicable provisions of this title." (Id.). If the Librarian rejects the Panel's report, the Librarian "shall, before the end of that 60-day period, and after full examination of the record created in the arbitration proceeding, issue an order setting the royalty fee or distribution of fees, as the case may be." (Id.). The Librarian then is required to publish in the Federal

Register both the Panel's determination and the decision of the Librarian. (Id.).

Judicial review of "[a]ny decision of the Librarian of Congress under subsection (f) with respect to a determination of an arbitration panel" is pursuant to section 802(g), 17 U.S.C.

802(g), which provides that such decision "may be appealed, by any aggrieved party who would be bound by the determination, to the United States Court of Appeals for the District of

Columbia Circuit." Section 802(g) further provides that "[t]he court shall have jurisdiction to modify or vacate a decision of the Librarian only if it finds, on the basis of the record before the

Librarian, that the Librarian acted in an arbitrary manner." This Court has held that this standard of review is "exceptionally deferential," requiring that the Librarian's determination be sustained

"if the Librarian has offered a facially plausible explanation for it in terms of the record evidence." National Association ofBroadcasters v. Librarian ofCongress, 146 F.3d 907, 918

(D.C. Cir. 1998). In this case, the administrative proceedings began when the Copyright Office publically announced a six-month voluntary negotiation period to set rates for the first licensing period.

See 63 FED. REG. 6555 (Nov. 27, 1998). No voluntary agreement was reached. The Recording

Industry Association of America thereafter petitioned the Copyright Office to convene a CARP, which was duly scheduled by Federal Register notice. See 64 FED. REG. 52107 (Sept. 27, 1999).

Pursuant to Copyright Office regulations, this Notice specifically established a "date certain by which parties wishing to participate in the proceeding must file with the Librarian a Notice of

Intention to Participate." 64 FED. REG. at 51108, citing 37 C.F.R. 251.45(a). The filing of such a

Notice of Intention to Participate is expressly required by the regulations as a necessary prerequisite to participation as a party in the formal proceedings set up by these regulations. See also 37 C.F.R. 251.41; 37 C.F.R. 251.43(a). Neither Intercollegiate nor Harvard filed a Notice of Intention To Participate and were never parties to the webcasting administrative proceeding under the regulations. See Declaration of Eugenia L. Giuffreda, $ 5, accompanying this Motion.

Specifically, according to official records maintained by the Copyright Office, 141 entities filed a notice of intention to participate in the administrative proceedings. See Giuffreda

Declaration, Attachment A.. Most ofthese 141 entities, however, either withdrew from the proceeding or failed to file a direct case and were therefore dismissed from the proceeding. The service list for the parties that did elect to participate in proceedings before the Panel likewise is devoid of any mention ofthese two entities. Giuffreda Declaration, Attachment B.

Intercollegiate and Harvard also do not appear as "parties" specifically identified in the

Librarian's July 8, 2002 decision, as published in the Federal Register. See 67 FED. REG. at

45241 (July 8, 2002). Finally, neither Intercollegiate nor Harvard is even listed as a party in the

-4- "Certificate As To Parties, Rulings, and Related Cases" filed by petitioners in this appeal. In short, the non-party status of Intercollegiate and Harvard is beyond dispute.

ARGUMENT

Section 802(g), 17 U.S.C. 802(g), expressly limits the right to seek judicial review ofthe

Librarian's decision to "any aggrieved party who would be bound by the determination" ofthe

Librarian. (Emphasis supplied).'hile this language of Section 802(g) has yet to be specifically construed by this Court, in other contexts, such a restriction ofjudicial review to "parties" has uniformly been construed by this Court and other courts of appeals to mean that the person seeking judicial review must have had a more than de minimis participation in the agency proceedings under review. This body ofprecedent is fully applicable to Section 802(g). Here, it is undisputed that neither Intercollegiate nor Harvard participated in the administrative proceedings before the Panel or the Librarian in any manner, much less in a more than de minimis manner. Accordingly, neither Intercollegiate nor Harvard has standing to seek judicial review ofthe Librarian's decision under Section 802(g). Dismissal oftheir appeal is thus required.

'ection 802(g) provides the exclusive means for seekingjudicial review ofthe Librarian's decisions under the Reform Act. See, e.g., Whitney National Bank v. Bank ofNew Orleans & Trust Co., 379 U.S. 411, 422 (1965) (noting that where Congress "has enacted a specific statutory scheme for obtaining review" then "the statutory mode ofreview [must] be adhered to notwithstanding the absence of an express statutory command of exclusiveness"); Greater Detroit Resource Recovery Authority v. E.P.A., 916 F.2d 317, 321 (6th Cir. 1990) ("It is a well settled principle that where Congress establishes a special statutory review procedure for administrative action, that procedure is generally the exclusive means of review for those actions"); Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 77 (D.C. Cir. 1984) ("a statute which vests jurisdiction in a particular court cuts off original jurisdiction in other courts in all cases covered by that statute"). -5- 1. The leading case on this question in this Circuit is Simmons v. ICC, 716 F.2d 40, 42

(D.C. Cir.1983). Simmons arose under the Hobbs Act, 28 U.S.C. 2344, which provides that a

"party aggrieved" by an agency order reviewable under that Act may file a petition for review in the court of appeals otherwise having venue. In Simmons, this Court noted that this "party aggrieved" language meant that the petitioners must "be parties to any proceedings before the agency preliminary to issuance of its order." (716 F.2d at 42). In so holding, the Court expressly rejected the argument that "party aggrieved" should be read "the same way" as the "person aggrieved" language of Section 702 ofthe APA, 5 U.S.C. 702. (716 F.2d at 43). The Court reasoned that Congress intentionally chose different language in enacting the Hobbs Act and that intention required reading "'party's referring to a party before the agency, not a party to the judicial proceeding." (Id.). As the Court explained, party status in structured proceedings before the agency is "the normal state of affairs" and that it was important that "the petitioner...

present its arguments first to the deciding agency." (Id.). The Court thus granted the agency's

motion to dismiss the appeal. This construction by Simmons of the "party aggrieved" language ofthe Hobbs Act has been universally followed both in this Circuit and by other circuits.'ee

Brotherhood ofLocomotive Engineers v. UnitedStates, 101 F.3d 718, 723 (D.C. Cir. (1996) ("The statute's use ofthe term 'party'ather than 'person,'owever, imposes one additional prudential requirement: that the petitioner demonstrate party status"); Southern Pacific Transp. Co. v. ICC, 69 F.3d 583, 587 (D.C. Cir. 1995) ("participation before the agency is a necessary condition to satisfying party aggrieved status") (emphasis the Court's).

'ee, e.g., Erie-Niagara Rail Steering Committee v. STB, 167 F.3d 111, 112-13 (2d Cir. 1999) (per curiam); Sierra Club v. UnitedStates Nuclear Regulatory Comm'n, 825 F.2d 1356, 1360 (9th Cir. 1987); Clark dc Reid Co. v. United States, 804 F.2d 3, 5 (1st Cir. 1986); In re Chicago, Milwaukee, St. Paul ck Pac. R.R. Co., 799 F.2d 317, 334 (7th Cir. 1986), cert. denied, 481 U.S.1068 (1987); Packard Elevator v. ICC, 808 F.2d 654, 655 (8th Cir.1986), cert. denied, 484 V.S. 828 (1987); American Trucking Ass'ns v. ICC, 673 F.2d 82, 85 (5th Cir. 1982), cert. denied, 460 U.S. 1022 (1983). This Court has also made clear that reasoning ofSimmons cannot be limited to the Hobbs

Act. Thus, in Jones v. Board ofGovernors, 79 F.3d 1168 (D.C. Cir. 1996), this Court found "no

reason to depart from that approach" applied in Simmons and held that the term "party aggrieved"

as used in the judicial review provisions of Bank Holding Company Act, 12 U.S.C. 1848, meant

that petitioner must have been a party to the administrative proceedings in order to seek judicial

review of orders ofthe Board of Governors ofthe Federal Reserve System. (79 F.3d at 1171).

The Court explained that when Section 1848 had been enacted, the APA had defined "persons"

broadly but had defined a "party" more narrowly as "including only persons or agencies 'named

or admitted as a party, or properly seeking and entitled to as of right to be admitted as a party, in

an agency proceeding.'" (73 F.3d at 1171). The Court thus reasoned that "[w]e may assume that

Congress intended 'party'n f 1848 to mean a party to the agency proceedings" and granted the

motion to dismiss. (Id.). This holding in Jones has been since followed this Court" and is in bywell.'.

accord with the uniform construction of Section 1848 by other circuits as

As in Jones, there is "no reason to depart from that approach" (73 F.3d at 1171)

applied in Simmons with respect to the substantively identical language of Section 802(g) at issue

" See Independent CommunityBankers ofAmerica v. BoardofGovernors ofFederalReserve System, 195 F.3d 28, 30 (D.C. Cir. 1999) (noting that the petitioner had "objected to the acquisition in the Board's proceedings, as required for standing to challenge the action in court").

'ee Lee v. Board ofGovernors ofthe Federal Reserve System, 118 F.3d 905, 911 (2nd Cir. 1997) ("we agree with the District of Columbia Circuit's view that such participation generally is a prerequisite to reviewunder the BHCA"); Gustafson v. BoardofGovernors ofthe Fed. Reserve Sys., 717 F.2d 242, 245-46 (5th Cir. 1983), cert. denied, 467 U.S. 1242 (1984); Blackstone Valley Nat'l Bank v. Board ofGovernors ofthe Fed. Reserve Sys., 537 F.2d 1146, 1147 (1st Cir. 1976); Bank of Commerce v. Board ofGovernors ofthe Fed. Reserve Sys., 513 F.2d 164, 166-67 (10th Cir. 1975); First Nat'l Bank v. Board ofGovernors ofthe Fed. Reserve Sys., 509 F.2d 1004, 1006-09 (8th Cir. 1975). -7- in this case. Like the Hobbs Act involved in Simmons and the Bank Holding Company Act at

issue in Jones, judicial review under Section 802(g) is expressly limited to a "party" aggrieved by the agency's action. Like the Bank Holding Company Act and the Hobbs Act, Section 802(g)

was passed in a context of the APA which, as Jones notes, strictly defines a "party" as persons

who were "named or admitted as a party" in the agency proceeding. (Id.). As in Jones, it is

therefore reasonable to "assume that Congress intended 'party'n [Section 802(g)] to mean a

party to the agency proceedings." (Id.). Certainly, there is nothing in the legislative history of

the Reform Act that suggests any contrary interpretation. See House Rept. No. 103286, 103d

Cong., 1st Sess. 12-14, 1993 USCCAN 2954 (1993). Thus, as Judge Easterbrook noted in the

context ofthe Hobbs Act, "[t]he statute limits review to petitions filed by parties, and that is

that." In re Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 799 F.2d 317, 335 (7th Cir. 1986),

cert. denied, 481 U.S.1068 (1987). See Simmons, 716 F.2d at 43 ("The merits ofthat policy are

for the Congress rather than us to determine").

A strict construction of Section 802(g) is also supported by the well-established principle

that "fj]urisdictional grants waiving sovereign immunity are strictly construed and may not be

expanded beyond the terms expressly set forth in the grant." Ramey v. Bowsher, 9 F.3d 133, 135

(D.C. Cir. 1993). See also Department ofArmy v. Blue Fox, Inc., 525 U.S. 255, 261 (1999);

United States v. Nordic Village, Inc., 503 U.S. 30, 33-34 (1992). As illustrated by the definition

provisions ofthe APA, discussed in Jones, Congress knows the difference between a "person"

and a "party" and elected to limit judicial review of Librarian's decisions to a "party." This

choice of terms is a condition to the waiver of sovereign immunity contained in Section 802(g).

As such, the term "aggrieved party" should be strictly construed and not "'enlarge[d]... beyond what the language requires.'" Ruckelshaus v. Sierra Club, 463 U.S. 680, 685 (1983). (Citation omitted). See also Library ofCongress v. Shaw, 478 U.S. 310, 318 (1986) (same).

3. There are especially good reasons to apply the rule ofSimmons and Jones to Section

802(g) appeals. As noted, the Reform Act created a whole new arbitration scheme that is heavily dependent on the creation of a formal record. Thus, the Act creates ad hoc arbitration panels designed to review the evidence and consider the arguments of concerned parties. See 17 U.S.C.

802(c). Implementing rules ofthe Copyright Office expressly accord parties discovery rights to access and test the evidence, 37 C.F.R. 251.45(c), and contemplate a structured, formal fact- finding proceeding for the presentation and consideration ofthe evidence. See, e.g., 37 C.F.R.

251.41; 37 C.F.R. 251.43; 37 C.F.R. 251.45(a)-(d). The Reform Act itselfmandates that the

Panel "act on the basis of a fully documented written record," 17 U.S.C. 802(c), requiring that decisions of a Panel must be provided in a written report setting forth "the facts that the arbitration panel found relevant to its determination." 17 U.S.C. 802(e). That report is reviewed by the Librarian who is required to adopt this determination unless the Librarian finds that the

Panel's determination "is arbitrary or contrary to the applicable provisions ofthis title" on the basis ofthe record before the Panel. See RIAL v. Librarian ofCongress, 176 F.3d 528, 535-36

(D.C. Cir. 1999). Judicial review of the Librarian's decision is similarly limited to the record, providing that the Librarian's decision may be overturned "only" if the Court finds, "on the basis ofthe record before the Librarian, that the Librarian acted in a an arbitrary manner." 17 U.S.C.

802(g) (emphasis supplied).

This statutory emphasis on the creation of a formal record would be obviously under- mined if a non-party is permitted to challenge the Librarian's decisions in court. Participation of concerned persons is essential to the creation of the formal administrative record required by these provisions of the Reform Act. Such participation has also been stressed by this Court. See

RIMA, 176 F.3d at 536. Congress plainly sought to encourage participation in the administrative process by according the right ofjudicial review only to those persons who did participate. In light of this statutory emphasis on an administrative record, it would be incongruous to allow a non-party that did not participate in the formation of this record to challenge the Librarian's decision in the face of statutory language limiting the right of appeal to an "aggrieved party."

Indeed, petitioners in this case seek to overturn the Librarian's decision by, inter alia,

attacking the sufficiency of evidence for imposing rates on webcasters. See "Joint Statement of Issues Presented," filed July 16, 2002. Yet, petitioners hadPetitioners'on-Binding full notice, provided by a Notice published in the Federal Register, that such CARP proceedings for these rates were being convened. See 64 FED. REG. 52107 (Sept. 27, 1999). There was nothing secret about this CARP administrative proceeding; it was common knowledge in the industry.

Petitioners, like other webcasters, had every opportunity to participate in these administrative proceedings, but elected, for whatever reason, not to do so. Having chosen to forego participa- tion in the administrative mechanism created by Congress for the creation of a record, petitioners should not now be heard to complain about the sufficiency of evidence or any unfairness to them of compulsory license rates that they and everyone else in this industry understood would be established by this administrative process.

4. Allowing non-parties, such as petitioners, to seek judicial review would also be grossly unfair. First, allowing such review would accord petitioners a free-ride by permitting petitioners to escape all of the arbitration panel costs that are otherwise statutorily imposed on

-10- parties by Section 802(c). Under such a rule, non-parties could sit on the side-lines during the

CARP proceedings, cost free, waiting to sabotage any result not to their liking after the completion ofthe statutorily mandated administrative proceedings. Allowing such an end-run of administrative proceedings and avoidance of the arbitration costs inequitably increases the burden on the participating parties and can only discourage good-faith participation in the CARP process by others. That result would further impede the ability of the CARP and the Librarian to create the full record contemplated by the statutory scheme.

Second, allowing appeals by non-parties would also effectively deprive the Panel and the

Librarian of the opportunity to consider the arguments and evidence that these non-party petitioners could have presented in these administrative proceedings if they had participated. The risk is real that such non-participants, if allowed to challenge the Librarian's decision, could

"sandbag" the agency in judicial review proceedings in this Court under Section 802(g). This

Court has never countenanced such tactics. See, e.g., USAir, Inc. v. DOT, 969 F.2d 1256, 1260

(D.C. Cir. 1992) ("litigants must not be encouraged to 'sandbag'gencies by withholding legal arguments for tactical reasons until they reach the courts of appeal"). There is no reason to allow such maneuvers under Section 802(g). Requiring "the petitioner... [toj present its arguments first to the deciding agency," Simmons, 716 F.2d at 43, is no less important under the Reform Act than it is under the Hobbs Act or other types of administrative proceedings where that requirement is de rigueur.'

See, e.g., Mitchell v. Christopher, 996 F.2d 375, 377 (D.C. Cir. 1993) ("The general rule that objections to agency decisions must be raised before the agency is well settled"); Air Line Pilots Ass'n Int'l v. CAB, 502 F.2d 453, 457 (D.C. Cir. 1974), cert. denied, 420 U.S. 972 (1975) ("As a practical inatter, we cannot exercise an appellate function in the review of administrative matters unless the problems have been fully aired and focused in the proceedings below"). -11- 4 More fundamentally, under Chevron U.SA., Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984), agencies, such as the Librarian in this case, are entitled to the

opportunity to construe and administer the statutory and regulatory scheme with which they have

been charged by Congress. As this Court has explained, "[w]e have recognized that to adopt a

contrary rule 'permitting a petitioner to bring a statutory challenge to an agency's action directly

to this court "would infringe on agencies'ightful role in statutory construction under the

Chevron framework."'" Northwest Airlines, Inc. v. F A.A., 14 F.3d 64, 73 (D.C. Cir. 1994).

(Citations omitted). These principles are no less applicable to Section 802(g) proceedings.

CO'5CI,USION

For all the foregoing reasons,.this motion should be granted and the petition for review

filed by Intercollegiate and Harvard should be dismissed for want of standing. We respectfully

suggest that the Court publish its decision on this motion so as to provide future guidance

concerning the scope of Section 802(g).

Respectfully submitted,

William Kanter (202) 514-4575

ark W. Pennak (202) 514-1673

Attorneys Appellate Staff Civil Division, Room 9148 Department ofJustice AUGUST 2002 Washington, D.C. 20530-0001

-12- ATTACHMENTS IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

INTERCOLLEGIATE BROADCAST ) SYSTEM, et al., ) ) Petitioners ) ) ) No. 02-1220 ) JAMES H. BILLINGTON, Librarian ) of Congress, ) ) Respondent. ) ) )

Declaration of Ku enia L. Giuffreda

I am an employee of the United States Copyright Office, the service unit of the Library of Congress that has responsibility for the Copyright Arbitration Royalty panels pursuant to Chapter 8 of Title 17, United States Code. My current title is Law Clerk. I have been an employee of the Copyright Office since December 1997.

From December 1997 to February 2002. I was the Copyright Arbitration Royalty Panel ("CARP") Specialist. My duties as CARP Specialist included the receiving and processing of all papers filed in any CARP proceeding conducted before the Copyright Office.

Title 37 of the Code of Federal Regulations requires that parties wishing to participate in a rate adjustment or distribution proceeding file with the Librarian of Congress ("Librarian") a Notice of Intent to Participate. 37 C.F.R. $ 251.45(a). The Notices ofIntent to Participate are then used to compile the official Service List for the rate adjustment or distribution proceeding. 37 C.F.R. $ 251.44(f).

As CARP Specialist, I was responsible for the preparation of the index of the Notices of Intent to Participate filed in the proceeding that is the subject of the Joint Petition for Review submitted by Intercollegiate Broadcasting System, Inc. and Harvard Radio Broadcasting Company, Inc. The purpose of that proceeding was to set rates and terms for the statutory license for eligible nonsubscription services to perform sound recordings publicly by means of digital audio transmissions under 17 U.S.C. $ 114 and for the statutory license to make ephemeral recordings of sound recordings for use of sound recordings under 17 U.S.C. $ 112 ("webcasting proceeding"). After preparing the index of the Notices of Intent, I then used the Notices of Intent to Participate to compile the official Service List for the webcasting proceeding. I also updated the official Service List whenever a party withdrew from the webcasting proceeding or was dismissed from the proceeding by the Librarian of Congress for failure to file a written direct case, as required under 37 C.F.R. $ 251.43(a). 5.. Neither Intercollegiate Broadcasting Systems Inc. nor Harvard Radio Broadcasting Company, Inc. filed a Notice ofIntent to Participate in the webcasting proceeding. As such, they were never parties to the webcasting proceeding and, therefore, never appeared on the official Service List for the proceeding.

6. Attached are true and correct copies ofthe index of all the Notices ofIntent to Participate filed in the webcasting proceeding and the Service List of all the parties who actually appeared and presented evidence to the panel of arbitrators presiding over the webcasting proceeding.

I declare under penalty of perjury that the foregoing is true and correct. Executed this 6~ day of August 2002 in Washington, D.C.

Euggia L. Giuffreda Notices of Intent to Participate filed in the Digital Performance Right in Sound Recordings and Ephemeral Recordings Consolidated Rate Adjustment Proceeding (For periods 1998-2000 and 2001-2002)

Docket No. 2000-9 CARP DTRA1dk2

1. Digital Bitcasting Corp. 2. NetRadio Corporation 3. cdnow Online, Inc. 4 Musicplex.corn 5. The American Federation of Television and Radio Artists (AFTRA) 6. Hardradio.corn 7. CBS Corporation The American Federation of Musicians ofthe United States and Canada (AFM) 9. Global Media Network 10. Virgin E-Commerce (US), Inc. 11. Bonneville International Corporation 12. Emmis Communications Corporation 13. NRB Music License Committee 14. AMFM, Inc. 15. Clear Channel Communications 16. Salem Communications Corp. 17. Music Choice 18. America Online, Inc. 19. The Walt Disney Company 20. ABC, Inc. 21. MTV Networks 22. Westwind Media.corn, Inc. 23. The Eclectic Radio Company, LLC 24. American Broadband Productions, LLC 25. Live365.corn 26. Recording Industry Association of America, Inc. (RIAA) 27. VergeRadio.corn 28. igroove.corn, Inc. fka FunkyFreshTunes.corn 29. Muzak, LLC 30. AEI Music Network 31. iCAST Corporation 32. Blue Tape, LLC d/b/a Sputnik7.corn 33. Everstream, Inc. 34. Launch Media, Inc. 35. BET.corn, LLC 36. National Public Radio 37. Tunes.corn Inc.

ATTACHMENT A 38. Nordic Entertainment 39. RadioWave.corn, Inc. 40. TuneTo.corn, Inc. 41. SOUNDSBIG.corn, Inc. 42. RadioActive Media Partners, Inc. 43. Association for Independent Music ("AFIM") 44. BroadcastAmerica.corn, Inc. 45. Performing Artists Society of America 46. XM Satellite Radio Inc. 47. Sirius Satellite Radio Inc. 48. Future of Music Coalition 49. MyPlay, Inc. 50. Echo Networks (fka iGroove.corn) 51. American Online, Inc./Spinner.corn 52. Listen.corn 53. Broadtime.corn LLC 54. Univision Online 55. Incanta, Inc. 56. Moodlogic, Inc. 57. EGBS 58. Loudeye Technologies, Inc. 59. Country.corn, Inc. 60. MTVi Group LLP/MTV Networks, a division of Viacom 61. RealNetworks/Rolling Stone Radio 62. Comedy Central 63. VocaLoca, Inc. 64. MusicMatch, Inc. 65. iVillage Inc. 66. Virgin Audio Holdings LLC 67. SBR Custom Channels 68. WREF-AM 69. WLAD-AM 70. WDAQ-FM 71. WJLS-FM 72. KWUF-AM 4 FM 73. WOLC/Maranatha, Inc. 74. Dead-Air Broadcasting Co., Inc. 75. XACT Radio LLC 76. Coollink Broadcast Network 77. CBS Broadcasting Inc. (amended) 78. WITZ AM/FM 79. Ocean Broadcasting, LLC 80. WMET/WMIT c/o Tom Atema 81. KOSP-FM 82. KKLH-FM 83. KOM6-FM 84. WCVO Radio 85. Iroquois County Broadcasting Corp. (WGFA FM 94.1) 86. WTUZ Webcast 87. KXST (Sets 102) 88. Radio Station KNGT-FM 89. IRMA-FM Radio 90. KLEM-AM Radio 91. KSCJ-AM Radio 92. KSUX-FM Radio 93. WNYQ-FM/WHTR-FM/WIVIML-AM/WENU-AM 4 FM 94. Albany Radio Corp. (dba KWIL and/or KHPE and/or KEED) 95. WHLC FM 104.5 (Charisma Radio Corp.) 96. KUKN Radio 97. KLOG Radio 98. CBS Television Stations Group 99. Viacom Internet Services Inc. 100. Educational Community Radio, Inc. T/A WOBO 101. KMTS 102. Wild West Radio, Inc. 103. WVKC Galesburg 104. WMCX 88.9 FM 105. KNCK Radio 106. Midcontinent Broadcasting Co. 107. Susquehanna Radio Corp. 108. Cromwell Group, Inc. and Cromwell Radio Group 109. Local Media Internet Venture Inc. 110. DMX Music, Inc. 111. KGGL (FM) Radio, Missoula, MT 112. KGRZ (AM) Radio, Missoula, MT 113. KZOQ (FM) Radio, Missoula, MT 114. KYLT (AM) Radio, Missoula, MT 115. KXDR(FM) Radio, Missoula, MT 116. KAAK (FM) Radio, Great Falls, MT 117. KXGF(AM) Radio, Great Falls, MT 118. KQDI-FM k AM Radio, Great Falls, MT 119. KMBR (FM) Radio, Butte, MT 120. IMPAR (FM) Radio, Butte, MT 121. KXTL (AM) Radio, Butte, MT 122. KRIDC (FM) Radio, Billings, MT 123. KBLG (AM) Radio, Billings, MT 124. KYYA (FM) Radio, Billings, MT 125. KRZN (FM) Radio, Billings, MT 126. KYSN (FM) Radio, E. Wenatchee, WA 127. KAAP (FM) Radio, Rock Island, WA 128. KZPH (FM) Radio, Wenatchee WA 129. KWWW-FM Radio, Quincy, WA 130. KWWX (AM) Radio, Wenatchee, WA 131. KKBS 132. KWED-AM 133. wsmonline.cornRadio Station KMRY 134. 135. WARX Radio (aka Oldies 106.9 FM)/Manning Broadcasting Inc. 136. KOTK-AM Radio 137. KWJJ-FM Radio 138. Entercom Communication Corp. 139. Journal Broadcast Group, Inc. 140. WSWI/University of Southern Indiana 141. WCPE Radio 142. Ithaca College Radio 143. Comedyaudio.corn 144. Cox Radio, Inc. 145. Yahoo( Inc. 146. Paradis Broadcasting ofAlexandria, Inc. d/b/a KARA-KX92-Z99 147. South Central Communications Corp. 148. Sheridan Broadcasting Corp./Sheridan Gospel Network 149. WQME 98.7 FM/Anderson University 150. Hall Communications, Inc. 151. FM 92 Broadcasters, Inc. (KMZE-FM) 152. Omni Communications (KWOX-FM) SERVICE LIST Docket No. 2000-9 CARP DTRA142

Bruce G. Joseph R. Bruce Rich Wiley, Rein & Fielding Kenneth L. Steinthal 1776 K Street, N.W. Adam I. Cohen Washington, D.C. 20006 Mark A. Jacoby Counselfor Clear Channel Communications, Fiona Schaeffer Inc.; National Religious Broadcasters Music Weil, Gotshal & Manges LLP License Committee; Salem Communications 767 Fish Avenue Corp. New York, New York 10153 Counselfor: BET.corn; CBS Broadcasting, Barry I. Slotnick Inc.; Comedy Central; Echo Networks, Inc.; Loeb & Loeb LLP Launch Media, Inc.; Listen.corn; Live365.corn; 345 Park Avenue MTVi Group LLC; MyPlay, Inc.; NetRadio New York, New York 10154 Corporation; Radio Active Media Partners, Counselfor Associationfor Independent Inc.; Radio@'ave.corn, Inc.; Entercom Music Communications Corporation; Spinner Networks, Inc.; Susquehanna Radio Corp.; Patricia Polach Xact Radio Network LLC Bredhoff & Kaiser, P.L.L.C. 805 Fifteenth Street, N.W., Suite 1000 David R. Berz Washington, D. C. 20005 Sandra M. Aistars Counselfor American Federation of Weil, Gotshal & Manges LLP Musicians ofthe United States and Canada 1501 K Street, N.W. . Suite 100 Arthur J. Levine Washington, D.C. 20005 Finnegan, Henderson, Farabow, Counselfor: AEIMusic Network; DMX Garrett & Dunner, LLP Music, Inc. 1300 I Street, N.W. Washington, D. C. 20005-3315 Robert Alan Garrett Counselfor American Federation of Ronald A. Schechter Television and Radio Artists Michele J. Woods Julc L. Sigall Brad R. Newberg Kenneth Kaufman John A. Freedman Skadden, Arps, Slate,Meagher & Flom LLP Christopher Winters 1440 New York Ave. NW Arnold & Porter Washington, DC 20005-2111 555 Twelfth Street, N.W'. Counselfor Live365.corn Washington, D.C. 20004 Counselfor the Recording Industry Association ofAmerica, Inc.

u:hcarpidtral &24erlstcls-wdc-current.wpd ATTACHMENT B August 5, 2002 DECISION OF THE LIBRARIAN 45240 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

LIBRARY OF CONGRESS 3. Benchmarks for setting market rates: subscription transmissions. 17 U.S.C. voluntary agreements vs. musical works 114(fl. Copyright Office fees a. Fees paid for use of musical works The scope of this license was

37 CFR Part 261 b. Voluntary agreements expanded in 1998 upon passage of the 4. Alternative methodology: Percentage-of- Digital Millennium Copyright Act of revenue ("DMCA" "Act"), — 1998 or Public Law [Docket No. 2000-9 CARP DTRA 1&2] 5. The Yahoo! rates evidence of a unitary — 'the marketplace value 105 304, in order to allow a nonexempt Determination of Reasonable Rates 6. Are rates based on the Yahoo! agreement eligible nonsubscription transmission and Terms for the Digital Performance indicative of marketplace rates'? "webcasting license") and a of Sound Recordings and Ephemeral 7. Should a different rate be established for nonexempt transmission by a Recordings commercial broadcasters streaming their preexisting satellite digital audio radio own AM/FM programming? service to perform publicly a sound AGENCY: Copyright Office, Library of 8. Methodology for calculating the recording in accordance with the terms Congress. statutory rates for the webcasting license a. Calculation of the unitary rate and rates of the statutory license. 17 ACTION: Final rule and order. b. The 150-mile exemption U.S.C. 114(a). In addition to expanding 9. Rates for other webcasting services and the section 114 license, the DMCA also SUMMARY: The Librarian of Congress, programming created a new statutory license for the upon recommendation of the Register of a. Business to business webcasting services making of an "ephemeral recording" of Copyrights, is announcing the Listener-influenced b. services a sound recording certain determination of the reasonable rates c. Other types of transmissions by and terms for two compulsary licenses, 10. Rates for transmissions made by non- transmitting organizations (the permitting certain digital performances CPB, noncommercial stations "ephemeral recording license"). 17 of sound recordings and the making of 11. Consideration of request for diminished U.S.C. 112(e). The new statutory license ephemeral recordings. rates and long song surcharge allows entities that transmit 12. Methodology for estimating the number performances of sound recordings to EFFECTIVE DATE: July 8, 2002. of performances business establishments, pursuant to the ADDRESSES: The full text of the 13. Discount for Promotion and Security public limitations set forth in section version of the Copyright Arbitration 14. Ephemeral recordings for services Royalty Panel's report to the Librarian of operating under the section 114 license 114(d)(1)(C)(iv), to make an ephemeral Congress is available for inspection and 15. Minimum fees recording of a sound recording for 16. Ephemeral recordings for business purposes of a later transmission. The copying during normal working hours establishment ("BES"I services new license also provides a means in the Office of the General Counsel, a. Rates for use of the statutory license by James Madison Memorial Building, b. Minimum fee which a transmitting entity with a Room LM-403, First and Independence 17. Effective period for proposed rates statutory license under section 114(f) Avenue, SE., Washington, DC 20540. B. Terms can make more than the one The report is also posted on the 1. Disputed terms phonorecord permitted under the Copyright Office website at http:// a. Definitions exemption set forth in section 112(a). 7 wtvw.copyright.gov/carp/ b. Designated Agent for Unaffiliated U.S.C. 112(e). Copyright Owners webcasting rates.html. c. Gross proceeds The statutory scheme for establishing FOR FURTHER INFORMATION CONTACT: 2. Terms Not Disputed by the Parties reasonable terms and rates is the same David O. Carson, General Counsel, or a. Limitation of Liability for both of the new licenses. The terms Tanya Sandros, Senior b. Deductions from Royalties for and rates for the two new statutory Attorney, Designated Agent's Costs Copyright Arbitration Royalty Panel c. Ephemeral Recording licenses maybe determined by (CARP), P.O. Box 70977, Southwest d. Definition of "Listener" voluntary agreement among the affected Station, Washington, DC 20024. e. Timing of Payment by Receiving Agent parties, or if necessary, through Telephone (202) 707—8380. Telefax: to Designated Agent compulsory arbitration conducted (202) 707-8366. f. Allocation of Royalties among pursuant to Chapter 8 of the Copyright SUPPLEMENTARY INFORMATION: Designated Agents and Among Copyright Act. Owners and Performers Table of Contents g. Choice of Designated Agent by In this case, interested parties were I. Background Performers unable to negotiate an industry-wide II. The CARP Proceeding to Set Reasonable h. Performer's Right to Audit agreement. Therefore, a Copyright Rates and Terms i. Effective date Arbitration Royalty Panel ("CARP") was A. The Parties V. Conclusion convened to consider proposals from VI. The Order of the B. The position of the parties at the Librarian of Congress interested parties and, based upon the commencement of the proceeding I. Background written record created during this 1. Rates proposed by Copyright Owners process, to recommend rates and terms 2. Rates proposed by Services In 1995, Congress enacted the Digital C. The Panel's determination of reasonable Performance Right in Sound Recordings for both the webcasting license and the rates and a minimum fee Act ("DPRA"), Public Law 104—39, ephemeral recording license. III. The Librarian's Scope of Review of the which created an exclusive right for Panel's Report copyright owners of sound recordings, 'n "eligible nonsubscription transmission" is a IV. The CARP Report: Review and subject to certain limitations, to perform nontnteractive, digital audio transmission which, as Recommendation of the Register of their the name implies, does not require a subscription Copyrights publicly sound recordings by for receiving the transmission. The transmission A. Establishing Rates means of certain digital audio must also be made a part of a service that provides Appropriate audio 1. The "Willing Buyer/Willing Seller transmissions. Among the limitations on programming consisting in a whole or in part the performance right was the creation of performances of sound recordings; the purpose Standard" of which is to provide audio or entertainmeni 2. Hypothetical Marketplace/Actual of a new compulsory license for programming, but not to sell, advertise, or promote Marketplace nonexempt, noninteractive, digital particular goods or services. Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulaticns 45241

II. The CARP Proceeding to Set A. The Parties ("AFM"); (vi) Association For Reasonable Rates and Terms Independent Music ("AFIM");9 and The parties 8 to this are:. These proceedings on proceeding (i) (vii) Recording Industry Association of began The Webcasters,4 November 27, 1998, when the namely, BET.corn, America, Inc. ("RIAA").'usic Copyright Comedy Central, Office announced a six-month voluntary Echo Networks, Inc., Choice, a Business Establishment negotiation period to set rates and terms Listen.corn, Live365.corn, MTVi Group, Service, was initially a party to this for the webcasting license and the LLC, Myplay, Inc., NetRadio proceeding, but on March 26, 2001, it ephemeral recording license for the first Corporation, Radio Active Media filed a motion to withdraw from the license period covering October 28, Partners, Inc.; RadioWave.corn, Inc., proceeding. Its motion was unopposed 1998-December 31, 2000. 63 FR 6555 Spinner Networks Inc. and XACT Radio and, on May 9, 2001, its motion to (November 27, 1998). During this Network LLC; (ii) the FCC-licensed withdraw was granted. period, the parties negotiated a number radio Broadcasters,e namely, Susquehanna Radio B. The Positiort of the Parties at the of private agreements in the Corporation, Clear Commencement marketplace, but no industry-wide Channel Communications Inc., of the Proceeding agreement was reached. Consequently, Entercom Communications Corporation, 1. Rates Proposed by Copyright Owners in accordance with the procedural Infinity Broadcasting Corporation, and RIAA proposed rates derived from an requirements, the Recording Industry National Religious Broadcasters Music of ("RIAA") analysis 26 voluntarily negotiated Association of America, Inc. License Committee (collectively "the itself and the agreements between petitioned Copyright Office on July Broadcasters"); (iii) the Business individual webcasters. RIAA claims 1999, to that 23, commence a CARP Establishment Services, namely, DMX/ these "involve the same proceeding to set rates and terms agreements the for AEI Music Inc. (also referred to as the the same these licenses. The Office responded buyer, same seller, right, by "Background Music Services" ); (iv) the same works, the same setting a schedule for the CARP copyrighted American Federation of Television and time period and the same medium as proceeding. See 64 FR 52107 (Sept. 27, Radio Artists ("AFTRA"); v (v) those in the marketplace that the CARP 1999). American Federation However, the schedule of Musicians of must replicate." CARP Report at 26, proved the United States and unworkable for the parties. RIAA filed Canada citing RIAA PFFCL» (Introduction at a motion with the Copyright Office on 8), Based upon these agreements, RIAA instance, November 23, 1999, requesting a the Panel submitted its report proposed the following rates for DMCA approximately three weeks later than anticipated compliant webcasting services: postponement of the date for filing under this provision due to a suspension of the (i) For basic "business to consumer" direct cases. It argued that the Office proceedings during the period November 9, 2001, should provide more time for the parties through December 2, 2001. The Copyright Office (B2C) webcasting services: to prepare their cases in of the granted the suspension at the parties'equest in 0.4c for each transmission of a sound light order to allow them complexity of the issues and the record to engage in further settlement recording to a single listener, or 15'/o of discussions. At the same time, the Office granted the service's number of new participants. The Office the Panel an additional period of time, gross revenues. granted this request and held a meeting commensurate with tbe suspension period, for (ii) For "business to business" (B2B) to clarify the procedural aspects of the hearing evidence and preparing its report. See webcasting services, where proceeding, especially for the new Order, Docket No. 2000—9 CARP DTRA 1&2 transmissions are made as part of a (November 9, 2001). Additional details concerning service that is syndicated to participants, and to discuss a new the earlier procedural aspects of this proceeding are third-party schedule for the arbitration phase of the set forth in the CARP Report at pp. 10—18. websites: s process. Order in Docket No. 99—6 At the outset of the proceeding. Webcaster 0.5c for each transmission of a sound parties also CARP DTRA (dated December 22, 1999). included Coollink Broadcast Network, recording to a single listener Everstream, Inc., Incanta, Inc., Launch Media, Inc., (iii) For "listener-influenced" In the meantime, the Office commenced MusicMatch, Inc., Univision Online, and Westwind the six-month negotiation period for the Media.corn, Inc., which have since w'ithdrawn or webcasting services: second license period, covering January been dismissed from the proceeding. Late in the 0.6c for each transmission of a sound proceeding, National ("NPR") 1, 2001 —December 31, 2002. 66 FR 2194 Public Radio reached recording to a single listener a private settlement with RIAA and withdrew prior (iv) Minimum fee (subject to certain (January 13, 2000). Ultimately, the to the conclusion of the 180-day hearing period. Copyright Office consolidated these two Because RIAA, AFTRA, AFM. and AFIM propose qualifications): $5,000 per webcasting proceedings into a single proceeding in the same rates and take similar positions on most service which one CARP issues, they are sometimes referred to collectively would set rates and as "RIAA" or "Copyright Owners and Performers" terms for the two license for AFM, the American Federation of Musicians, is periods for convenience. Similarly, Webcasters, a labor organization representing professional both the webcasting license and the Broadcasters, and the Business Establishment musicians. See Bradley W.D.T. 1. ephemeral recording license. See Order Services are sometimes referred to collectively as AFIM, the Association "the Services." For Independent Music, in Docket Nos. 99—6 CARP DTRA and is a trade association representing independent 4 The Webcasters are internet services that each 2000—3 CARP DTRA 2 (December 4, record companies, wholesalers, distributors and employ a technology known as "streaming," but retailers. See Tr. 2880 (Himelfarb) 2000). The 180-day for comprise a period the range of different business models and » RIAA is a trade association representing record consolidated proceeding began on July music programming. companies, including the five "majors" and 30, 2001, and on February 20, 2002, the s The Broadcasters are commercial AM or FM numerous "independent" labels. radio stations that panel submitted its report (the "CARP are licensed by the Federal » Hereinafter, references to proposed findings of Communications Commission ("FCC"). fact and conclusions of law shall be cited as Report" or "Report"), in which it s The Business Establishment Services, DMX/AEI "OFFCK" preceded by the name of the party that proposed rates and terms to the Music, deliver sound recordings to business submitted the filing followed by the paragraph Copyright Office. It is the decision of establishments for the enjoyment of the number. Rei'erences to written direct testimony this Panel that is the basis for the establishments'ustomers. See Knittel W.D.T. 4. shall be cited as "W.D.T." preceded by the last DMX/AEI Music Librarian's decision today.z is the successor company resulting name of the witness and followed by a page from a merger between AEI Music Network, Inc. number. References 9to written rebuttal testimony ("AEI") and DMX Music, Inc. ("DMX"). shall be cited as "W.R.T." * preceded by the last Section 802 (e) of the Copyright Act requires the 'FTRA, the American Federation of Television name of the witness and followed by a page CARP to report its determination concerning the and Radio Artists, is a national labor organization number. References to the transcript shall be cited royalty fee to the Librarian of Congress 180 days representing performers and newspersons. See Tr. asd "TR." followed by the page number and the last after the initiation of a proceeding. In this particular 2820 (Himelfarb). name of the witness. 45242 Federal Register/Vol. 67, No. 130/Monday, july 8, 2002/Rules and Regulations

(v) Ephemeral license fee: The proposed rates are set forth in Review of the case law applying the 10% of each service's performance Appendix A of the CARP Report, which APA "arbitrary" standard reveals six royalty fee payable under (i), (ii), or (iii). is posted on the Copyright Office factors or circumstances under which a For the section 112 license applicable website at: http://www.copyright.gov/ court is likely to find that an agency to the business establishment services, carp/webcasting rates a.pdf. acted arbitrarily. An agency action is the copyright owners proposed a rate set The proposed terms of payment may generaHy considered to be arbitrary at 10% of gross revenues with a be found in Appendix B of the CARP when: minimum fee of $50,000 a year. Report, which is posted on the 1. It relies on factors that Congress did Copyright Office website at: http:// not intend it to consider; 2. Rates Proposed by Services www.copyright.gov/carp/ 2. It fails to consider entirely an Webcasters proposed per-performance webcasting rates b.pdf. important aspect of the problem that it and per-hour sound recording III. The Librarian's Scope of Review of was solving; performance fees, based upon an the Panel's Report 3. It offers an explanation for its economic model, that considered the decision that runs counter to the The aggregate fees paid to the three Copyright Royalty Tribunal evidence presented before it; Reform of 1993 Reform performance rights organizations Act (the Act), 4. It issues a decision that is so Pub. L. No. 103-198, (ASCAP, BMI, and SESAC) that license 107 Stat. 2304, implausible that it cannot be explained the public performances created a unique system of review of a of musical CARP's as a product of agency expertise or a works for radio programs that are determination. Typically, an difference of arbitrator's decision is not reviewable, viewpoint; broadcast over-the-air by FCC-licensed 5. It fails to examine the data and but the Reform Act created two layers of broadcasters, by S72 radio stations articulate a satisfactory explanation for review that result in final orders: one during 2000, From this model, the by its action a rational the Librarian of (Librarian) including webcasters derived a per-song and a per- Congress and a second the United States Court of connection between the facts found and listener hour base rate of 0.02'er song by the choice made; and and 0.3e hour, Appeals for the District of Columbia per respectively. These Circuit. 6. Its action entails the unexplained figures were then adjusted to account Section 802(fj of title 17 directs the Librarian on the recommendation of discrimination or disparate treatment of for a number of factors, including the similarly situated parties. promotional value the Register of Copyrights either to gained by the record accept the decision Motor Vehicle Mfrs. Ass'n. State Farm companies from the performance of of the CARP, or to reject it. If the Librarian rejects it, he Mutual Auto. Insurance Co., 463 U.S. 29 their works. This adjustment resulted in must substitute (1983); Celcom Communications Corp. a fee his own determination proposal of 0.014'er "after full examination v. FCC, 789 F.2d 67 (D.C. Cir. 1986); performance or 0.21g of the record per hour. created in the arbitration Airmark Corp. v. FAA, 758 F.2d 6S5 the proceeding." At end of the proceeding, 17 U.S.C. 802(t). If the Librarian (D.C. Cir. 1985). Webcasters accepts suggested in their proposed it, then the determination of the CARP In reviewing the CARP's decision, the findings of fact and conclusions of law becomes the determination of Librarian has been guided by these an the alternative method for calculating Librarian. In either case, through principles and the prior decisions of the royalty fees, namely, a percentage-of- issuance of the Librarian's Order, it is District of Columbia Circuit in which revenue fee structure. Specifically, his decision that will be subject to the court applied the "arbitrary and Webcasters proposed a fee of 3% of a review by the Court of Appeals. 17 capricious" standard of 5 U.S.C. webcaster's gross revenues for all U.S.C. 802(g). 706(2)(A) to the determinations of the services. The alternative proposal was The review process has been former Copyright Royalty Tribunal made with the understanding that the thoroughly discussed in prior (hereinafter "CRT or Tribunal"). See, service would be able to elect either recommendations of the Register of e,g, National Cable Tele. Ass'n v. CRT, option. Copyrights (Register) concerning rate 724 F.2d 176 (D,C. Cir. 1.983) (applying Webcasters proposed no additional adjustments and royalty distribution the Administrative Procedure Act's fee for the making of ephemeral proceedings, See, e.g., Distribution of standard authorizing courts to set aside recordings and a minimum fee of $250 1990, 1991, and 1992 Cable Royalties, agency action found to be arbitrary, per annum for each service operating 61 FR 55653 (1996); Rate Adjustment for capricious, and abuse of discretion, or under the section 114 license. the Satellite Carrier Compulsory otherwise in accordance with law."); see The Business Establishment Services License, 62 FR 55742 (October 28, also, Recording Industry Ass'n of who need only an ephemeral recording 1997). Nevertheless, the discussion America v. CRT, 662 F.2d 1, 7— 9 (D.C. license proposed a flat rate of $10,000 merits repetition because of its Cir. 1981); Amusement and Music per year for each company. importance in reviewing each CARP Operators Ass'n v. CRT, 676 F.2d 1144, C. The Panel's Determination decision. 1149-52 (7th Cir.), cert denied, 459 U.S. of Section Reasonable Bates and a Minimum Fees 802{f) of the Copyright Act 907 (1982); National Ass'n of directs that the Librarian shall adopt the Broadcasters v. CRT, 675 F.2d 367, 375 In this proceeding, the Panel had to report of the CARP, "unless the n. 8 {D.C. Cir. 1982). establish rates and terms of payment for Librarian finds that the determination is Review of judicial decisions regarding digital transmissions of sound arbitrary or contrary to the applicable Tribunal actions reveals a consistent recordings made by noninteractive, provisions of this title." Neither the theme; while the Tribunal was granted nonsubscription services and rates for Reform Act nor its legislative history a relatively wide "zone of the making of ephemeral phonorecords indicates what is meant specifically by reasonableness,*'t was required to made pursuant to the section 112(e) "arbitrary," but there is no reason to articulate clearly the rationale for its license; either to facilitate those conclude that the use of the term is any award of royalties to each claimant. See transmissions made or by business different from the "arbitrary" standard National Ass'n of Broadcasters v. CRT, establishments which are otherwise described in the Administrative 772 F.2d 922 (D.C. Cir. 1985),. cert. exempt from the digital performance Procedure Act {APA), 5 U.S.C. denied, 475 U.S. 1035 (1986) (NAB v. right. 706(2) (A). CRT); Christian Broadcasting Network v. Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45243

CRT, 720 F.2d 1295 (D.C. Cir. 1983) Librarian reject the proposed rates services for its use of the ephemeral (Christian Broadcasting v. CRT); ($0.14 per performance for Internet-only license at $500 when clear evidence National Cable Television Ass'n v. CRT, transmissions and $0.07 per exists in the contractual agreements to 689 F.2d 1077 (D.C. Cir. 1982) (NCTA v. performance for radio retransmissions) establish a much higher range of values CRT); Recording Indus. Ass'n of for the section 114 license and for setting the minimum fee. America v. CRT, 662 F.2d 1 (D.C. Cir. substitute his own determination (0.07c Consequently, the Register evaluated the 1981) (RIAA v. CRT). As the D.C..Circuit per performance for both types of contracts and proposed a minimum fee succinctly noted: transmissions), based upon the Panel's consistent with the record evidence. We wish to emphasize * * * that precisely analysis of the hypothetical The result is a minimum fee of $ 10,000 because of the technical and discretionary marketplace, and its reliance upon per license pro rated on a monthly basis. nature of the Tribunal's work, we must contractual agreements negotiated in the Section 802(f) states that "fi]f the especially insist that it weigh all the relevant marketplace. Librarian rejects the determination of considerations and that it set out its These changes necessitate an the arbitration panel, the Librarian shall, conclusions in a form that permits us to adjustment to the proposed rates for before the end of that 90-day period, determine whether it has exercised its non-CPB, noncommercial responsibilities lawfully. * * * and after full examination of the record broadcasters» for Internet-only created in the arbitration proceeding, Christian Broadcasting v. CRT, 720 transmissions as well. The adjusted rate issue an order setting the royalty fee or F.2d at 1319 (D.C. Cir. 1983), quoting for arch!ved programming subsequently distribution of fees, as the case may be." NCTA v. CRT, 689 F.2d at 1091 (D.C. transmitted over the Internet, During that 90-day period, the Register Cir. 1982). substituted programming and up to two reviewed the Panel's report and made a Because the Librarian is reviewing the side channels is 0,02g, reflecting a recommendation to the Librarian to CARP decision under the same downward adjustment from the 0,05g "arbitrary" accept in part and reject in part the standard used by the courts rate proposed by the Panel, The new Panel's report, for the reasons cited to review the Tribunal, he must be rate for all other transmissions made by herein. The Librarian accepted this presented the CARP a rational by with non-CPB, noncommercial broadcasters recommendation and, on May 2'1, 2002, analysis of its decision,, setting forth is 0.07g per performance per listener. he issued an order rejecting the Panel's specific findings of fact and conclusions Using this methodology, the Register determination proposing rates and terms of law. This requirement of every CARP recommends that the Librarian also for the webcasting license and the report is confirmed by the legislative reject the Panel's determination of a rate ephemeral recording license. See Order, history of the Reform Act which notes for the making of ephemeral recordings Docket No. 2000—9 CARP DTRA 1gc2 that a "clear report setting forth the by those Licensees operating under the (dated May 21, 2002).

panel's reasoning and findings will webcasting license. Because the Panel The full review of the Register and her greatly assist the Librarian of Congress."'.R. had made an earlier determination not corresponding recommendations are Rep. No. 103-286, at 13 (1993). to consider 25 of the 26 contracts presented herein, Within the limited This goal cannot be reached by submitted by RIAA for the purpose of scope of the Librarian's review of this "attemptfing] to distinguish apparently setting a rate for the webcasting license, proceeding, "the Librarian will not inconsistent awards with simple, it was arbitrary for the Panel to use second guess a CARP's balance and undifferentiated allusions to a 10,000 these same rejected licenses to set the. consideration of the evidence, unless its page record." Christian Broadcasting v. Ephemeral License Fee. See section decision runs completely counter to the CRT, 720 F.2d at 1319. IV.13 herein for discussion. evidence presented to it." Rate It is the task of the Register to review Consequently, the Register proposes a Adjustment for the Satellite Carrier and — the report make her downward adjustment from 9% of the Compulsory License, 62 FR 55757 recommendation to — the Librarian as to performance royalties paid to 8.8% to (1997), citing 61 FR 55663 (October 28, whether it is arbitrary or contrary to the the Ephemeral License Fee to remove 1996) (Distribution of 1990, 1991 and provisions of the Copyright Act and, if the effect of the discarded licenses. 1992 Cable Royalties). Accordingly, the In the License so, whether, and in what manner, the determining Ephemeral Register accepts the Panel's of Fee for Business Establishment Services weighing Librarian should substitute his own the evidence and will not question '17 under an to the determination. U.S.C. 802(f). operating exemption findings and conclusions which proceed digital performance right, the CARP IV. The CARP Report: Review and directly from the

considered separate licenses negotiated arbitrators'onsideration Recommendation of the Register of in the marketplace between individual of factual evidence. The however, a Copyrights record companies and services. Its Register, may reject finding these of the Panel it clear The law gives the Register the reliance on these agreements as an where is that its responsibility to review the CARP report determination is not supported by the adequate benchmark for purposes of evidence and make recommendations to the setting the rate for the section 112 in the record. Librarian whether to adopt or reject the license was well-founded and supported A. Establishing Appropriate Rates Panel's determination. In doing so, she by the record. Therefore, the Register

reviews the Panel's Panel's 1. The "Willing Buyer/Willing Seller report, th parties'ost-panel recommends adopting the submissions, and the record proposal of setting the Ephemeral Standard" evidence. License Fee for Business Establishment Sections 112(e)(4) and 114(f)(2)(B), of After carefully considering the Panel's Services at 10% of the service's gross title 17 of the U.S.C., provide that "the report and the record in this proceeding, proceeds. However, the Register cannot copyright arbitration royalty panel shall the Register has concluded that the rates support the Panel's recommendation to establish rates and terms that most proposed by the Panel for use of the set the minimum fee applicable to these clearly represent the rates and terms webcasting license do not reflect the that would have been negotiated in the rates that a willing buyer and willing » A non-CPB, noncommercial broadcaster is a marketplace between a willing buyer seller would agree upon in the Public Broadcasting Entity as defined in 17 U.S.C. and a seller," its(gl that is noi qualified to receive funding from willing and enumerate marketplace. Therefore, the Register has the Corporation for Public Broadcasting pursuant to two factors that the panel shall consider made a recommendation that the the cruaria sat forth in 47 U.S.C. 396. in making its decisions: (1) The effect of 45244 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations the use of the sound recordings on the response rates in the survey study fell considerations, including any sale of phonorecords, and (2) the below generally acceptable standards. significant promotional value of the relative contributions made by both All in all, the evidence on either side transmissions, would already have been industries in bringing these works to the was not persuasive. Consequently, the factored into the agreed upon price. Id. public. In applying this standard, the Panel concluded that, for the time at 35—36. This is not a contested finding. Panel determined that it was to consider period under consideration, "the net It is also important at the outset of the enumerated factors along with all impact of Internet webcasting on record this review to distinguish the willing other relevant factors identified by the sales [was] indeterminate." Id. at 34. buyer/willing seller standard to be used parties, but that it was not to accord the Broadcasters, however, disagree with in this proceeding from the standard listed factors special consideration. the Panel's conclusions. They argue that that applies when setting rates for Report at 21; see also Final Rule and the Panel should have made an subscription services that operated Order, Rate Adjustment for the Satellite adjustment for the promotional value of under the section 114 license. They are Carrier Compulsory License, Docket No. the transmissions, noting that the statute not the same. Section 114(Q(1](B), 96-3 CARP SRA, 62 FR 55742, 55746 singled out this factor for consideration governing subscription services, (October 28, 1997). when setting the rates. Broadcasters requires a CARP to consider the Nevertheless, when the Panel Petition at 38. They further contend that objectives set forth in section 801(b)(1), considered the record evidence offered the record demonstrates that "the as well as rates and terms for audio to establish a marketplace rate, it paid promotional value of radio play should comparable types of digital close attention to the two factors set be far and away the most significant transmission services established through- See forth in the statute. In analyzing the first factor in determining the fair market voluntary negotiations. factor, which focuses on the value of broadcasters simulcast rates." Final Rule and Order, 63 FR 25394, interplay 25399 between webcasting and sales of Id. at 39-40. But all the evidence cited (May 8, 1998). This standard for phonorecords, in the record references the setting rates for the subscription the panel found that the services is whereas the evidence offered during the proceeding interrelationship between radio stations policy-driven, was insufficient and record companies in the analog standard for setting rates for to demonstrate whether nonsubscription forth in webcasting or sales world. As noted above, the Panel services set promoted displaced section is fair market of sound recordings. RIAA's evidence to considered the evidence but did not 114(f)(2)(B) strictly find it persuasive. value—.willing buyer/willing seller. demonstrate that performances of their Thus, two rates sound recordings over Where the Panel makes a decision any argument that the the Internet should be equal as a matter of law is displace record sales consisted of based upon its weighing of the evidence, the Register will not disturb wiithout merit. See, e.g., Webcasters unsupported opinion testimony and Petition at 4 (comparing rates set for consequently, the Panel afforded it no its findings and conclusions that proceed directly from the Panel's preexisting subscription services under weight. Report at 33. Similarly, the the policy driven standard with the

Panel rejected the consideration of the factual evidence. Webcasters'ontention proposed marketplace rates for that webcasting promoted Thus, the Register accepts the Panel's conclusion that performances of sound nonsubscription services and inferring sales, affording little weight to its that the rates should be similar). empirical studies. It concluded that the recordings over the Internet did not Sounddata survey is was not useful for significantly stimulate record sales. 2. Hypothetical Marketplace/Actual purposes of this proceeding because it More importantly, though, the Panel Marketplace correctly focused on the promotional value of found that promotional value To set rates based on a willing buyer/ traditional radio broadcasts and not the is a factor to be considered in willing seller standard, the CARP first promotional value of webcasting. Id. determining rates under the willing had to define the relevant marketplace Likewise, the Panel rejected a study by buyer/willing seller model, and does not in which such rates would be set. It Professor Michael Mazis" because the constitute an additional standard or determined, and the parties agreed, that policy consideration to be used after the rates should be those that a willing »Michael Fine is an expert witness for the rates are set to adjust a base rate buyer and willing seller would have Webcasters and Broadcasters. He wss the chief upwards or downwards. Report at 21. executive officer to Soundata, SoundScan and agreed upon in a hypothetical Therefore, the effect of any promotional marketplace that was not constrained Broadcast Data Systems until December 31, 2000, value by and is uow a management consultant to the firms attributable to a radio a compulsory license. The CARP then operating these services. He analyzed data collected retransmission would already be had to define the parameters of the by these services to determine the promotional reflected in the rates for these marketplace: the buyers, the sellers, and effect upon record sales from radio retransmissions transmissions reached through arms- and Internet-only transmissions and the the product. displacement effect of record sales due to copying length negotiations in the marketplace. In this configuration of the of sound recordings from Internet trsnsmissions. As for the second factor, the Panel marketplace, the willing buyers are the Fine's W.D.T. at 1. found that both copyright owners and 's services which may operate under the Professor Mazis is s Professor in the Kogod licensees made significant creative, webcasting license (DMCA-compliant School of Business, American University, who technological and financial testified on behalf of the Webcasters and services), the willing sellers are record Broadcasters. He designed a survey study to analyze contributions. It concluded, however, companies, and the product consists of usage patterns of people who listen to simulcast of that it was not necessary to gauge with a blanket license from each record a radio station's over-the-air broadcast programming specificity the value of these company which allows use of that and transmissions made by services transmitting contributions in the case where actual solely over the Internet. Specitiicall, the study was company's complete repertoire of sound designed to measure: agreements voluntarily negotiated in the recordings. Report at 24. Because of the a. The effect listening to transmissions over the marketplace existed, since such diversity among the buyers and the Internet hsd on s listener's music purchases; sellers, the CARP noted that one would b. the extent to which listeners to radio that time spent listening to music programming expect "a range of negotiated rates," and retransmissions are either listeners from the versus non-music programming; snd broadcaster's local market or non-local listeners; d. the reasons why people visit radio station so interpreted the statutory standard as c. the amount of time spent listening to websites and the activities they engage in when "the rates to which, absent special programming on the Internet and the proportion of they visit these sites. Mazis'.D.T. at 1-2. circumstances, most willing buyers and Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45245

willing sellers would agree" in a unfair bargaining advantage over the license). Thus, the CARP could only competitive marketplace.'6 Id. at 25. Services because RIAA represented the consider negotiated rates for the rights The Services take issue with the five major record companies who covered Panel's by the statutory license that analysis of the hypothetical together owned most of the works. They were contained in an marketplace. that agreement They argue the willing contend that RIAA used its superior between RIAA and a Service with sellers should be considered as a group market power to negotiate supra- of comparable resources and market hypothetical "competing collectives competitive prices with Services who power. each offering access to the range of could not match either RIAA's power in The sound only agreement that met these recordings required by the the marketplace or its sophistication in criteria was the Yahoo!'r agreement. Services," and as not, the Panel negotiating contracts. Moreover, they The Panel found that both parties to that contends, viewed as individual record utterly reject the Panel's determination agreement entered into companies. Broadcasters negotiations in Petition at 9; that RIAA's perceived market power good faith and on equal footing. Webcasters Petition at 9—10. It is hard to was tempered by the existence of the Moreover, RIAA's see, however, how negotiating advantage competition would statutory license, which, for purposes of disappeared. RIAA could not extract be stimulated in a marketplace where negotiating a fair 'rate for use of sound super-competitive rates because Yahoo! every seller offers the exact same recordings, leveled the playing field. brought comparable product and where more resources, likely than not, Webcasters Petition at 12. sophistication, and market power to the the sellers would act in concert to Not surprisingly, RIAA agrees with extract negotiating table. monopolistic prices. Possibly the Panel on this issue. It maintains that Moreover, Yahoo! could have sellers would choose to undercut each the statutory license offers the Services continued to other, at operate under the license but some point the price would two clear advantages which more than and wait for the outcome stabilize. In of this any event, the Services offset any perceived advantage the RIAA proceeding. Yet, Yahoo!, failed to explain how unlike most of such collectives may have had in negotiating a voluntary the other Services, did not take this would operate in a competitive agreement. First, the license eliminates course of action. It wanted a negotiated marketplace. Consequently, the Register the usual transaction costs associated the agreement so that it could fully develop rejects Webcasters'hallenge to the with negotiating separate licenses with its business Panel's definition on model based on certainty as this point and each of the copyright owners. Second, to the costs of the use of adopts the Panel's characterization the sound of services may avoid litigation costs recordings. Consequently, it had the relevant marketplace, recognizing every associated with setting the rates for a incentive to negotiate a rate that that for purposes of this proceeding, the statutory license provided they choose major record reflected its perception of the value of companies are represented not to participate in the CARP process. the by a single entity, the RIAA. digital performance right in light of RIAA reply at 12. its needs and position in the Turning next to the actual In essence, both sides articulate valid marketplace. Had RIAA insisted upon a marketplace in which RIAA negotiated positions which are supported by the agreements with individual services, the record. super competitive rate, Yahoo! could RIAA is clearly an established have walked Services voice a number of objections to market force with away and waited for the extensive resources CARP to set the Panel's decision to rely on the 26 and sophistication. the rates. RIAA Reply at 13. In fact, the Panel Thus, it was not voluntary agreements offered into found that when RIAA arbitrary for the Panel negotiated with to consider the negotiated evidence by RIAA. Specifically, the less sophisticated buyers who agreement could not between Yahoo! and RIAA. Services object to the use of the wait for the outcome of this It met all the proceeding, criteria identified the CARP voluntary agreements because they fail the rates were above-market value, and by to exhibit a range of negotiated rates therefore, not considered (discussed above) that characterized the by this CARP. hypothetical among diverse buyers and sellers. Report at 54-56. Nevertheless, it would marketplace: Yahoo! was a Broadcasters Petition at 10; Webcasters make no sense for DMCA-compliant Service; RIAA RIAA to take any represented the Petition at 10. They also question the other position in a marketplace interests of five validity of relying on agreements negotiation. Sellers independent record companies, and the expect to make a license negotiated during the early stages of a profit and will extract from the granted the same rights as those market offered under newly emerging industry, noting the what they can, just as buyers will do the webcasting and the Panel's admonition to approach such ephemeral recording licenses. everything in their power to get the The agreements with caution. Report at 47. product at the lowest Webcasters make one final possible price. argument The reason for the warning was Dr. These are the fundamental principles concerning use of licenses Jaffe's '6 stated concern that such guiding marketplace negotiations. negotiated in the marketplace. They licenses "may not reflect fully educated Such negotiations, however, were fault the Panel for its reliance on a assessments of the nascent businesses" few. For the most part, webcasters chose contract for which there was no prior long-term prospects." not to enter into negotiations for marketplace precedent for setting a rate. The Services also argue that the voluntary agreements, knowing that Webcasters Petition at 15. Yet, that existence of the antitrust exemption in they could continue to operate and wait alone cannot be a reason to reject the statutory license gave RIAA an for the CARP to establish a rate. Such » actions on the part of the users clearly Yahoo! is a streaming service which provides "The a retransmissions of AM/FM radio stations and panel used the same analysis for setting the impeded serious negotiations in the programming from other webcaster rates for the ephemeral sites. Report at recording license because marketplace and CARP's 61. Yahoo! is also a the statutory support the global Internet language defining the standard for communications, commerce and media setting rates for the ephemeral observation that the statutory license company, recording license is offering comprehensive services to more than nearly identical to the had a countervailing effect 200 standard set forth in section on the million users each month. Content 114. negotiation process and limited for its features 's the like Yahoo! Finance. Yahoo! News, and Yahoo! Adam jaffe is a Professor of Economics at ability of RIAA to exert undue Sports, are typically licensed from third parties. Brandeis University. He is also the Chair of the marketplace power. See Tr. Mandelbrot W.D.T. I 3-5. Department of Economics and the Chair of the 9075-77, — The Panel was well aware of the many faces of University Intellectual Property Policy Committee. 9490 94 (Marks) (explaining the He Yahoo! Nevertheless, it found no reason to reject testitned on behalf of the Webcasters and the difficulties of bringing webcasters to the the Broadcasters. Yahoo! agreement merely because it offered negotiating table due to the statutory other business services. See Report at 76, in 63. 45246 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

consideration of agreements negotiated the-air radio stations paid in 2000 to the a. Fees paid for use ofmusical works. in the marketplace, albeit at an early performing rights organizations BMI, The Broadcasters and the Webcasters stage in the development of the ASCAP, and SESAC.'e It combined the fault the Panel for disregarding the fees industry. At some point, rates must be fee data with data on listening paid for musical works as a viable set. Such rates then become the baseline audiences obtained from Arbitron to benchmark. Webcasters Petition at 15, for future market negotiations. RIAA generate an average fee paid by an over- 47. They maintain that Dr. Jaffe's recognized an opportunity to participate the-air broadcaster per "listening hour." analysis proves that the value of the in this initial phase and moved forward From this value, Webcasters calculated performance of the sound recording is to negotiate contracts with users with a per performance fee by dividing the no higher than the value of the the intention of using these contracts to "listener hour" fee by the average performance of the musical work. indicate what a willing buyer would pay number of songs played per hour by Webcasters argue that the fees for in the marketplace. However, that was music-intensive format stations. Id. musical works constitute a valid easier said than done. As discussed These calculations yielded a per song benchmark because these rates are the above, most Webcasters chose not to fee of 0.02g or, in the alternative, a per result of transactions between willing enter into marketplace agreements, listener hour fee of 0.22g. For purposes buyers and willing sellers over a long preferring to wait for the outcome of the of webcasting, these values were period of time, in a marketplace that CARP proceeding in the hope of getting adjusted upward to reflect the fact that, shares economic characteristics with the a low rate. Clearly, such resistance to on average, webcasters play 15 songs marketplace for sound recordings. enter into faith negotiations 48. good made per hour, as compared to the 11 per- Webcasters Petition at The it difficult for the copyright owners to hour played on over-the-air radio. The Broadcasters agree. They maintain that gauge the market accurately and find webcaster per hour rate works out to be even under the willing buyer/willing out what a "the just willing buyer would be 0.3 instead of 0.2g per hour. seller standard, over-the-air willing to pay for the right to transmit musical works license experience * * a sound recording over the Internet. After carefully considering both has resulted in fees 'to which most approaches, the Panel chose to focus on 3. Benchmarks for Market Rates: willing buyers and willing sellers [have] Setting the RIAA agreements. In rejecting Dr. agree[d]'nd constitute 'comparable Voluntary Agreements vs. Musical Jaffe's theoretical model, the panel cited Works Fees agreements negotiated over a longer three reasons for its conclusion. First, period, which ha[ve] withstood 'the test The parties offer two very different the Panel expressed strong concern of time.' Broadcasters Petition at 45— methods for setting the webcasting rates. regarding the construct of the model, 46, citing Report at 25, 47. RIAA argued that the best evidence of including: 1. The difficulty in Broadcasters and Webcasters also the value of the digital performance identifying all the factors that must be object to the Panel's characterization of right is the actual rates individual considered in setting a price, and 2. The its proposed benchmark as merely a services agreed to pay for the right to inherent error associated with theoretical model. Webcasters Petition transmit sound recordings over the predicating a prediction on a "string of at 51. They maintain that Dr. Jaffe's Internet. In support of its position, it assumptions," especially where the model was much more than a offered into evidence 26 separate level of confidence in many of the theoretical model because it used actual agreements it had negotiated in the assumptions is not high. Second, the data from the musical works marketplace prior to the initiation of the Panel was wary of analogizing the marketplace to calculate an analogous CARP proceeding. The Services take a market for the performance of musical rate for use of sound recordings in the different approach. They dispute the works with the market for the digital marketplace. Consequently, these validity of the contracts as a bases for performance of sound recordings, Services contend that the Panel gave marketplace rates and offer in their finding instead that the two inadequate consideration to their place a theoretical model (the "Jaffe marketplaces are distinct based upon proposed benchmark and rejected the model") predicated on the fees the difference in cost and demand model out of hand because it was commercial broadcasters pay to use characteristics. And finally, the Panel purported to be only a theoretical model musical works in their over-the-air AM/ determined that the Jaffe model was based upon a number of untested FM broadcast programs. basically unreliable. It could not be used assumptions. Broadcasters Petition at The Jaffe model builds on the premise to predict accurately the amount of 18—19; Webcasters Petition at 18—20, 52. that in the hypothetical marketplace, royalty fees owed to the performing Finally, the Services argue that the copyright owners would license their rights societies by a particular radio statute does not compel the Panel to digital performance rights and station. It came to this conclusion after consider only negotiated agreements. ephemeral recording rights at a rate no using the model to predict the royalty They also contend, that the reliance on higher than the rates music publishers fees owed by a particular station and the fees paid for use of the musical currently charge over-the-air radio comparing that figure to the amount the works in a prior CARP proceeding to broadcasters for the right to publicly radio station actually paid. For some establish rates for subscription services perform their musical works.'a Report at radio stations, the model severely operating under the same license 28, citing Webcasters PFFCL ']['][ 276-78; underestimated the amount owed to the required the panel to give more Jaffe W.D.T. 16-19. To find the rate performing rights societies, thus, consideration to the musical works copyright owners would charge under drawing into serious question the benchmark. Broadcaster's Petition at 1- this model, Webcasters calculated a per reliability of the model. Report at 42, 2; Webcasters Petition at 1 —2, 15, 17, 47. performance and a per hour rate by Webcasters find support for this last over- using the aggregate fees that 872 's BMI, Inc., American Society for Composers, argument in an Order of the Copyright Authors and Publishers, and SESAC, Inc. are Office issued in this proceeding, dated ' "musical work" is a musical composition, performing rights organizations that represent July 18, 2001. including any words accompanying the music. A songwriters, composers and music publisehrs in all In that order, the Office "sound acknowledged recording" is a work that results from the genres of music. These societies offer licenses and that in 1998 fixation of a series of musical, spoken, or other collect and distribute royalty fees for the non- it had adopted the rates sounds, other than those accompanying a motion dramatic public performances of the copyrighted paid for musical works fees as a relevant picture or other audiovisual work. works of their members. benchmark for setting rates for Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45247 subscription services. It stated, however, services on the prior decision setting instances questionable. For example, the that the evidence in that case did not rates for preexisting subscription Panel did not accept the assumptions support a conclusion that the value of services. that a percentage of revenue model the sound recording exceeded the value Moreover, the Panel is not required to could be converted accurately to a per of the musical work. Moreover, and justify why the rates it ultimately performance metric, or that the buyers directly to the point, the Register's recommended here are greater than the and sellers in the two marketplaces are recommendation in the earlier rates preexisting subscription services analogous. proceeding concurred with the earlier pay for use of the musical works. That Broadcasters assert that they had Panel's determination that the musical is merely the result of the analysis of the established that the value of the musical works benchmark is NOT determinative written record before this Panel, and its work is higher than the comparable of the marketplace value of the decision flows naturally from its right for sound recording based on the, performance right in sound recordings. reliance upon contractual agreements fees paid for use of these works in The relevant passage states: "The negotiated in the relevant marketplace movies and television programs. question, however, is whether this for the right at issue. This difference in Broadcasters Petition at 24. In addition, reference point (the musical works the rates is also attributable to the they offered a study of the fees paid for benchmark) is determinative of the different standards that govern each rate these rights in twelve foreign countries marketplace value of the performance in setting proceeding. As discussed where the Services claim these rights sound recordings; and, as the Panel previously in section IV.1, the standard are valued more or less equally. Id. at determined, the answer is no." 63 FR for setting rates for subscription services 24, 49. Because the Panel failed to 25394, 25404 (May 8, 1998). is policy based and not dependent upon analyze this information, the Services The July 18 Order went on to note market rates. Consequently, it is more argue, the Panel's rejection of the that in the subscription service likely that the rates set under the musical benchmark was arbitrary. proceeding, "[h]ad there been record different standards will vary markedly, RIAA responds that the information evidence to support the opposite especially when rates are being set for offered on the fees paid for the public conclusion, [namely, that the value of a new right in a nascent industry. performance of sound recordings fails to sound recordings exceeds the value of Nevertheless, the Register agrees with establish that in these countries sound musical works], the outcome might have the Services on a number of theoretical recordings are valued according to a been different." This statement was an points. Certainly, the Panel could have "willing buyer/willing seller" standard. invitation to the parties to provide utilized Dr. Jaffe's model in making its RIAA Reply at 20, fn 36. In fact, many whatever evidence they could adduce in decision, either alone or in conjunction of the countries surveyed evidently use this proceeding to establish the value of with the voluntary agreements, an "equitable remuneration" standard, the sound recording. It was not to be provided that it considered the model's which courts have held not to be read as an absolute determination, that deficiencies, and made appropriate equivalent to a fair market value. the value of the sound recording in a adjustments for the fact that the model Because it is not possible to ascertain marketplace unconstrained by a required reliance on a string of whether any of the rates offered in the compulsory license is less than the assumptions to perform. the conversion survey of foreign countries represented value of the underlying musical work. of a rate for the public performance of a fair market rate, or that the rights in Instead, the Order stated that "the a musical work in an analog these countries are equivalent to the musical work fees benchmark identified environment, into a comparable rate for rights under U.S. law, the Panel was not in a previous rate adjustment the public performance of a sound arbitrary in its decision to disregard this proceeding as the upper limit on the recording in a digital format. See AMOA evidence. The Register also concludes value of the performance of a sound v. CRT, 676 F2d 1144 (7th Cir, 1982). that the Panel's decision not to consider 'recording may or may not be adopted as But the fact remains that it was not master use and synchronization licenses the outer boundary of the "zone of required by law to do so. The Panel was for use of musical works and sound reasonableness" in this proceeding. This free to choose any of the benchmarks recordings in motion pictures and is a factual determination to be made by offered into the record or to rely on each television was not arbitrary. At best, the CARP based upon its analysis of the of them to the degree they aided the these licenses offered potential record evidence in this proceeding." Panel in reaching its decision. See, e.g., benchmarks for evaluating the digital It is also important to note that in the Use of Certain Copyrighted Works in performance right for sound recordings, prior proceeding, the only reason the Connection with Noncommercial and they may well have been useful had Register and the Librarian focused on Broadcasting, 43 FR 25068—69 (CRT not actual evidence of marketplace the musical works benchmark was found voluntary license between BMI, value of the sound recordings existed. In because it was the only evidence that Inc., and the public broadcasters, Public any event, they did not represent better remained probative after an analysis of Broadcasting System and National evidence than the voluntary agreements the Panel's decision. Each of the other Public Radio, of no assistance in setting negotiated in the marketplace for the benchmarks possessed at least one fatal rates for use of ASCAP repertoire). sound recording digital performance

deficiency and, consequently, each was The Register also rejects the Services'ontentions right. rejected as a reliable indicator of the that the Panel failed to b. Vo/untary agreements. On the other value of the performance of a sound consider fully Dr. Jaffe's model. See hand, the Panel articulated tw'o recording by a subscription service, Of Webcasters Petition at 20, 52. The Panel affirmative reasons for its focus on the equal importance is the fact that the did consider Jaffe's model and negotiated agreements. First, the statute musical works benchmark had never concluded that it need not consider invites the CARP to consider rates and been fully developed in the record, nor alternative benchmarks that are at best terms negotiated in the marketplace. had any party relied on it to any great analogous when it had actual evidence Second, the Panel accepted the premise extent in making its case to that Panel. of marketplace value of the performance that the existence of actual marketplace Consequently, it was not arbitrary for of the sound recordings in the record. agreements pertaining to the same rights

the Panel to reject the Report at 42. It also the offer to for Services'nvitation rejected comparable services offers the best to anchor its decision for utilize the model because the evidence of the going rate. Report at 43, setting rates for nonsubscription underlying assumptions were in many citing Jaffe Tr. at 6618. 45248 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

But in choosing this approach, the Panel assumed MMM had renewed its Specifically, the Register concluded that Panel did not accept the 26 voluntary agreement in 2001 for the same reasons "it was arbitrary for the Panel to rely on agreements at face value. It evaluated that led it to accept a higher than market a single provision extracted from a the relative bargaining power of the value rate in 1999. RIAA Petition at 32. complex agreement where the evidence buyers and sellers, scrutinized the Webcasters respond that RIAA demonstrates that the (rate] provision negotiating strategy of the parties, misrepresents the facts of the renewal. would not exist but for the entire considered the timing of the agreements, They maintain that MMM renewed the agreement." Id, at 25402. discounted any agreement that was not agreement in 2001 based on "many of The two agreements, however, are not implemented, eliminated those where the same motivating factors" that led to analogous. The primary purpose of the the Service paid little or no royalties or the initial agreement, including its Yahoo! agreement was to set a rate for the Service went out of business, and concerns about its long-term use of sound recordings over the evaluated the effect of a Service's relationship with RIAA in other areas. Internet. Thus, the noted trade-offs in immediate need for the license on the Webcasters Reply at 29. Because the this agreement were all directly tied to negotiated rate. See Report at 45—59.ao evidence supports a rationale for MMM considerations relating to the value of Ultimately, it gave little weight to 25 of to accept a higher than marketplace rate, the performance righi, and did not affect the 26 agreements for these reasons and it was not arbitrary for the Panel to its validity as a benchmark. Such was because the record demonstrated that decide not to adopt it as an adequate not the case with the subscription the rates in these licenses reflect above- benchmark. The Panel need not rely on services agreement offered into evidence marketplace rates due to the superior the MMM agreement when it had in the prior proceeding, where the bargaining position of RIAA or the another agreement negotiated in the performance right component was licensee's immediate need for a license marketplace that did not suffer from the merely "one of eleven interdependent due to unique circumstances. At best, same perceived shortcomings. co-equal agreements which together the Panel concluded that the rates Specifically, the Panel gave constituted the partnership agreement included in these agreements establish significant weight to the one remaining between [Digital Cable Radio Associates — an upper limit on the price of the digital agreement negotiated the RIAA-Yahoo! ("DCR")] and the record companies." Id. performance right, and where included, agreement—and used it as a starting Along these same lines, the Services the right to make ephemeral copies. point for setting the rates for the challenge the Panel's dependence upon Report at 59. webcasting license and the ephemeral a single contract negotiated between a RIAA objects to the Panel's decision recordings license. The Panel found this single seller (RIAA) and a single buyer to reject 25 of the 26 agreements on the agreement particularly reliable and (Yahoo!), especially in light of the grounds that the Panel's criticisms were probative because: (1) Yahoo! was a Panel's construct of the hypothetical overbroad. RIAA Petition at 34. successful and sophisticated business marketplace. Broadcasters Petition at 14; Specifically, it claims that the Panel which, to date, had made well over half Live365 Petition at 5; Webcasters mischaracterized its agreement with of all DMCA-compliant performances; Petition at 9, 14. These parties argue www.corn/OnAir ("OnAir"), arguing (2) it had comparable resources and that under 17 U.S.C. 114(fl(2)(B), the that this Licensee paid substantial bargaining power to those RIAA brought Panel had discretion to consider royalties and its decision to enter into to the table; and (3) the agreement negotiated agreements only when the were for the agreement was not motivated by provided for different rates for different agreements comparable types special circumstances as the CARP types of transmissions. See Report at of services in comparable claimed. Id. at 31. This observation, 64 —67; 70. While the first two reasons circumstances. Webcasters, including however, is not sufficient to overcome offer strong support for the Panel's Live365, maintain that Yahoo! had a the Panel's conclusion in regard to this decision to rely upon the Yahoo! unique position among webcasters and it was for agreement, especially in light of the agreement, the third reason is argue that manifestly arbitrary to set rates based on testimony of RIAA's own expert questionable in the context of the the Panel solely the Yahoo! rates this one webcaster which witness, Dr. who testified the agreement because the different paid by Nagle, its own admissions was not similarly Panel should give no consideration to rates do not actually represent the by of value of situated with other webcasters. Live365 agreement with a licensee who parties'nderstanding the any Petition Webcasters 27. cannot survive in the marketplace. the performance right for these types of at 11; Petition at transmissions. See discussion Specifically, they contend that Yahoo! Report at 24. Had OnAir continued to infra, had little concern about a operate in and section IV.5. getting the marketplace renew Webcasters, however, argue that the reasonable rate for Internet-only its license with RIAA, the Panel might Panel's reliance on the Yahoo! transmissions so as RR have long the rate for given it more serious agreement was fatal because it selected transmissions was favorable and it consideration. But it was again, not a single term out of a multifaceted could continue to grow in this arena. to do when the required so, especially contract. Webcasters at 22—23. Webcasters note that Yahoo!'s main Panel found more probative evidence in Specifically, they maintain that the business was the retransmission of radio the record upon which to rely. webcasting rate did not reflect merely re-broadcasts, and that over 90% of all Likewise, RIAA objected to the Panel's the value of the sound recording, but an transmissions made by Yahoo! fall decision not to give any weight of trade-offs ("MMM") abundance that met the within this category. Id. at 28. to the MusicMusicMusic needs of RIAA and Yahoo!. Id. at 24. Consequently, Webcasters maintain that agreement, arguing in this case that the Webcasters make this argument because, the rates set for Internet-only in a prior CARP proceeding, the Register transmissions in the Yahoo! agreement so The Panel also considered, and ultimately rejected three offers of corroborating evidence made had refused to adopt a complicated cannot be fairly applicable to by RlAA in support of its position that all 26 partnership agreement that purportedly Webcasters at large. Id. at 29. agreements should be used in setting the royalty included a rate for the digital Broadcasters have other complaints rates: (i) License agreements for ma)dng [material performance right as a benchmark for with the Panel's approach. First, they redacted subject to Protective Order]; (2) prior case law articulating a method for assessing damages in setting the statutory rate. See, Rate object to the use of the Yahoo! contract patent infringement cases; and (3) a pricing strategy Setting Proceeding for Subscription to set rates for broadcasters when the analysis. Services, 63 FR 25394 (May 8, 1998). buyer in that case was not a broadcaster Federal Register/Vo]. 67, No. 130/Monday, ju]y 8, 2002/Ru]es and Regulations 45249 but a third-party aggregator—a testimony, he acknowledged that Panel's determination that a per completely different type ofbusiness. voluntary agreements between a willing performance fee is directly tied to the Second, they fault the Panel for its buyer and a willing seller would right being licensed. The Panel also failure to follow its own dictate to constitute the best evidence of found that it was difficult to establish proceed cautiously when viewing reasonable marketplace value if such the proper percentage because business contracts negotiated in a nascent agreements were between parties models varied widely in the industry, industry for newly created rights. comparable to those using the such that some services made extensive Broadcaster Petition at 14. Similarly, webcasting license. Tr. 6618 gaffe). The music offerings while others made Webcasters fault the Panel for relying Services'rgument, of course, is that the minimal use of the sound recordings. exclusively on the Yahoo! agreement Yahoo! agreement is not a comparable Report at 37. The final reason and because it offers only a single, uniform agreement for purposes of setting rates perhaps the most critical one for rate for each type of transmission, in for all webcasters, and this appears to be rejecting this model was the fact that contrast to the "range of rates," a valid point. Yahoo!'s business model many webcasters generate little revenue involving "diverse buyers and sellers," is somewhat unique. Unlike webcasters under their current business models. As that the Panel identified as the hallmark that create their own programming, the Panel noted, copyright owners of a willing buyer/willing seller Yahoo! merely offers programming by should not be "forced to allow extensive marketplace." Webcasters Petition at 14. AM/FM radio stations and other use of their property with little or no Webcasters also contend that the Yahoo! webcasters. compensation." Id, citing H.R. Rep. agreement should not have been Nevertheless, RIAA offers record 105-796, at 85-86. Thus, it seemed considered because it, like the evidence that contradicts the illogical to set a rate for the statutory Lomasofl-RIAA agreement, had not been Webcasters'ssertion that Yahoo! is not . license on a percentage-of-revenue basis renewed. Webcasters Petition at 41. a comparable service for purposes of when in fact a large proportion of the Moreover, Live365 questions the this proceeding, noting that many services admit they generate very little Panel's reliance on the Yahoo! contract webcasters affirmatively stated that revenue, and, therefore, would generate when it had rejected use of a second Yahoo! is a competitor. Moreover, RIAA meager royalties even for substantial similar agreement between MusicMatch asserts that the number of the uses of copyrighted works. Moreover, it ("MM") and RIAA because MM had performances made by Yahoo! on its is highly unlikely that a willing seller, accepted higher than marketplace rates Internet-only channels is roughly who negotiates an agreement in the for nearly identical reasons to those that equivalent to the number of marketplace, would agree to a payment account for the inflation in the Yahoo! performances made by the other model which itself could not provide rates. MM had wished to settle litigation webcasters in this proceeding and, adequate compensation for the use of its with RIAA and it received a benefit therefore, Yahoo!'s interest in getting a sound recordings. from the inclusion of a Most Favored reasonable.rate for its Internet-only Nevertheless, Webcasters and Live365 Nations (MFN) clause in the contract. stations should be comparable to those assert that the Panel acted arbitrarily Yet, in spite of the similarities, the of the Webcasters in this proceeding. when it failed to provide a revenue- Panel relied on the Yahoo! agreement RIAA reply at 33-34. based royalty option. Webcasters at 54. and disregarded the second one. Such Because Yahoo! is engaged in both They maintain that both sides advocated disparate treatment of similarly situated types of transmissions, it is reasonable adoption of a percentage-of-revenue services is arguably arbitrary. Live365 to accept this agreement as a basis for option, see RIAA PFFCL, Appendix C; Petition at 13. A closer examination of setting rates for both types of Webcasters PFFCL [['][ 283-296, and that the agreements, however, reveals a transmissions. Yahoo! has developed a it was arbitrary for the Panel to refuse significant difference between the two significant business presence in the to adopt this approach. See Live365 contracts which allowed the Panel to marketplace for Internet-only Petition at 10; see also pg. 11, fn 6. disregard the MM agreement for further transmissions and understands the Webcasters also assert that they had consideration. Most importantly, the marketing and business ofInternet-only made clear that in the event the Panel MM agreement contained a MFN clause webcasters. Consequently, allegations rejected jaffe's model, a revenue-based that [material redacted subject to a that Yahoo! has only a de minimis alternative license proposal would be protective order). The Panel reasoned interest in the webcasting field and is necessary to avoid putting certain that this provision undermined the thus less interested in getting a webcasters out ofbusiness. Webcasters usefulness of the agreement to establish reasonable rate for the right to make Petition at 56, 60. Moreover, Webcasters a marketplace rate because [material digital transmissions are without merit. reject the Panel's conclusion that the redacted subject to a protective order]. The question, however, is whether each Services'evenue-based fee proposal Report at 56—57. Such was not the case rate in the Yahoo! agreement reflects the was untimely. Id.. at 57—60. They with the Yahoo! agreement since the actual value of the particular maintain that under $ 251.43(d) they MFN clause only allowed Yahoo! to transmission or whether one must were allowed to revise their claim or receive a partial benefit commensurate consider both rates in concert to their requested rate "at any time during with [material redacted subject to a understand the valuation process. For a the proceeding up to the filing of the protective order]. Report at 62. more detailed discussion on this point, proposed findings of fact and The Register concurs and agrees with see section IV.5 infra. conclusions of law," and that the Panel the Panel's observation that it would be had no authority to alter this provision unsound to establish a rate for the 4. Alternative Methodology: Percentage- by order under II 251.50.» statutory license using a rate that itself of-Revenue is subject to change based on the The Panel also carefully considered » Section 251.50 of the 57 CPR provides that: outcome of this proceeding. and rejected a percentage-of-revenue In accordance with 5 U.S.C., subchapter II, s The Register also finds the other model for assessing fees and determined Copyright Arbitration Royalty Panel may issue

arguments by the parties unavailing. In that a per performance metric was rulings or orders, either on its own motion or that spite of their objections, the Services'wn preferable to a percentage-of-revenue of an interested party, necessary to the resolution of issues contained in the proceeding before it; expert, Dr. Jaffe, agreed in principle model. A key reason for rejecting the Pmvided, that no such rules or orders shall amend, with the Panel's approach. In his percentage-of-revenue approach was the Continued 45250 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

In reply, RIAA notes that the consequently, it will not be considered the record contains evidence that a Webcasters cite no evidence for their further. number of webcasters do not expect or assertion that they reasonably believed On the other hand, Live365 does intend to earn revenues from their the Panel would offer a percentage-of- make a substantive argument webcasts, see Report at 37; see, e.g., revenue option and counters their concerning the Panel's decision not to Live365 Petition at 7, maintaining that timeliness argument by setting forth the adopt a percentage-of-revenue model. It their use is designed primarily to timeline regarding the parties's notes that the current marketplace uses maintain their over-the-air audience. submissions concerning the rates. RIAA two types of rate structures, a revenue Because certain Services take this Reply at 62. Evidently at the request of based model and a performance rate approach, when RIAA did consider the Webcasters, the Panel issued an structure, and that the revenue based using a percentage-of-revenue model, it order setting November 2 as the model is better for start-up and smaller included a substantial minimum fee deadline for submitting revised or new webcasters. Live365 Petition at 8. In proposal in conjunction with the rate proposals, so that parties were fully fact, Live365 points out that many of the percentage of fee proposal to address the aware of each other's position and could agreements that RIAA negotiated with problems associated with low revenue style their findings of fact and webcasters incorporated this model. generating businesses. Specifically, the conclusions of law accordingly. Moreover, Live365 maintains that it was RIAA proposal required that a Service Consequently, the Panel found that the arbitrary for the Panel to propose rates either .15% of revenues or 5,000 "had pay $ Services'ater submission including a that the effect of rendering sound per $100,000 of a webcasters'perating proposed rate based on percentage-of- recordings substantially more valuable costs, whichever is greater. RIAA Reply revenue in their PFFCL was untimely. than musical works, even though the at 61. In this way, RIAA sought to avoid Report at 31, citing Order of November CARP acknowledged that it was the anomaly of allowing a business 3, 2001. rendering no opinion on this issue." unfettered use of the sound recordings After considering the arguments now Live365 Petition at 5, 14-15. In its without reasonable compensation to the advanced by the Services concerning opinion, this result was arbitrary based copyright owners. Id. at 54, 61. This the Panel's authority to require final upon Yahoo!'s stated perception that the formulation, however, would not have submissions on rates prior to the filing value of the performance right for the given the webcasters the relief they seek of the PFFCLs, the Register finds that musical work is comparable to the value through the adoption of a rate based on the Panel acted in a lawful manner and of the performance right for the sound a percentage-of-revenues. In fact, under within its authority. As RIAA points out recording. Finally, Live365 argues that RIAA's percentage-of-revenue in its the Panel has rates based upon mere perception, as formulation, webcasters, reply, authority those many pursuant to 37 CFR 251.42 to waive or negotiated in the Yahoo! including Live365, would have paid suspend any procedural rule in this agreement, are by their very nature more than they will under the Panel's arbitrary and should be disregarded. Id. proceeding, including the time by per performance rate structure. which at 15. parties must make final RIAA refutes the Services'laim that The Register finds that the Panel's submissions regarding proposed rates. the Panel was arbitrary because decision not to set a percentage-of- What the Panel do it failed cannot is engage in to offer a percentage-of-revenue model. revenue fee option was not arbitrary in a rulemaking proceeding to amend, It argues that the record supports the light of the record evidence. First, it is supplement, or supersede any of the Panel's conclusion that a percentage-of- clear that the Services'rimary position rules and regulations governing the revenue model would have been was to seek adoption of a fee based CARP procedures. See 37 CFR 251.7. difficult to implement because Services upon performances and not a Moreover, the language in tt 251.43 is use sound recordings percentage-of-revenue. Indeed, Dr. somewhat to different ambiguous as to when a party degrees—a position taken by the Jaffe's model proposed a fee model can make its final rate proposal, lending Webcasters'wn witness. Specifically, based on listener hours or number of itself to two interpretations. For this Jaffe questioned the appropriateness of listener songs, and not a rate based upon reason alone, it was prudent for the using a percentage-of-revenue model percentage-of-revenues, because a Panel to issue an order clarifying the where those percentages were based on royalty based upon actual performances application of the rule for purposes of the economics driving over-the-air would be directly tied to the nature of this proceeding. In fact, Webcasters had broadcasts. RIAA Reply Petition at 52, the right being licensed. Report at 37; asked for this ruling and cannot be citing Tr. 6487, 6488, 12582 (Jaffe). Jaffe Jaffe W.R.T. at 31. Moreover, because heard at the end of the process to argue also acknowledged that it was difficult they took this position, Services argued against a ruling that they sought and to to assess what the revenue base should for a low minimum rate that would only which they never objected. be for such a model given the variation cover administrative costs and not the

Consequently, the Panel was not of the business models utilized by the value of the performances themselves- arbitrary when it found the Webcasters'equest webcasters. RIAA also notes that section an approach the CARP adopted in its for a percentage-of-revenue fee 114(f)(2)(B) requires the Panel to Report. structure untimely. consider the quantity and nature of the Moreover, the statute does not require Moreover, the Panel was not arbitrary use of the sound recording and argues the CARP to offer alternative fee for failing to adopt a percentage-of- that a per performance metric structures, and the Services should not revenues model merely because some automatically accounts for the amount have expected the Panel to do so, parties voiced an expectation that the of use by the various services. RIAA especially when the Webcasters never Panel would offer such a model as an Reply at 59. advanced a percentage-of-revenues alternative means of payment. This RIAA also argues that a basic option in their own case. In fact, there complaint of unmet expectations is not percentage-of-revenue fee structure is no precedent in the statutory a substantive argument for finding the would frustrate the purpose of the law licensing scheme anywhere in the Panel's decision arbitrary and, because it would deny copyright owners Copyright Act that would support fair compensation for use of their works alternative rates for the same right. supplement or supersede the rules end regulations in those situations where a service Clearly, it cannot be arbitrary for the contained in this subchapter. See g 251.7. generates little or no revenue. Certainly, Panel to choose not to deviate from the Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45251

longstanding practice of establishing the existence of the rate differential in was nervous about the application of the only one rate schedule for a license. the Yahoo! agreement to the 150-mile radius exemption to 5. The Yahoo! Rates—Evidence of a promotional value enjoyed by the retransmissions made by third-party Unitary Marketplace Value copyright owners from the performance aggregators, like Yahoo!. Consequently, of the sound recordings by broadcasters RIAA maintains that it agreed to a lower The starting point for setting the rates in their over-the-air programs, and not rate for for radio retransmissions, knowing the webcasting license is the Yahoo! to promotional value attributable to that its agreement. In that arguments for not exempting agreement, rates were transmissions made over the Internet. these transmissions were set for two different time periods. weak, and For Report at 74-75. Specifically, the Panel because Yahoo! agreed to the initial time period covering the first pay for each found that, "to the extent that Internet transmission without regard to the 1.5 billion performances, Yahoo! agreed simulcasting of over-the-air broadcasts to exemption. The resulting adjustment for pay one lump sum of $1.25 million. reaches the same local audience with the 150-mile From this information, the Panel exemption consisted of a the same songs and the same DJ support, reduction to the calculated a "blended," base rate, 0.2g, and per there is no record basis to conclude that reflects the fact that about performance rate of 0.083g. This 70% of all value the promotional effect is any less." radio retransmissions fall within the represents the actual price that Yahoo! Report at 75. 150-mile zone.24 In addition, RIAA paid for each of the first 1.5 billion This finding, however, did not transmissions agreed to a further reduction to without regard to which prompt the Panel to make any further compensate of service made the Yahoo! for any type transmission. adjustment for promotional value, "competitive disadvantage" it faced For the second time period, Yahoo! if and finding instead that the differential rates commercial broadcasters were found to RIAA agreed to a differential rate in the Yahoo! agreement already reflect structure. be totally exempt from the digital One rate was set for "marketplace assessment of the various performance performances in right under a separate radio retransmissions promotion and substitution effects, exemption. 5 (RR) (0.05e per performance) and along with a myriad of other factors." The Panel, however, did not credit another rate was set for transmissions in Report at 87. Primary among these RIAA's Internet-only explanation and concluded that (IO) programming (0.2g factors were the Most Favored Nations this concern over the exemptions, per performance). These rates were first (MFN) clause 22 and the cost savings to especially the 150-mile used in exemption, had early 2000 and do not apply to Yahoo! in avoiding CARP litigation. The no bearing on Yahoo!'s the first 1.5 negotiations. billion performances. Panel reasoned that Yahoo! was willing The Panel steadfastly maintained However, the CARP did not accept to accept somewhat inflated these differentiated royalty throughout its report that Yahoo!'s only rates at face value. rates in exchange for the costs it saved aim in the negotiation The Panel engaged in a far-ranging process was to by not participating in the CARP achieve a rate that translated into an inquiry to determine how the parties proceeding, and for the MFN clause established acceptable overall level of payment, and the negotiated rates. What it which had some indeterminate value for that it did found was that Yahoo! not concern itself with the agreed to a Yahoo!. legal consequences of the 150-mile higher rate for the IO transmissions in RIAA disagrees with the Panel's exemption. Report at 66—67. Thus, the exchange for a lower rate for the RR analysis and these findings. As an initial Panel because this characterized RIAA's arguments arrangement addressed matter, it maintains that there was no in regard to the 150-mile specific concerns of both parties. In exemption to record evidence to support a separate be nothing more than a "red particular, RIAA wished to establish herring" a rate for commercial broadcasters. RIAA and without effect in the negotiation marketplace precedent for IO — Broadcaster PFOF 24 52. Second, it process. Id. at 85. Consequently, the transmissions in line with rates it had argues that the Panel adopted a two-tier negotiated Panel found that Yahoo! willingly in earlier agreements, while rate structure for RR and IO granted RIAA's Yahoo! sought to negotiate request for the "whereas rates which, transmissions based on the different clause," relating to the transmissions in the aggregate, yielded a rate it could rates in the Yahoo! agreement, and its within the 150-mile radius, because it accept. Consequently, the Panel found mistaken view of the significance of an the rate for the IO transmissions to be exemption in the law for a s~ At the insistence of RIAA, the Yahoo! artificially high and, conversely, the retransmission of a radio station's agreement includes a "whereas" clause which rates for the RR to be artificially low. broadcast transmission within a 150 states that approximately 70 percent of Yahoo!'s For this reason, it made a downward mile radius of the radio broadcast radio retransmissions are within a 150-mile radius adjustment to the IO rates and an of the originating radio station. transmitter in setting the rate for radio r'ection 114(d)(1)(A) exempts a upward adjustment to the RR rates. retransmissions." See 17 U.S.C. "nonsubscription broadcast transm'ssion." Before making this adjustment, 114(d)(1)(B). Following a lengthy rulemaking proceeding to though, the Panel had to consider Although RIAA maintains that in its determine the scope of this exemption, the whether it was reasonable to establish negotiations with Yahoo! it had argued Copyright Oflice concluded that the exemption separate rates for the two categories applies only to over-the-air broadcast transmissions of that the value of the radio and does not include radio retransmissions made transmissions. In reaching its decision, retransmission should not be based on over the Internet. 65 FR 77292, December 11, 2000. the Panel considered two facts, the fact the location of the original radio This decision was upheld when challenged in the that the Yahoo! agreement provided for broadcast transmitter, it claims that it United States District Court for the Eastern District two separate rates, and the fact of Pennsylvania. See Bonneville Int'I, et al. v. that all Peters, 153 Supp. Zd 763 (E.D. Pa. 2001). The case ss parties agreed that performances of The MFN clause in the Yahoo! agreement is is now on appeal to the United States Court of sound recordings in over-the-air radio discussed in detail in section IV.3, pg. 27. Appeals, Third Circuit. rs broadcasts promote the sale of records. Section 114(d)(1)(B)(i) of the Copyright Act However, during the negotiation period and prior Report at 74. Based on this finding, the provides an exemption from the digital performance to the Copyright Office's rulemaking decision and right for "a retransmission of a nonsubscription the court's decision, Yahoo! had Panel concluded a argued that it that willing buyer broadcast transmission: Provided, That in the case would be at a competitive disadvantage if the courts and a willing seller would agree that the of a retransmission of a radio station's broadcast adopted the broadcasters interpretation of section transmission— value of the performance right for RR (i) the radio station's broadcast 114(d)(1)(A) and found all transmissions made by transmission is not willfully or repeatedly FCC-licensed broadcasters (those made over-the-air would be considerably lower than for IO retransmitted transmissions. more than a radius of 150 miles from and those made over the Internet) to be exempt Moreover, it attributed the site of the radio broadcast transmitter." from the digital performance right. 45252 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations cost Yahoo! nothing. Yahoo!'s retransmissions. Ultimately, the Register promotional effect of radio broadcasts, perception of the clause, however, did concludes that they do not and, but said little about the net promotional not alter the significance of the therefore, the Panel's reliance on these effect of the Internet—and nothing about "whereas clause" to RIAA, who wanted specific rates for IO transmissions and the net promotional effect of the provision included in the agreement radio retransmissions as a tool for webcasting." Id. at 33. It went on to say because it would allow RIAA to argue setting the statutory rates is arbitrary. that "for the time period this CARP is before this CARP that the 0.05g rate for The fundamental flaw in the Panel's addressing, the net impact of Internet radio retransmissions represents a real analysis, though, is not its acceptance of webcasting on record sales is rate of 0.2s, which was discounted to the Yahoo! agreement as a starting indeterminate. Id. at 34. These account for the legal uncertainties at the point. Rather, it is the Panel's observations do not support a time of the negotiation. Report at 67. determination that the differential rate conclusion that radio retransmissions Webcasters had problems with the structure reflects a true distinction in have a greater impact than IO Panel's analysis, too. It found fault with value between Internet-only transmissions on record sales or that the Panel's approach to setting rates for transmissions and radio retransmissions either form of transmission has any webcasting based on the rates in the based upon the promotional value to the ixnpact on record sales. Yahoo! agreement. Webcasters object to record companies and performers due to However, the CARP did conclude that the methodology used by the Panel in airplay of their music by local radio "to the extent promotional value calculating the proposed rates, stations. The Panel reached this influences the rates that willing buyers especially the use of an inflated rate as conclusion in spite of the fact that and willing sellers would agree to, it a starting point for setting the rates for nothing in the record indicates that the will be reflected in the agreements that IO transmissions. Moreover, they parties considered the promotional result from those negotiations." Id. But contest the use of any rate for IO value of radio retransmissions over the therein lies the problem. As discussed transmissions contained in the Yahoo! Internet when they negotiated these above, RIAA and Yahoo! did not agreement because Yahoo! had less rates. consider proxnotional value when interest in negotiating a favorable rate RIAA maintains, and the Broadcasters negotiating the Yahoo! agreement, for these transmissions, which 'concur, that no evidence exists to therefore, its effect cannot be reflected constituted only 10'f its business. support the Panel's determination that in the IO and RR rates set forth in the Webcasters Petition at 30-40. Instead, Yahoo! and RIAA considered and made Yahoo! agreement. Webcasters argue that Yahoo! agreed to adjustments for the promotional value However, rejection of the CARP's the 0.2s rate for IO transmissions only of radio retransmissions. RIAA Reply at conclusion on this point does not because it obtained a significantly lower 48; Broadcasters Petition at 39. In fact, nullify the usefulness of the Yahoo! rate for its radio retransmissions, and the Broadcasters argue that it was agreement. The Register'ccepts the that any number of possible " 'patently'rbitrary for the Panel to Panel's determination that the Yahoo! combinations of rates could have been conclude that promotional value was a agreement yields valuable information set to achieve Yahoo! 's targeted rate. "likely influence" on Yahoo! 's RR rate about the marketplace rate for Because of this, Webcasters argue that when the record evidence showed that transmissions of sound recordings over the endpoints settled upon in the neither party had ever suggested the Internet, and is a suitable

agreement were patently arbitrary. The anything of the kind." Broadcasters benchmark for setting rates for all the Register concurs with the Webcasters'nalysis Petition at 39. The Register agrees and reasons discussed in section IV.3, supra. on this point and finds that the finds that the Panel's reliance on Moreover, a careful review of the record Panel's use of the IO rate was arbitrary promotional value to justify the price support's the Panel's further finding that because of the IO rate, which, in and of differential for IO transmissions and in effect, the real agreement between 'itself, did not reflect what the willing radio retransmissions was arbitrary. The Yahoo! and RIAA was for a single, buyers and willing sellers had agreed to Panel's speculative conclusion that unitary rate for the digital performance in the Yahoo! deal. "this factor was likely considered by of a sound recording and not the two Another flaw in the Panel's reasoning, RIAA and Yahoo!, and is evidently separate rates set forth in the according to Webcasters, was its reflected in the resulting difference agreement—rates, which the Panel reliance on the 0.0830 "blended rate" as between RR and IO negotiated rates," found were artificially high (for IO the lower end of the acceptable range of only serves to undermine the validity of transxnissions) and low (for RR). IO rates. They argue that this rate the Panel's final analysis on this point. The Register accepts the CARP's should not even be considered because See Report at 75. conclusion that the differential rate it was never negotiated as a performance Moreover, the Panel's own earlier structure was developed to effectuate rate at all. This observation, however, findings with regard to the studies particular objectives of the parties, overlooks the fact that Yahoo! actually offered to show that the Internet has a distinct and apart from establishing an paid this rate for 1.5 billion promotional effect contradicts its later actual valuation of the performances. performances without regard to the finding concerning the promotional Specifically, the Panel found that RIAA nature of the performances. The fact that effect derived from radio obtained an artificially high IO rate in the rate was not negotiated as a separate retransmissions over the Internet. After an attempt to protect its targeted rate for Internet-only transmissions does considering the two studies offered into valuation of IO transmissions for use in not diminish its usefulness for purposes evidence by the Services, the Panel this proceeding and Yahoo! received an of this proceeding. As the Panel asserted categorically stated that it "could not "effective rate" it could accept. Because throughout this proceeding, it is hard to conclude with any confidence whether the record evidence supports this find better evidence of marketplace any webcasting service causes a net fmding, Report at 65. referring to Tr. value than the price actually paid by a substitution or net promotion ofthe 11256—57; 11281 (Mandelbrot); Panel willing buyer in the marketplace. sales of phonorecords, or in any way Rebuttal Hearing Exhibit 1 at 4; Tr. The question, however, is whether the significantly affects the copyright 11279—81, 11395-96 (Mandelbrot); Tr. rates in the Yahoo! agreement represent owners'evenue streams." Report at 33— 10237—38 (Marks), it was not arbitrary distinct valuations of Internet-only 34. It noted that "the Soundata survey for the Panel to reach this conclusion. transmissions and radio presented by Mr. Fine evinced a net Report at 64—65 (noting that "Yahoo!'s Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45253

primary concern, as characterized by its determination regarding the credibility were prohibitively high, including a negotiator, was to negotiate a license of a witness. Likewise, the Register and revenue-based royalty set at 15% of a agreement under which it would pay the Librarian may not question findings webcaster's gross revenue. Live 365 'the lowest amount possible', that and conclusions that proceed directly Petition at 16. It then argues that it was "Yahoo! was willing to accept a higher from the arbitrators'onsideration of arbitrary f'r the Panel to make this IO rate in exchange for a lower RR rate factual evidence in the record. In this finding and then propose rates that in order to achieve the lowest overall instance, the Panel credited exceed the rates it deemed to be effective rate for all its transmissions" Mandelbrot's testimony and his excessive, and more than the market (emphasis added), and that Yahoo! was characterization of the negotiation could bear. Id. To make its point, pleased to achieve the lowest possible process, specifically concluding that his Live365 uses the Panel's per overall rate."); (noting that "the bottom testimony was credible, and that Yahoo! performance rate and calculates how line" combined rate was of paramount understood the argument based on the much certain services would pay for the importance to Yahoo!). Report at 74. 150-mile exemption had no significant digital performance right and translates Moreover, Yahoo! maintains that it impact on the rates ultimately that amount into a percentage of would not have paid the 0.2 cent rate for negotiated.ze Report at 67. revenue metric. In each of the cited the IO transmissions but for the rate it Consequently, we must accept the examples, the amount to be paid based received for radio retransmissions Panel's assessment on this point, which on the proposed per performance rate because the two rates, when considered leads to the conclusion that the {as expressed as a percentage of together, yielded an acceptable "effective rate" achieved through the revenues) is considerably higher than "effective rate" for all transmissions. unique rate structure represents the that that would be required under any The testimony of David Mandelbrot, the value these parties placed on the of the percentage-of-revenue models Yahoo! representative, is particularly performance of a sound recording, proposed by any party at any time. For informative on this point. without regard to origin of or the entity example, under the Panel's proposed Question: When you entered into the making the transmission. rates, one service would purportedly agreement with the RIAA, just looking Based upon a modification to the pay 21 /o of its gross revenue, a figure at the 0.2 cents per performance rate for Panel's approach for calculating rates which is considerably higher than the Internet-only broadcasting, you didn' for making transmissions of sound 15'/o of gross revenues contained in consider that an unfair rate, did you7 recordings under statutory license that many of the voluntary agreements Answer: Mandelbrot: We considered it accepts as much of the Panel's reasoning ultimately rejected by the Panel. Based a higher rate than we would have paid as possible, the hase rate for each on this observation, I ive365 contends if we were just negotiating an Internet- performance is 0.07g (rounded to the that the Panel*s proposal runs counter to only rate. I would say we did not nearest hundredth). The methodology the evidence and, therefore, it is consider it an unfair rate in the totality for calculating this rate is presented and arbitrary. Id. at 18. of the entire agreement, which was that discussed in full in section IV.8. Moreover, Live365 argues that the we were getting the 0.05 cent rate for the 6. Are Rates Based on the Yahoo! Panel failed to account for relevant radio retransmissions. market factors, including how much a — Agreement Indicative of Marketplace Mandelbrot Tr. at 11347 11348. This webcaster can Id. at 19. Webcasters statement Rates7 pay. supports. a finding that choice similar concerns, arguing that the Yahoo!, the willing buyer in this case, Many webcasters, including Live365, adoption of a per performance rate will did not accept the stated IO rate as an maintain that the proposed rates derived cause ruin to many webcasters who to accurate reflection of what it would be from the Yahoo! rates do not reflect date have yet to generate a viable willing to pay for the right to make what a willing buyer would pay in the income stream. Webcasters Petition at those transmissions. marketplace for the right to make these 60. In place of this structure, webcasters There is also scant evidence to transmissions. Live365 maintains that assert that a percentage-of-revenue indicate that Yahoo! gave any serious the Panel incorrectly analyzed the model must be adopted in order to consideration to the effect 150- of the evidence in the record. First, it nates address the economic situation facing mile exemption for certain radio that the Panel itself found that many of small, retransmissions independent webcasters. They when negotiating the IO the rates in the voluntary agreements maintain that those Services that and RR rates. Mandelbrot maintained entered into s voluntary agreements based that the exemptions were of little The Register finds that RIAA's explanation for on a percentage-of-revenue will remain the rate structure is equally plausible. Certainly, at significance to Yahoo!, since it was in business while those operating under "looking to use whatever the time the Yahoo! agreement was being [it] could to negotiated, the application of the general the statutory license with its as exempti on per get low a rate as possible." Id. at for a nonsubscription broadcast transmission, 17 performance royalties will not. 11381; also U.S.C. 114(d)(1)(A), and the more see 11331 (Mandelbrot specialized Webcasters — exemption for radio relransinissions within '150 Petition at 62 63. In the admits using the ambiguities in the law, eyes of the Webcasters, such a result even miles of lhe radio broadcast transmitter, 17 U.S.C. though they thought the arguments 114 (d)(1)(B)(1), was in dispute. Thus, it would have reflects unexplained disparate treatment in their favor were weak, solely for the been totally rational for ihe parties to fashion a rate of similarly situated parties, and "an structure that accounted for possibly purpose of getting effective rate that exempt requires an adjustment to eliminate this we could live with"). Again it is clear transmissions. It would have been logical to achieve this end by discounting the unitary rate to rellect unjust and arbitrary result. Webcasters that Yahoo!'s focus was the negotiation the number of exempt transmissions which, in this also argue that the Panel failed to of a rate at the lowest possible level that case, was approximately 70% of all the radio articulate a rational basis for retransmissions. failing to would allow it to conduct business offer an alternative rate structure based without concerns about copyright However, it is not for the Register or the Librarian to choose between two equally plausible on percentage-of-revenue. violations. explanalions of the facts. The law requires that the In addition, Live365 argues, as do the Where such determinations are based Librarian accept the Panel's determination unless Broadcasters, that Yahoo! is a on the testimony and evidence found in its conclusions are unsupported by the record. substantially different Thus, having found type of business the record, the Register and the record support for the Panel's from small start-up webcasters who Librarian must conclusion that the 150-mile exemption played no accept the Panel's role in the final determination of the negotiated would be unwilling to pay the same weighing of the evidence and its rates, we must accept iis finding on this point. rates as Yahoo! for the use of sound 45254 Federal Register/Vo]. 67, No. 130/Monday, July 6, 2002/Rules and Regulations

recordings. Thus, it contends that the The law requires only that the Panel shows that both business models are Yahoo! rates do not reflect what these set rates that would have been fundamentally comparable in at least buyers would be willing to pay in the negotiated in the marketplace between a one all-important way: they simulcast marketplace. The implication is that willing buyer and a willing seller. It is AM/FM programs over the Internet to these businesses have expended silent on what effect these rates should anyone anywhere in the world who significant monies on start-up costs, have on particular individual services chooses to listen. Even accepting the including software, infrastructure who wish to operate under the license. fact that Broadcasters say their development, and bandwidth, and Thus, the Panel had no obligation to fundamental business is to provide having not yet established substantial consider the financial health of any programming to their local audiences, revenue streams would be unable or particular service when it proposed the the potential for reaching a wider unwilling to pay the same rates. Live365 rates. It only needed to assure itself that audience cannot be denied. Given that Petition at 7, 11. Moreover, Live365 the benchmarks it adopted were the record indicates that 709o of argues that the rates set by the Panel indicative of marketplace rates. Yahoo! 's radio retransmissions are to thwart Congressional intent "by making listeners within 150 miles of the 7. Should a Different Rate be station's Internet performances of sound Established for Commercial originating radio transmitter, Yahoo! 's business with to radio recordings economically unviable for Broadcasters Streaming Their Own AM/ respect many webcasters." Live365 Petition at FM Programming? retransmissions seems to be very 21. similar. Moreover, the fact that Yahoo! RIAA takes exception with the Although RIAA had argued that the offers many additional services is not Webcasters and Live365 on these issues. rate for commercial broadcasters should relevant to this proceeding because the It analyzes how much certain be the same as the rate for Internet-only Yahoo! agreement only addressed the webcasters, the Panel did not It webcasters and Live365 pay, as a agree. rates Yahoo! paid for streaming sound percentage-of-revenue, for sales and did agree, however, that the rate for recordings over the Internet. Had the marketing cost, personnel cost and commercial broadcasters should be the contract been tied to other services bandwidth. The results show that a same as the rate adopted for radio offered by Yahoo!, it might well have company's costs for these services can retransmissions and that these rates been inappropriate to use this contract amount to more than 100 times should be based on the Yahoo! in this context. That is not the case and the agreement. amount of a company's revenue, so it was not arbitrary for the Panel to whereas It noted that the Yahoo! agreement rely on the Yahoo! contract to set the the projected costs of the established rates for retransmissions of royalties for transmitting sound rate for broadcasters who stream their the same types of radio station signals own programming over the Internet. recordings for the same time period are as those directly streamed no more than 2 times the amount of a by Commercial broadcasters then take commercial broadcasters. Consequently, another approach and argue that they company's revenue. RIAA Reply at 57. it put the burden of proof on the In all cases, these costs reflect the start never would have agreed to the rates broadcasters to present evidence to that Yahoo! paid because their purposes up nature of the industry, and not the distinguish between the direct ultimate make or break point of the for streaming differ from Yahoo!'s transmission of their programs over the purposes. Commercial broadcasters business. Thus, a proposed fee that Internet and the retransmission of the results in royalty payments above the assert that they began streaming in order same programming made by a third- have a "in current revenue stream for a webcaster to presence the online world, party. Broadcasters were unable to offer to maintain the local radio brand, and is not atypical or unexpected. Certainly, any compelling evidence on this point. if that were the measure of the value as a convenience to their regular over- of Thus, in the end, the Panel was unable the-air listeners." Broadcasters Petition these services, then the costs for to distinguish between commercial employment, hardware, and at 29. They then note that many broadcasters and radio retransmisions, commercial broadcasters have already marketing—so essential to establishing that "the — stating record was utterly ceased streaming because of an increase and maintaining the business must devoid of evidence implying a higher also viewed in costs. They cite this fact as evidence be as excessive and above rate [for commercial broadcasters] and of their assertion that the fair market value for each of these they would only insufficient [evidence] to warrant a be willing to a significantly lower services. Clearly, that is not the case, pay lower rate." Report at 84—85. (emphasis rate than a third-party aggregator like nor can one rationally conclude that it in the original). should be'the Yahoo! See Broadcasters Petition at 31, case. Nevertheless, Broadcasters are fn 25 (offering examples of decisions Moreover, RIAA notes that the courts troubled by the Panel's use of the made by radio stations to cease their have historically upheld rates set by the Yahoo! agreement to set rates for streaming operations because of CRT, even when users have argued that broadcasters for two main reasons. First, bandwidth fees and dispute over royalty the rates would cause the business to they argue that Yahoo! represents a fees between AFTRA and the cease certain operations. Where the substantially different type of business. advertising agencies). They also cite the intent of Congress is to set a rate at fair Second, they maintain that the Panel testimony of David Mandelbrot, who market value, as in this proceeding, the must make affirmative findings that the testified that Yahoo! feared broadcasters Panel is not required to consider businesses are comparable before would be unwilling to absorb the rates potential failure of those businesses that applying the same rates to both Yahoo! negotiated for streaming AM/FM cannot compete in the marketplace. See Services. Broadcasters Petition at 26—27. programming. Id. at 32. Based upon this Nationa/ Cable Television Ass'n. v. CRT, Indeed, Yahoo! offers a plethora of evidence, the Broadcasters and Live365 724 F.2d 176 (D.C. Cir. 1983) (holding services, making available hundreds of conclude that the Panel acted in an that rates set at fair market value were radio stations, local television stations, arbitrary manner in setting the rates that proper even though cable operators video networks, concerts, CD listening will put many services out of business. argued that the rates were prohibitively programs, Internet-only music channels Live365 Petition at 15, 18. high and would cause them to cease and educational and entertainment However, the Panel did consider the transmission of the distant signals at video programs. Id. at 28. Nevertheless, differences between the two business issue.). an examination of the record clearly models, speculating that it was entirely Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45255 possible that the cost to stream AM/FM by the number of performances ($1.25 Determination of this rate, however, is programming would be lower for million/1.5 billion performances) to get not necessarily the end of the rate- broadcasters than for third-party a "blended" rate of 0.083g per setting process. Webcasters had argued aggregators like Yahoo! Id. at 84—85. performance. Report at 63. To determine for a downward adjustment to the rates Had Broadcasters made that argument or the "effective rate" for the second proposed by the Panel to compensate for similar ones to show that Yahoo! period, a calculation must be made to litigation cost savings and added value received greater value from its streaming account for the differential IO and RR due to MFN clause. Such arguments activities, the Panel may well have set rates, 0.2g and 0.05g, respectively, set apply with equal force to the unitary a lower rate for Broadcasters who stream forth in the agreement and the relative rate proposed by the Register. their own programming. Id. at 85. But as proportion of Internet-only Webcasters Petition at 42—43. The the Panel observed, it cannot make transmissions to radio retransmissions. Webcasters'rgument is well taken and, adjustments based on mere speculation. This is a simple arithmetic calculation based on the record evidence, it is So when the Panel found no record and one that Yahoo! had already reasonable to assume that the rates in evidence to distinguish these services, it performed in order to gauge the actual the Yahoo! agreement are slightly higher had no reason to offer a separate rate for costs of the performances under the to account for these two factors. See commercial broadcasters who stream differentiated rate structure. This Report at 68-69. However, there is a their own AM/FM signal over the calculation yielded an "effective" or problem in making an adjustment to the Internet. Id. at 84. "blended" rate of 0.065g per proposed rate where the record contains Moreover, RIAA points out that performance based upon Yahoo!'s no information quantifying the added Yahoo! never even tried to pass along expectation that 90% of its value of the factors that purportedly the costs of the transmissions to the transmissions would continue to be resulted in inflated rates. See Report at radio stations. Thus, no determination radio retransmissions with the 29 (discussing lack of record evidence could be made as to whether the remaining 10% being Internet-only quantifying value of any factor, other broadcasters would have accepted the transmissions [((9 x 0.05g) + (1 x 0.2g))/ than promotional value, that allegedly rate and paid it, or rejected it out of 10]. Report at 63, citing Tr. 11279, influenced the negotiated rates). The hand. RIAA Reply at 45. RIAA's 11292 (Mandelbrot), Panel Rebuttal potential (but apparently observation is persuasive, as is the Hearing Exhibit 1 at 7. unquantifiable) added value attributable Panel's general observation that the Now the question is how to reconcile to these 2 factors might present a record did not contain any evidence to these values to determine the unitary problem if the Register were proposing support a different rate for commercial rate. Although an argument can be made a rate at the high end of the 0.065g- broadcasters. Thus, the Panel's decision for adopting either value, it makes more 0.083g range, but because the Register is not to set a different rate for commercial sense to use both values and take the recommending a rate in middle of the broadcasters was not arbitrary. average of the two. In this way, the final "zone of reasonableness," it is safe to For these reasons, the Register accepts unitary rate captures the actual value of conclude that the recommended rate the Panel's decision not to differentiate the performances made in the initial falls into that zone of reasonableness between simulcasts made by period (for which Yahoo! paid a lump even taking these factors into account. commercial broadcasters and simulcasts sum for the first 1.5 billion Similarly, Broadcasters argued for a of the same programming made by a performances) and the projected value downward adjustment of the simulcast third-party aggregator. Accordingly, the of the transmissions at the agreed upon rate to account for the promotional rate for commercial broadcasters rates for the remainder of the license value associated with over-the-air streaming their over-the-air radio period; and it falls within the range of broadcasts. Broadcasters Petition at 41. programs on the Internet is the unitary acknowledged values of these The record, however, does not support rate gleaned from the Yahoo! agreement. transmissions.'Courts have long this suggestion. Indeed, the Panel did is over-the-air 8. Methodology for Calculating the acknowledged that rate setting not an acknowledge that radio exact science, and all that is necessary retransmissions had promotional value, Statutory Rates for the Webcasting "zone "the License is that the rates lie within a of but it concluded that net impact of reasonableness." See National Cable Internet webcasting on record sales is a. Calculation of the unitary rate. In Television Assoc. Inc. v. CRT, 724 F.2d indeterminate." Report at 34. This is not section IV.5, the Register rejected the 176, 182 (D.C. Cir. 1983) ("Ratemaking to say that webcasting, including Panel's determination that the Yahoo! generally "is an intensely practical simulcasting of over-the-air radio agreement provided a basis for affair. The Tribunal's work particularly, programming, has no promotional establishing different rates for Internet- in both ratemaking and royalty value. It only means that the record only transmissions and radio distributions, necessarily involves companies gain similar benefits from retransmissions. Instead, a estimates and approximations. There both types of transmissions. determination was made that the Yahoo! has never been any pretense that the Consequently, no adjustment is agreement justified only a single rate CRT's rulings rest on precise necessary. applicable to all transmissions, without mathematical calculations; it suffices b. The 150-mile exemption. Under regard to the source of the transmission. that they lie within a "zone of section 114(d)(1)(B)(I), any To calculate this unitary rate, it is reasonableness"'). Thus, the record here retransmission of a nonsubscription necessary to determine what Yahoo! supports a "zone of reasonableness" broadcast transmission is exempt, as a paid for the initial 1.5 billion between 0.083g and 0.065g. matter of law, from the digital performances, based on the lump sum Accordingly, the Register performance right, provided that "the payment, and what it expected to pay recommends that the rate for making an radio station's broadcast transmission is for transmissions after that time. eligible nonsubscription transmission of not willfully or repeatedly retransmitted The first calculation was actually a sound recording over the Internet more than a radius of 150 miles from the done by the Panel based upon Yahoo!'s under section 114 be set at 0.07 cents site of the radio broadcast transmitter." agreement to pay RIAA $ 1.25 million for per performance, per listener, the During the course of the negotiations the first 1.5 billion transmissions made midpoint of the "zone of between RIAA and Yahoo!, there was a by Yahoo!. It divided the amount paid reasonableness." great deal of uncertainty regarding this 45256 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

provision and whether it applied to statutory language, however, does not the section 114(d)(1)(C)(iv) exemption transmissions made over the Internet. make clear whether that same Licensee are eligible for the section 112(e) See discussion above, section IV.a.5. would retain the benefit of the statutory license for ephemeral As noted above (section IV.a.5.), in its exemption for those transmissions if recordings in order to facilitate Internet Petition, RIAA argued that during the additional retransmissions of the radio transmissions by business transmission course of the negotiations between broadcast signal were also made services. Congress's failure to do the RIAA and Yahoo!, there was a great deal "willfully" or "repeatedly" outside the same for services operating under the of uncertainly regarding this provision 150-mile radius. section 114(d)(1)(B) exemption and whether it applied to transmissions A critical piece in the analysis is the demonstrates that Congress did not made over the Internet. RIAA argued meaning of the word "retransmission." contemplate that that exemption would that because of this uncertainty, it had Each retransmission of a radio signal be available to services making been willing to agree to a lower radio over the Internet maybe viewed as a retransmissions via the Internet. retransmission rate. In fact, RIAA discrete, point-to-point transaction to be Moreover, pointed out that its chief negotiator had considered on its own merit without if section 114(d)(1)(B) were advised its negotiating committee that reference to further retransmissions interpreted as providing an exemption for a radio retransmission over the RIAA's arguments against application of made by the Licensee. Alternatively, the Internet, when that retransmission is the 150-mile exemption to a reference to "willful and repeated" may to retransmitter such as Yahoo! "are not require consideration of each a recipient located within 150 miles of station's particularly strong." RIAA Petition at retransmission, with all the radio transmitter, the together other Licensee 20. retransmissions, made by the Licensee could not make ephemeral recordings to Confronted with the assertions made to multiple listeners over a period of facilitate such an exempt in RIAA's petition which indicated that time, both inside and outside the 150- retransmission. This interpretation RIAA itself had had considerable doubts mile radius. would put the Licensee in the illogical on the subject at the time of the Having considered the position of having a right to retransmit

negotiations, the Register felt compelled the statutory languageparties'esponses, and its the radio signal, but no means of to determine whether radio relationship to section 112, the Register accomplishing the retransmission retransmissions over the Internet to now concludes that the exemption is without negotiating private licenses to recipients within 150 miles of the radio not applicable to radio retransmissions make ephemeral recordings to facilitate transmitter are, in fact, eligible for the made over the Internet. While Copyright the exempt transmissions. At the same

section 114(d)(1)(B) exemption.27 The Owners and Performers offer many time, the Licensee could operate under a Register issued an order on June 5, 2002,'sking arguments in support of their position statutory license for making the the parties to brief two legal that radio retransmissions within 150 ephemeral recordings to facilitate its questions concerning the 150-mile miles of the radio station's transmitter non-exempt transmissions beyond the exemption. The first question asked are not exempt, and while Broadcasters 150-mile radius made pursuant to the whether a retransmission over the offer many arguments to the contrary, section 114(f! statutory license. As RIAA Internet of a radio station's broadcast the critical piece of the analysis—and points out in its response to the June 5 transmission to a recipient located the argument that the Register finds Order: "Such a result is inconsistent within 150 miles of the site of the radio persuasive—is found in the text of with one of the purposes of the DMCA broadcast transmitter is an exempt section 112(e). This section provides a statutory licenses to create efficient transmission pursuant to 17 U.S.C. statutory license for making ephemeral licensing mechanisms for copyright 114(d)(1)(B). The second question then recordings only to "a transmitting owners and webcasters," citing H.R. queried whether the exemptiori would organization entitled to transmit to the Rep. 105-796, at 79-80 (1998). still apply to radio retransmissions public a performance of a sound Consequently, the better interpretation of made within the 150-mile radius by a recording under the limitation on the section 114(d)(1)(B) exemption is Licensee, in the case where that same exclusive rights specified by section to consider all retransmissions of a service is simultaneously retransmitting 114(d)(1)(C)(iv) or under a statutory License in the aggregate, which logically the radio station's broadcast license in accordance with section means that no Internet retransmissions transmission of one or more recipients, 114(f)." 1.7 U.S.C. 112(e)(1). are exempt under section 114(d)(1)(B). located more than 150 miles from the The statutory license for ephemeral Based on the interplay between site of the radio broadcaster's recordings in section 112(e) was enacted sections 112 and 114, the better transmitter. as part of the same section of the interpretation of — — the law is that the Section 114 could be read as allowing DMCA section 104 that expanded the exemption does not apply to radio a Licensee to take advantage of the section 114 statutory license to include retransmissions made over the exemption for all Internet webcasting. The purpose of this Internet.'a retransmissions of a radio broadcast to ephemeral recording statutory license recipients within a 150 mile radius of was to enable business establishment ss Copyright Owners argue that the Copyright that radio station's transmitter. The services and services using the new Office had already decided this issue twice before: section 114 statutory license for (1) In its decision in a rulemaking announced webcasting to make the December 11, 2000 that transmissions of a broadcast » If the Register had concluded that Internet ephemeral signal over a digital communications network, such retransmissions to recipients located within the recordings they need to make in order as the Internet, are not exempt from copyright 150-mile radius are exempt, she most likely would to facilitate their licensed transmissions, liability under section 114(d)(1)(A), Public have recommended an adjustment of the 0.07s per and in Performance of Sound Recordings: Definition of a performance rate as recognition of the fact that the applied to radio exemption in section Service, 65 FR 77292; and (2) in an Order issued retransmissions to take into account the record 112(a) permitting July 16, 2001, in which the Office stated that the evidence that approximately 70'Io of radio the making of a single ephemeral "Panel must use the "willing seller/willing buyer" retransmissions are to recipients located within 150 recording might not be adequate. See standard to set rates for all non-interactive, miles of the radio transmitter. The result would H.R. — nonsubscription transmissions made under the 'ave been radio Rep. 105-796, at 89 90. a retransmission rate of.02tr per Congress expressly provided in the section 114 license, including those within 150 performance, and correspondingly lower rates for miles of the broadcaster's transmitter." (Emphasis radio retransmissions by non-CPB, noncommercial DMCA amendments that business added.] The Register made no such decision on broadcasters. establishment services operating under either occasion. Federal Register/Vo). 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45257

9. Rates for Other Webcasting Services that the "value of the performance does for these services. Again, the Panel and Programming not change merely because of the found no record support for setting a a. Business to business webcasting technology of the webcaster or the fact separate and higher rate for listener- services. Some Services provide that the sound recording is heard when influenced services. It rejected the specialized Internet radio-like stations it is accessed at a third-party website agreements between RIAA and non- to businesses rather than directly to rather than the originating webcaster's DMCA compliant services because the consumers. These business-to-business website." Webcasters Reply at 57. rates in those agreements were for rights Moreover, webcasting services (B2B) are in many they maintain that RIAA beyond those granted under the respects analogous to business offered no evidence to demonstrate that statutory license. Nor could the Panel establishment music services as and can these transmissions should be valued at discern from the record evidence which provide programming customized to the a higher rate. In fact, the record services would be subject to the basic indicates the demographics of the customers of a opposite. Most of the RIAA webcasting rate as distinguished from particular business. voluntary agreements which permit the the rate for listener-influenced services. Report at 78. For licensee this reason, RIAA had proposed setting to distribute its webcasts to Consequently, the Panel decided "that a higher rate for business to business third-party websites contain no so long as a service complies with, and webcasting services than for business premium for this practice. Id. at 59. is deemed eligible for the statutory to Thus, based on the weight of consumer (B2C) services. The Panel, the license, it should not pay a separate rate evidence, it was not arbitrary for the based upon listener influence." Report however, rejected this suggestion, Panel to finding that the evidence conclude that a separate rate at 81. did not should not be set for syndication support a higher rate for B2B services. The Register finds the Panel's analysis services. The Panel is responsible for to be It found that most of the agreements for consistent with the law, and thus weighing the evidence and so long as accepts the Panel's decision not to set a such services had rates near or below the record the predominant supports its decision, the separate rate for transmissions which rate set for standard Register will not second-guess the Internet-only transmissions. Report at might not come within the scope of the Panel's finding of fact. Nevertheless, license. Again, if transmissions made by 79. Thus, the Panel concluded that it this had "found determination does not end the a listener-influenced service are insufficient evidence to inquiry. RIAA correctly cites section determined support a separate rate for syndicator to be outside the scope of 114(j)(6) of the Copyright Act for the the statutory license, services", and set the rate accordingly at the proper course proposition that an eligible of action would be for the parties to 0.146 per performance, just as it had for nonsubscription transmission Internet-only does not negotiate a voluntary agreement for performances. Id. include those made a service whose RIAA for by these transmissions, or for the copyright argues a premium rate for primary purpose is to sell, advertise, or these Services, owner to file a copyright infringement because they syndicate promote particular products or services suit against the service. their programming through third-party The Panel has other than sound recordings, live no authority to propose a rate for any non-entertainment websites. RIAA concerts, or other music-related events. transmissioa maintains that these which cannot be made transmissions are Thus, in any given case a determination lawfully under the statutory license. outside the scope of the webcasting would have to be made to ascertain c. Other trensmissions. license, types of A and consequently, services whether such transmissions are covered broadcaster may stream three different should a pay premium when they make under the statutory license. This types of programming in addition to a transmissions through non- proceeding, however, is not the simulcast of its AM/FM radio signal: (1) entertainment websites. RIAA Petition appropriate vehicle for such a fact- "Archived" (previously aired) radio at 50—52. In response, Webcasters argue specific determination. If a court programming; (2) "side channels" determines that the transmissions made (Internet-only programming); and (3) The scope of section 114(d)(1)(B) was not at issue by a particular business-to-business "substituted in the December 2000 rulemaking on the status of programming" broadcasters. Likewise, the July 16 Order was in service fall outside the scope of the (programming that replaces over-the-air response to Copyright Owners'otion for webcasting license, then those programming that has not been licensed Declaratory Ruling Concerning Statutory Standard, transmissions are acts of copyright for simulcast over the Internet). The in which Copyright Owners argued that one of the infringement unless the service obtains question for Services'itnesses was "in effect" arguing for "an the Panel was whether such exemption for AM/FM Webcasts within the 150- licenses from the copyright owners. In programming is the same or mile area." However. the testimony in question such cases, an infringement action substantially similar to radio actually was arguing only that in determining the would be the appropriate course of retransmissions or Internet-only radio retransmission rate. the CARP should take action, rather than the imposition of a programming. into account that no royalty is payable on non- In Internet radio retransmissions within the 150-mile premium rate for such transmissions as making its decision, the Panel first radius because of the promotional value those suggested by RIAA. No rate—premium considered the definition of a "radio retransmissions have on record sales. The witness or otherwise—can be set for a retransmission performance." It found asserted that because "local distribution of exactly transmission that does not comply with that the record failed to provide a .the same material via the Internet hss identical the terms of coherent and economic effects," the Panel should exclude from the license. workable definition, its calculations "recipients of those transmissions b. Listenerinfluenced services. There rejecting both the definition set forth in who lie within 150 miles of the station's was also much discussion about the Yahoo! agreement and the one that transmitter." Fisher Testimony st 'g 52. In their listener-influenced services that allow was included in the defunct settlement opposition to the motion, the Services made no the listener some control over the agreement between RIAA and the argument that Internet retransmissions are exempt programming on-line under section 1 1 s(d)(1)(B), and the Office made no through ratings commercial broadcasters. Instead, it ruling with respect to the exemption. Thus, until and skip-through features. RIAA's adopted the definition of the term the responses to the June 5, 2002 order were filed, position first and foremost is that these provided by Congress in the statute the issue had never been joined, much less decided, services do not qualify for the which defines the term as "a on whether radio retransmissions within the 150- further mile radius are exempt, and the issue had never webcasting license. However, RIAA also transmission of an initial transmission been decided. proposed a much higher rate for these * * * if it is simultaneous with the s'ee footnote 6, supra. for a description of a services in the event the Panel initial transmission." See 17 U.S.C. Business Establishment Service. discerned a need to set a separate rate 114(j)(12). Based on this definition, the 45258 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

Panel concluded that a transmission Moreover, the earlier Panel determined initiate Internet-only programs and do made as part of archived programming, that a rate set for a commercial station so at a higher cost. side channels or substituted is an inappropriate benchmark to use Non-CBP broadcasters argue in their programming was something other than when setting a rate for the same right for petition to set aside the CARP report, a radio retransmission and, therefore, noncommercial stations because of that the Panel failed to set the not entitled to the lower rate proposed these economic differences between appropriate rates in two ways. They for radio retransmissions. Instead, it these businesses. Specifically, it contend that the Panel ignored the agreed with RIAA that the programming acknowledged that use of a rate set for record evidence which clearly was essentially the same as Internet- a commercial broadcaster would established that the noncommercial only programming, and without any overstate the market value of the stations are fundamentally different record evidence to substantiate a from commercial broadcasters and performance for a noncommercial different rate, should be subject to the station. webcasters, and less viable 0.14g IO rate. economically, thus requiring the Panel Broadcasters do not contest the Next, the Panel examined RIAA's to establish a lower rate for these Panel's determination with respect to approach, which focused on the amount stations. They also dispute, like the side channels, and they recommend that the performing rights organizations Webcasters and the commercial the Librarian provide that the side ("PROs") were awarded in the 1998 broadcasters, the Panel's decision to channel rate be set at the webcaster rate Noncommercial Education Broadcasting reject, as a benchmark, the amount of expressly without prejudice to Rate Adjustment Proceeding for use of royalty fees these services pay for the reconsideration in a subsequent CARP their works by noncommercial stations. use of the underlying musical works in proceeding, Broadcasters Petition at 56. It adduced that they received '/s the an analog market under a separate They do, however, object to the amount of the fees paid by the compulsory license. Non-CPB Petition imposition of the rate for IO commercial stations. Based on this at 4. They then calculate a ratio between transmissions on the performances of precedent, RIAA offered the what a commercial broadcast station sound recordings made during the noncommercial stations a rate that pays for use of the musical works in the transmission of an archived program or corresponds to '/s the rate to be paid by analog world and what on average the a substituted program. Id, at 55. commercial broadcasters.so The Panel, non-CPB stations pay in the same Broadcasters'rguments no longer have finding no other evidence in the record market, based on an estimation of the any relevance under the statutory rate to support a different rate, adopted the number of stations, and tbe amount of structure proposed by the Register. RIAA proposal for radio royalties the stations paid for use of which a rate for proposes single, unitary retransmissions, and proposed a rate of musical works in their over-the-air all transmission. This fact in broadcasts, Prom these calculations, conjunction with the Panel's 0.02S per-performance (one-third of the 0.07S per performance rate, rounded to they suggest that a noncommercial observation that the Yahoo! agreement 'roadcaster, on average, pays only '/acth did not differentiate even the nearest hundredth of a cent) for or recognize transmissions the amount of royalties that a these alternative categories a these only. Just as with supports commercial commercial station pays for use of the determination that no separate rate the broadcasters, the Panel same for found that archived musical works and argue a rate should be set for these transmissions. programming equal to '/acth the amount that subsequently transmitted over the commercial broadcasters will 10. Rates for Transmissions Made by Internet, transmissions of substituted pay. Non-CPB, Noncommercial Stations Alternatively, they request a flat rate of programming, and transmissions of side $100 per station, see Non-CPB, National Public Radio ("NPR") and channels constitute a transmission more Noncommercial Broadcasters Reply the National Religious Broadcasters akin to an Internet-only event. Petition at 5, and argue that in no case Music License Committee ("NRBMLC") Consequently, it proposed a per should the rate exceed '/s the rate were the only two representatives of performance rate for noncommercial adopted for commercial broadcasters. non-commercial stations participating broadcasters of 0.05g (one-third the rate Non-CPB, Noncommercial Broadcasters in this proceeding. NPR reached a paid by commercial broadcasters and Petition at 9. private settlement with the Copyright webcasters for IO transmissions) for NRBMLC also turned to the rates for Owners during the proceeding and each sound recording included in these the statutory noncommercial withdrew. In considering what the rate transmissions. This rate, however, is broadcasting license and argued that the should be for the stations represented by meant to apply only to the first two side rates for the webcasting license should NRBMLC and any other noncommercial channels—and not to additional side be based upon the rates currently paid station operating under the statutory channels—in order to avoid the to performing rights organizations for license, the panel first considered past possibility of a noncommercial use of the musical works in over-the-air CARP decisions involving the statutory broadcaster gaining a competitive programs under this license. The Panel licenses. It found that a prior CARP had advantage over the commercial rejected this proposal on a number of considered and distinguished broadcasters and webcasters who grounds. First, it noted that those rates commercial stations and noncommercial were the subject of prior settlements stations on basis of financial the their seRIAA stated that "the Noncommercial which stated that the negotiated rates resources, noting that noncommercial Broadcasters should pay the same royahy rates that for the noncommercial license were to stations depend upon funding from the apply to Webcasters and commercial broadcasters, have no precedential value for future government, business, and viewers, which are based on a benchmark derived from rate setting proceedings for the whereas commercial broadcasters marketplace agreements for the same and closely related rights." RIAA PFFCL concerning the noncommercial license. In light of this generate a revenue stream through Broadcaster Royalty Rate Qan. 25, 2002) at I aa; but term, the Panel found the rates for the advertising. Report at 89, citing CARP see, Reply of Copyright Owners and Performers to statutory noncommercial license had no report adopted by Librarian on Non-CPB Entities. (Dec. 18, 2001) at 3 ("Copyright relevance to the current proceeding. Not September 18, 1998, Noncommercial Owners are willing to accept a rate for Noncommercial Broadcasters that is no less than only were the rates for a totally different Education Broadcasting Rate one-third of the rate paid for commercial right, but they apparently have no Adjustment Proceeding, 63 FR 49823. broadcasters."). precedential value for considering Federal Register/Vol. 67, No, 130/Monday, July 8, 2002/Rules and Regulations 45259 future statutory noncommercial rates for broadcasters. The Panel also provided a Webcasters PFFCL jj 363. In any event, use of the musical works. Report at 90. separate rate for archived programming the Panel set the rate at $500 to cover Second, the panel considered rates subsequently transmitted over the administrative costs to the copyright proposed by Dr. Murdoch, the expert Internet, substituted programming and owners and access to the sound witness for NPR, who at the request of up to 2 side channels set at one-third recordings. It was not arbitrary to the Panel made an attempt to identify an the rate established for Internet-only impose a minimum fee on the Non-CPB, appropriate rate for noncommercial transmissions. The Panel made this noncommercial broadcasters that merely stations based on the fees currently paid adjustment based on its determination covers costs for these rudimentary to the PROs. Although she complied that a noncommercial broadcaster purposes nor can it be deemed excessive with the request of the Panel, she should not be subject to commercial in light of what these entities pay the expressed severe reservations about her rates when streaming programming PROs for the public performance of own conclusions, citing numerous consistent with the educational mission musical works. problems with her own calculations. of the station, over the Internet. Report 11, Report at 91. For these reasons, the at 94. However, the Panel imposed a Consideration of Request for Panel rejected Murdoch's proposed limitation on the use of this reduced Diminished Rates and Long Song rates. rate for Internet-only transmissions to Surcharge RIAA supports the Panel's decision, avoid the possibility that a non-CPB RIAA requested a surcharge for songs noting that the non-CPB, broadcaster could use its unique longer than five minutes. RIAA PFFCL noncommercial broadcasters failed to position to essentially become a 'll 210. Its request was denied because offer any differential rate for this type of commercial webcaster. the Panel did not find that such a charge service in its direct case or an expert The Register accepts the Panel's was included in most of the relevant witness who could support their methodology for setting the rate for license agreements. Report at 105. ultimate request for a $100 flat rate. The noncommercial broadcasters. The rates RIAA, however, argues that the Panel only witness who testified on behalf of proposed by the Panel, however, must misread the Yahoo! agreement. RIAA this group was Joe Davis, who works for be adjusted to reflect the Register's Petition at 42. It notes that Yahoo! could a commercial broadcaster, and had only recommendation to set a unitary rate for estimate the number of performances it anecdotal information concerning both commercial broadcasters and made by multiplying its listening hours noncommercial stations, Because of his webcasters. Using the proposed base by a fixed number of performances and lack of expertise in this area, the Panel rate of 0,07'nd reducing this value by that when it did so, the record did not credit his testimony. Such two-thirds, the adjusted rate for non- companies received compensation for action on the part of the is not panel CPB, noncommercial broadcasters is [material redacted subject to a protective'rder] arbitrary. 0,02'one-third of 0.070, the base rate performances, even though Nor was it arbitrary for the Panel to for all transmissions, rounded to the Yahoo! may have only for decide not to on played, rely the statutory rates nearest hundredth) per performance, per example, 5 12-minute classical set for use of the musical works by listener. This rate shall apply to a recordings in an hour. noncommercial Id. The Yahoo! broadcasters. The simultaneous retransmission of the non- agreement, however, does not require arbitrators rejected the non-CPB, CPB, noncommercial over-the-air radio that it commercial employ the estimation broadcasters'equest to programming, archiving programming methodology; it look to these rates merely states that because the subsequently transmitted over the Yahoo! make this agreements, at the may calculation. insistence of the Internet, substituted programming, and Thus, there was no probative evidence parties to the agreements, are not even up to two side channels. The rate for all that considered precedent the marketplace valued a classical for setting future other Internet-only transmissions is sound recording, or similar rates for the use of the musical works. sound 0.07g. recordings of longer than average If anything, it would be arbitrary to rely One last disputed issue raised by the duration, at a different rate. on these values as a benchmark for non-CPB, noncommercial broadcasters setting rates for a Consequently, it was not arbitrary for completely different is the imposition of the same $500 the Panel RIAA's category of works when they had no to reject suggestion to minimum fee that the CARP set for all a "long song" acknowledged value for the impose surcharge. In any readjusting other licensees. They argue that a $500 event, it is rates for the works to which they do minimum highly likely that this fee far exceeds any reasonable concern will be addressed for the time apply. Had the Panel wished to use rate that should be imposed on this these rates, it needed at the least period to which these rates apply, since very an category of users in light of the financial most opportunity to examine the considerations services will be using the that distinguish them estimation formula for circumstances surrounding the adoption from the other services. Non-CPB calculating the number of performances which assumes of the "no precedent" clause. It would Broadcasters Petition at 10. In Reply 15 performances for each have also required record evidence to support of this position, the users cite aggregate substantiate such bold assertions on the Dr. Murdoch's tuning hour. 'ee section IV.11, infra. testimony to illustrate On the other side, webcasters asked part of the users as the notion that these that the Internet license for use of that there be no royalty fee t'or songs rates were set at a rate higher than what SESAC's repertoire is less than 100. $ that are less than thirty seconds long, would have been negotiated in the But this is not the total amount that a marketplace. Non-CPB Broadcasters noncommercial citing technology problems or the use of station would pay; it song-skip functions. Webcasters Petition Reply Petition at 7; RIAA Reply at 11. would also have to fees to BMI and pay at 71. The Panel disagreed and saw no Because of these infirmities, the Register ASCAP in order to license all the works finds the Panel did not act arbitrarily in included in the sound recordings s'evertheless, RIAA has raised a valid point and rejecting the rates set for the section 116 covered by the section 114 license. The future CARPs should carefully consider how to license as a benchmark. minimal amount that a webcaster must value performances of longer recordings, such as Thus, in the end, the Panel accepted pay to cover the combined works classical music, to ensure that the copyright owner is fully compensated. That RIAA's proposal to set the rate for administered by the three PROs is $673, being said, no party noncommercial broadcasters at one- should assume that a particular approach to the more than the proposed minimum rate problem is being advocated by the Register for third the rate established for commercial to operate under the section 114 license. adoption by a future CARP. 45260 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

need to make any adjustment. It noted decision is neither arbitrary nor contrary estimation shall be based on multiplying the that the use of the blended rate from to law. licensee's total number of Aggregate Tuning which it calculated the proposed rates The Panel did, however, grant the Hours by 15 performances per hour (1 was itselfbased upon figures which users an exemption for incidental performance per hour in the case of already took into account problem performances, citing the existence of a retransmissions of AM and FM radio stations performances that had occurred similar term reasonably classified as news, business, talk during in the Yahoo! agreement as or the initial period. This adjustment was the basis for its decision. sports stations, and 12 performances per Specifically, hour in the case of al! other AM and FM expressly made for the first 1.5 billion the Panel "excludefd] transmissions or radio stations). transmissions only. Report at 106-107. retransmissions that make no more than The Panel chose not to make a similar incidental use of sound Report at 110. recordings, The Broadcasters adjustment for subsequent performances including but not limited to, certain object to the Panel's because the Yahoo! agreement did not performances of brief musical formulation for estimating the number of performances, provide for such an adjustment. transitions, brief performances during arguing that for many I.ikewise, the Panel determined news, talk and sports program formats, e.g., news, business, that programming, talk, or sports stations, the use of the skip function provides a commercial jingles, and certain the estimate would likely significantly overstate benefit to webcasters and it saw no need background music." Report at 108. This the to penalize copyright owners for is not a disputed provision. use of music by these stations. the Broadcasters Petition benefit that flowed to the users through With the agreement of the parties, the at 57. However, a conscious use of a function provided Panel also exempted performances of they do not offer an alternative for by the service. Moreover, none of the sound recordings made pursuant to a methodology calculating these negotiated agreements private license agreement. Id. performances. Moreover, a mere provided for any likelihood of reduction in rate for skipped songs. The Register notes, however, that the overstating the values in Report at 107. Webcasters'oncerns some cases is not enough to undo the Consequently, the Panel regarding the Panel's did not provide a lower Panel's determination not to its formulation. rate or grant Likewise, Webcasters exemption for truncated request to impose no royalty on songs argue that the performances 30-day cutoff period for the resulting from use of the skip song less than 30 seconds in duration are using function. ameliorated for the current licensing methodology for estimating the number period. Under the terms of performances is arbitrary because The Webcasters object to the Panel's proposed of there is conclusion, payment, a service may estimate the no record support for this maintaining that the Panel determination. Webcasters failed to adequately number of performances for purposes of Petition at explain its decision 72. Instead, they propose allowing the and consider relevant evidence. See determining the extent of copyright liability on an "Aggregate Hour" Services to employ this methodology Webccasters Petition at 71. They Tuning through the remainder contend that the Panel should basis, which calculates payment on the of the current have licensing period, which ends December given more weight to three of the 26 basis of 15 performances per hour.» This approach alleviates a Licensee's 31, 2002, since it will be used, in any agreements, which provided an event, most exemption for obligation to account for and for by Services for purposes of performances less than pay calculating their liability for their thirty seconds in duration. Such action, each performance, including those that past are less than 30 seconds in duration. usage of the sound recordings. Id. would itself, have been arbitrary. What is troubling about this Clearly, the Panel could not provision rely on 12. Methodology for Estimating the is the Panel's determination to require a these agreements when it hatl already Number ofPerformances full accounting of each disregarded performance them for purposes of beginning 30 days after the effective establishing the royalty rates. Until each service can account for each date of the order setting the rates and Moreover, RIAA makes a number of performance, and is required to do so, there is a need for a methodology terms. The Report documents that many arguments in support of the Panel's services are not currently equipped to decision. First, it notes that the that will allow a service to make a reasonable track or accurately account for each performance of even a portion of a estimate of the number of performances. performance, and the Register agrees. In sound recording without a license is an Accordingly, the Panel proposes the following procedure: fact, until the issuance of final rules infringement of a copyright owner's regarding Records of For Use, there are no rights. As such, there is no a priori the period up to the effective date of requirements for tracking these the rates and terms prescribed herein, and reason for making 30-seconds-or-fewer for performances. Because the Office has performances exempt from royalty 30 days thereafter, the statutory licensee may estimate its total yet to establish just how a service will obligations. Second, RIAA cites 17 number of performances if the actual number is not availab!e. Such account for its use of the sound U.S.C. 114(h)(2)[B) to demonstrate that recordings, the Register determines that Congress recognized the value of » The Webcaatars had advocated the the proposed timeframe for requiring a performances of use of limited duration and "Aggregated Tuning Hours" as a way to address strict accounting is arbitrary. Instead, the right to license such performances. their concerns regarding the Panel's decision uot to the rule shall require that a provide a lower Service Specifically, this section exempts rate for partial performances. begin accounting for each performance copyright owners licensing Wabcastars Petition at 71-72. Their argument. public however, is not tha bases for the Register's in accordance with the rules and performances of sound recordings from recommendation to provide for usa of the regulations regarding Records of Use 30 the requirement to make these sound estimation methodology throughout the license days after the effective date of final recordings available on no less favorable period. rules. These rules shall determine The Register is proposing this course ol action in what terms or conditions to all bona fide information needs to be calculated to entities, when the short term merely to address separate concerns they are licensing of the Register regarding the logistics involved in determine which sound recordings have promotional performances of up to 45 reporting the number of performances of sound been performed, how many of such seconds in duration. RIAA Reply at 71- recordings. This recommendation on the part of the performances occurred, and when and 75. Register should in no way be construed as These arguments support the Panel's how often such information shall be decision not to undermining the Pauai's decision that exempt performances of transmissious of sound recordings of less than so collected by the Services. Meanwhile, thirty seconds or less, and as such, its seconds are compensable. interim rules are being promulgated that Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45261 will, for the immediate future, impose the beneficiaries of the license, just as recording license as it had in setting the more modest reporting requirements on the users, are in most instances the same rates for the webcasting license. Report Services. for both the webcasting license and the at 104. It first examined the 26 RIAA In the meantime, for the remainder of ephemeral recording license. However, agreements for evidence that market the period covered by this proceeding there is one group of users of the participants paid a fee to make (i.e., through December 31, 2002), ephemeral recording license that is ephemeral copies and how much they Services may estimate the number of exempt from the digital performance paid. Of the 26 agreements, fifteen did performances in accordance with the right—services which provide not contain any rate for the ephemeral Panel's formulation. While this is not transmissions to a business license and did not purport to convey the perfect solution, it represents a establishment for use by the business this right; two used a percentage of reasonable approximation of the number establishment within the normal course overall revenues; eight used a of performances. And in those cases of its business ("business establishment percentage (calculable to 10/e) of the where a Service believes the services").33 17 U.S.C. '114(d)(1)(C)(iv). performance royalty fees paid; and one formulation overestimates the use of the During the proceeding, the Services paid a flat rate per use of the license for sound recordings, it has the option of argued that these "ephemeral" copies a year (calculable to 8.8 /e of the actually counting the number of have no economic value apart from the performance royalty fees paid). Id. From performances and calculating the value of the performance they facilitate. this, the Panel identified a range of rates royalties accordingly. Certainly, it Webcasters Petition at 67; Broadcasters between 8.8% and 10/e of the cannot be seriously argued that a Petition at 50. In support of this performance fees paid.» It then chose to Service would be unduly burdened by position, the Services cite with approval place significant weight on the 8.8% undertaking this task. Conversely, if a Copyright Office Report which stated value because it was derived from the after accounting for each of the that the Office found no rationale for information in the Yahoo! agreement to performances in the programs which are "the imposition of a royalty obligation which the Panel has given considerable allowed to use the one performance per under a statutory license to make copies weight throughout this proceeding. Id. hour estimate, the Service finds its that have no independent economic However, the Panel did not rely solely programming performs more sound value, and are made solely to enable on the Yahoo! agreement in this recordings than the approximation, a another use that is permitted under a instance, choosing instead to give Service benefits from use of the Panel's separate license." Report at 98, citing minimal weight to the eight other methodology. U.S. Copyright Office, DMCA Section agreements that set the ephemeral rate 13. Discount for Promotion and Security 104 Report at 114, fn 434 (August 2001). at 10% of the performance rate, and so The Panel also contended that experts rounded the 8.8 %%d value up to 9.0%. Id. RIAA proposed a 25% discount to any on both sides took this view. Webcasters service that includes promotional and Both Webcasters and Broadcasters filed Petition at 66, citing Jaffe W.D.T. 52-54; Petitions to Modify in which they object security features beyond those required Tr. at 6556; Tr. at 2632 (Nagle). Had Panel's under either the webcasting license or to the approach to setting the there been nothing more, the Panel ephemeral rate. They argue that the the ephemeral recording license. might have agreed with the Services and Because that proposal would exceed the evidence supports their position that the adopted the Office's position. In ephemeral copies have no independent scope of the terms set forth in the law, construing the statute, however, the the Panel declined RIAA's invitation to economic value apart from the Panel found that Congress did not share performances they facilitate. In the provide for such discounts within the the Copyright Office's view. Instead, the context of the statutory license. Report alternative, they maintain that the value Panel found that Congress required that of the ephemeral copies is included in at 110. It is clear that the Panel may a rate be set for the making of ephemeral reject such a proposal, as it did here, the royalty fee for the performance of copies in accordance with the willing the sound recording. because the statutory license does not buyer/willing seller standard.s4 Consequently, they Report contend that the appropriate way to set expressly require that such a rate be at 98—99. established. No party contested the The Panel utilized the same approach the ephemeral rate would be to Panel's determination on this issue. in setting rates for the ephemeral determine the economic value of the Therefore, the Register sees no reason to ephemeral copies and reduce the question the Panel's decision. ss Business establishment services deliver sound performance rate by that amount. recordings to business establishments for the Webcasters Petition at 67; Broadcasters 14. Ephemeral Recordings for Services enjoyment of the establishments'ustomers. Two Petition at 51. Operating Under the Section 114 such services, ABI, Music Network, Inc. and DMX Moreover, the Services disagree with License Music, Inc., participated in these proceedings. Panel's use and These companies merged into a single company the analysis of the A transmitting organization entitled to during the course of this proceeding. AEI/DMX voluntary agreements for setting this make transmissions of sound recordings provides music to more than 120,000 businesses, rate. Specifically, they cite the lack of an including Pottery Barn, Abercrombie & Fitch, Red under the webcasting license may also ephemeral rate in 15 of the 26 Lobster, and Nordstrom. The rate setting process as even make a single ephemeral copy of each it pertains to the business establishment services is agreements, though it is clear that work to facilitate the,transmission under discussed in Section IV.14. these recordings are necessary to an exemption in the law or it may make "The Panel and the Services note that the effectuate a performance, as evidence of Register has adopted a policy position regarding the RIAA's view that the making of multiple copies of these works pursuant making of ephemeral recordings which attributes no to a statutory license. See 17 U.S.C. economic value to the making of such recordings ephemeral copies had only a de minimis 112(a) and (e), respectively. In addition when "made solely to enable another use that is » to setting rates and terms for the permitted under a separate compulsory license." Most of the original 26 license agreements did U.S. Copyright Office, DMCA Section 104 Report at not grant the right to make ephemeral copies, either webcasting license, the Panel in this 144, fn.434. (August 2001). This statement was because the Service did not realize it needed this proceeding had the responsibility for made in a different context and has no relevance right or because the Service had assumed the setting the rates for the ephemeral to the current proceeding. The task of the Register negotiated rate covered all rights needed to make recordings. The Office combined these in this proceeding is to determine whether the the digital transmissions. However, that trend did Panel's determinatian is arbitrary or contrary to law not continue. Licenses that were renewed expressly section 112 and section 114 proceedings without regard to the Office's own views on how granted the right to make ephemeral copies for a because the licenses are interrelated and the law should read to implement policy objectives. fee. Report at 5S, fn 39. 45262 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

value. Broadcasters Petition at 52. For of the 26 licenses "reveals an Moreover, as a policy matter, RIAA this reason, webcasters and broadcasters inconsistent, rather than a consistent, contends that use of the lowest value set argue that RIAA placed little value on pattern." Report at 100. Moreover, the forth in a single agreement discourages these copies and implicitly Panel conceded that these agreements copyright owners from adopting a low acknowledged that the value of these "do not represent evidence which minimum fee in a single instance to recordings is at best de minimis. They establishes RIAA's proposed rate." Id. at accommodate special circumstances for then criticize the Panel's methodology, 104. Nevertheless, the Panel granted a particular service. RIAA Petition at asserting that the calculation of the "very modest effect" to those 44-45. Finally, RIAA faults the Panel for ephemeral rate based upon the rates agreements which have ephemeral rates justifying its choice by comparing the derived from the Yahoo! agreement for around 10'o justify its decision to $500 minimum fee to the amount that a per performance model, totally round the 8.8% effective rate up to 9'. the Services pay the performing rights ignored the fact that Yahoo! agreed to Considering those agreements is clearly organizations (PROs) under a blanket pay a flat fee once it began making arbitrary and, consequently, to the license. RIAA rejects this rationale on payments on a per performance basis, extent the Panel gave any weight to any two fronts. First, the minimum fee does without regard to the number of license agreement other than the Yahoo! not approximate the amounts that are performances. Webcasters Petition at 69; agreement, it acted in an arbitrary paid to the PROs, and second, use of the Broadcasters Petition at 53. Finally, manner. Accordingly, the rate for the musical works benchmark has been Webcasters object to any use of the non- ephemeral license for licensees found by the CARP to be an Yahoo! agreements in calculating this operating under section 114 should be inappropriate measure for establishing rate because the Panel had already set at 8.8k of the performance rate. fees in this proceeding. found these agreements to be unreliable In response, Broadcasters first note for purposes of setting the marketplace 15. Minimum Fees that RIAA never disputed the Panel's rates. Similarly, the Broadcasters The Panel established a minimum fee understanding for the existence of a question the Panel's reliance on eight of of $500 for each licensee for use of the minimum fee, or claimed that a higher the agreements that it had rejected webcasting license and the ephemeral fee is necessary to achieve the stated earlier as "unreliable benchmarks." Id. recording license. These rates are in line purposes of the minimum fee. Namely, at 54. with those negotiated by RIAA and the the minimum fee is meant to cover the The non-CPB, noncommercial 26 services with which it reached an costs of incremental licensing, i.e., the broadcasters adopt the objections to agreement. The Panel determined that cost to the license administrator of ephemeral recording rate put forth by RIAA would not have negotiated a adding another license to the system the commercial broadcasters. minimum fee that failed to cover at least without regard to the number of Noncommercial Broadcasters Petition at its administrative costs and the value of performances made by the Licensee, see 11. access to all the works Webcasters On up to the cost of PFFCL I 361, and access to the other hand, RIAA supports the the minimum fee. the Panel's determination Report at 95. The entire repertoire of sound in general, noting adoption of the 500 minimum, recordings. Broadcasters 12-13; that the CARP relied primarily on the $ Reply at however, is predicated on the adoption Webcasters Reply at 52-53. Moreover, Yahoo! agreement to calculate the of a ephemeral rate per performance rate and not a they claim that the minimum fee is in for webcasters. It percentage-of-revenues. line with maintains, however, that the Panel The Panel the fees paid to the performing implied that had it decided to a rights organizations should have afforded the 25 adopt which can serve as voluntary percentage-of-revenue model, a benchmark for agreements more weight and set the rate the the minimum because minimum fee would have been more "they serve the same purposes that the at 10% of the performance rate in substantial deference to the fact that because the Panel would CARP identified in setting the minimum many RIAA have had to consider more fees for the issue." licensees had agreed to a negotiated or carefully the statutory license at effective impact of start-up services with little Broadcasters Reply at 14; Webcasters ephemeral rate of 10%. RIAA revenue. Reply at 68. RIAA also challenges the Report at 95. Reply at 52, 55. The Services, however, Because the minimum rate is do not blindly accept the Panel's Services'omplaints in general, noting calculated to cover that in spite of all the at least the proposed fee, arguing first that the objections to the administrative costs of the Panel's determination, the Services fail copyright record supports a much lower minimum to offer owners in administering the license and fee. They also strenuously object to any evidence regarding an access alternative rate. to the sound recordings, the RIAA's request for a $5,000 minimum, The Panel's in Panel applied the rate to all webcasting arguing that such a high minimum approach setting the services ephemeral rate was not arbitrary. It and made it payable as a non- would be confiscatory for most users of calculated the rate based on the fees refundable advance against future the license, especially for those radio Yahoo! actually paid to RIAA for the royalty fees to be paid during that year, stations that play little featured music. right to make ephemeral reproductions. due upon the first monthly payment of Broadcasters Reply at 16; Webcasters Use of the Yahoo! agreement for this each year. Moreover, the Panel offered Reply at 56. purpose was perfectly logical, and no proration of the fee, making it due in None of these arguments compel the consistent with the general approach full for any calendar year in which a Librarian to reject the proposed $500 taken by the Panel in determining rates service operates under the statutory minimum. The Panel set a minimum for webcasting. What causes concern, license. Report at 96. rate to accomplish two purposes, and however, is the Panel's reliance, even to RIAA objects to the low value for the none of the parties argue that the $500 a small degree, on the ephemeral rates minimum fee set by the Panel because fee falls outside the "zone of set forth in eight of the 25 voluntary it fails to take into account the broad reasonableness" for such rates. If agreements it had previously range of rates established in the licenses anything, the fee may be viewed as too repudiated. Such action is arbitrary RIAA negotiated in the marketplace.se low, if one takes into account the unless the Panel can offer a clear ss According to RIAA, a S5,000 minimum fee is royalties are paid on a percentage of revenue base explanation for its actions. It did not do the 'so typical amount paid by users in the or in accordance with a per performance metric. and, in fact, it stated that its review marketplace, without regard to whether the RIAA Petition at 43. Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45263 minimum amounts paid to the Of the services offered by AEI and refrain from setting rates tailored performing to the rights organizations for the DMX only those services that transmit needs of specific companies. RIAA blanket license for performing musical musical programs to their customers via made the later works. request because AEI/ Together each Service must pay, cable or satellite in a digital format are DMX asserted that its digital at the database is very least, a total of $673 to the eligible for the ephemeral recording already covered by preexisting licenses three performing rights organizations to license. The Panel referred to this aspect and therefore, it does not need cover an access to the musical works for of the business as the "broadcast ephemeral license in order to make use over the Internet and the model" of the service. Through this these phonorecords. incremental — Consequently, AEI/ cost of licensing the very process, these services make hundreds DMX asked the Panel to set a rate to purposes for which the minimum fee is of thousands, if not millions, of copies cover only the cache and buffer copies being set in this proceeding. of the sound recordings. The law allows it needed to facilitate its transmissions Whether to utilize the musical works these services to perform sound and to exclude the value of the database benchmark was a decision for the Panel recordings publicly by means of a copies when setting the rate for the and it chose not to do so. This approach digital transmission under an exemption ephemeral license. In fact, AEI/DMX was not arbitrary. As it had done in section 114.59 However, Congress did contends that it was arbitrary for the throughout this proceeding, the Panel not exempt these services from Panel to set a rate "for all ephemeral could choose, as it did, to rely on copyright liability when making copies copies which may be utilized in the agreements negotiated in the of these works in the normal course of operation of a broadcast service" when marketplace between willing buyers and their business. Rather, Congress created it had received evidence for setting a willing sellers, Moreover, the Panel a statutory license to cover the making rate only for buffer and cache copies. could propose any rate consistent with of ephemeral recordings by these DMX/AEI Petition at 4. It also maintains the agreements so long as the proposed services. In its proposed findings of fact that the statute contemplates that the rate would cover costs for admirustering and conclusions of law, DMX and AEI Panel set rates according to the needs the license and access to the works.sr proposed a flat fee of $10,000 per year « and desires of the parties. Id, at 8—10. For this reason, the Panel examined the for each company for the making of RIAA disagreed with this approach, agreements offered into evidence by the buffer and cache copies, but argued in asking the panel to establish a RIAA and chose the lowest value that the alternative for a zero rate. See DMX/ technology-neutral rate to cover the RIAA had accepted in a prior AEI PFFCI. 'll 44. In support of the making of all copies that a business agreement. It did so because it assumed alternative position, DMX/AEI argued establishment service may need to make that an entity would not agree to a that Congress had only envisioned a under the license. It also proposed that minimum rate that would result in a minimal rate to compensate the the CARP rely on license agreements loss, Had RIAA truly believed that the copyright owners for the use of between the copyright owners and $500 minimum fee was inadequate to ephemeral copies, It also cited the Business Establishment Services when cover at least the administrative costs Copyright Office's Section 104 DMCA fashioning the appropriate rate and not and the value of access, the Panel Study for the proposition that the 26 voluntary licenses considered reasoned that it would have required a ephemeral recordings have no when setting the webcasting rates. higher fee. This approach is not independent economic value apart from As an initial matter, the Panel had arbitrary and, consequently, the its use to facilitate. transmissions. first to decide which copies and how proposed minimum fee is adopted for However, as RIAA points out, these many are covered by the ephemeral the period covered by this proceeding, businesses have always paid for such recording license. This is a necessary copies. Report at 115-116, citing RIAA step in the process, because the 16. Ephemeral Recordings for Business — Reply to DMX/AEI PFFCI. 'I "}I 8 1.2. statutory license allows a transmitting Establishment Services ("BES") RIAA asked that rate be set at 10% of organization to make and retain no more a. Rates for use of the statutory gross revenues with a minimum fee of than a single phonorecord of a sound license. Business establishment services $50,000 a year and asked the Panel to recording, except as provided "under are well-established the terms and conditions as negotiated businesses, which ss have offered their services for many Section 114(d)(1)(iv) provides that: or arbitrated under the statutory years. Among the established (d) Limitations on Exclusive Right.— license." Section-by-section analysis of businesses Notwithstanding the provisions of section 106(6)— in this group are AEI Music Network, the H.R. 2281 as passed by the United (1) Exempt transmissions and retransmission.— States House of Inc„" DMX Music, Inc., Muzak, Inc., The performance of a sound recording publicly by Representatives on PlayNetwork, Inc. and Radio means of a digital audio transmission, other than as August 4, 1998, Committee Print, Serial a part of an Programming and Management Inc. Two interactive service, is not an No. 6, 105th Cong., 2d Sess., p. 61. infringement of section 106(6) if the performance is of the old guard, AEI and DMX, and one part of— Thus, the Panel considered and ultimately rejected DMX/AEI's new service, Music Choice, participated (C) a transmission that comes within any of the request in this proceeding. At an early stage of following categories- for a rate that only covered certain types (iv) a transmission a of this proceeding, but after filing a direct to business establishment for ephemeral copies. It did so in large use in the ordinary course of its business: Provided, part because it case, Music Choice withdrew from the That determined that Congress the business recipient does not retransmit the had "intended to proceeding. transmission outside of its premises or the create blanket licenses immediately surrounding vicinity, and that the which would afford each licensee all the transmission does not exceed the second recording rights necessary sr Had the Panel recommended a to operate such a royalty based on performance complement. Nothing in this clause a percentage-of-revenues. its recommended service," and noted that in this case, shall limit the scope of the exemption. Nothing in minimum fee also would have had to serve the this clause shall limit that would include "the right to make function the scope of the exemption of ensuring that copyright owners receive in Clause (ii). any and all ephemeral copies utilized in adequate compensation in cases where a service makes 't the beginning of this proceeding, DMX and a broadcast background music service." substantial use of works copyrighted but AEI each filed a separate direct generates little or no revenue. cause in which each Report at 118. This interpretation of the company proposed a ilat rate of $25,000 for each AEI and DMX law is consistent with were separate business entities year (prorated for the October—December 1996 the purpose of the at the beginning of this proceeding. During the period) covered these section 112 license. course by proceedings for use of the of this proceeding, they merged into a single section 112 license. Knitte) W.D.T. Troxel In creating the company. 19; ephemeral recording W.D.T. 15. license, Congress sought to provide a 45264 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

way for any licensee or business very nature be arbitrary if the rate failed In any case, the starting point for establishment service to clear all the to cover the entire scope of the license. setting the rates for the ephemeral reproduction rights involved in making The fact that DMX/AEI has chosen to recording license as it applies to digital transmissions of sound license the copies in its database business establishment services is the recordings under section 114. Congress through a private agreement and use the statute. It provides that, as with the rates "intended [this provision] to facilitate statutory license to cover the remaining for the webcastjng license, the rates efficient transmission technologies, ephemeral copies would not relieve the should be those that "most clearly such as the use of phonorecords Panel of its responsibility to set rates for represent the fees that would have been encoded for optimal performance at all ephemeral copies which fall within negotiated in the marketplace between a different transmission rates or use of the scope of the license, including those willing buyer and a willing seller." 17 different software programs to receive copies in a DMCA compliant database. U,S.C. 112 (e)(4). Thus, the Panel turned the transmissions." H.R. Rep. No. 105— Other business establishment services to actual agreements that have been 796, at 90 (1998). These copies are using a DMCA-compliant database exist negotiated in the marketplace to known as "ephemeral recordings." "The and may choose to meet their copyright discover how the market values these term "ephemeral recording" is a term of liability by operating under the statutory rights. As discussed previously, the use art referring to certain phonorecords license. See RIAA reply at 18; Report at of rates negotiated in the marketplace is made for the purpose of facilitating 116. It is without question that such a not arbitrary. It eliminates the need to certain transmissions of sound service may take advantage of the try to value specific economic, recordings, the reproduction of which statutory license without participating competitive, and programming factors phonorecords is privileged by the in a CARP proceeding. because the parties would have already provisions of section 112." Id. Because Once these rates are set, a Service can accounted for these considerations the purpose of the license is to facilitate either operate entirely under the during the negotiation process and their a lawful transmission of a sound statutory license or, alternatively, the impact would be reflected in the recording under a statutory license or Service may choose to make some negotiated rates. exemption, it would appear that the ephemeral copies under the statutory Both sides seem to agree with the license covers not only the first license and others under a private Panel's approach. RIAA had no reproduction of the sound recording on agreement. These choices, howev er, complaint with the Panel's use of a company's server, but also all have no bearing on the responsibility of voluntarily negotiated licenses in setting intermediate copies needed to facilitate the Panel to establish a rate, or a the ephemeral rates for business the digital transmission of the sound schedule of rates, that would allow a establishment services. Moreover, DMX/ recording. Service to utilize the license to the full AEI's own counsel acknowledged that The mere fact that the license covers extent of the law. marketplace agreements were different ephemeral recordings that may In fashioning the rate, the Panel appropriate benchmarks for establishing be catalogued in different ways does not considered the arguments put forth by the rates for the rate for the section 112 mean that a separate rate must be set for the parties and ultimately rejected license and conceded that the each category. Had the record supported DMX/AEI's basic premise that Congress agreements relied upon were worthy of different rates for different categories of had contemplated a de minimis rate to consideration. Tr. 9577—78 (Sept. 12, ephemeral recordings, or for different compensate for "leakage" (use of 2001). Nevertheless, DMX/AEI did argue types of business establishment ephemeral copies to make phonorecords that the proposed rate constitutes an services, it is conceivable that the Panel for sale) and, its interpretation of what undue financial burden that thwarts might have chosen to differentiate it characterized as the Copyright Office's Congress'ntent to facilitate the among these categories or types of view that such copies have no adoption of new technologies. DMX/AEI businesses by assigning different rates to independent economic value. This Petition at 1'l. each one." See also Order (dated July decision was reached after examining The question is which agreements 16, 2001) (advising Panel that it could the statute and its legislative history and should be considered when setting the set different rates for different business finding nothing that directly supported rates for the ephemeral reproductions. models, provided that the record the "leakage" theory.'z Moreover, the Having found that the business supported such a decision). Whether Panel had already determined that its establishment services offer a such an approach would have been responsibility was not to give effect to completely different type oi'service arbitrary would depend upon the the Copyright Office's vievv on how the from webcasting, the Panel rejected findings of the Panel in light of the law should change. Instead, it DMX/AEI's invitation to use the record evidence and, more importantly, determined that its duty was "to follow ephemeral rates negotiated by the upon whether the proposed rates the current Congressional mandate set webcasters. Report at 121. Instead, the covered the making of all ephemeral forth in section 112(e)(4) and determine Panel opted to use the license copies needed to facilitate the digital a separate rate for ephemeral copies'ased agreements that had been negotiated transmission of a sound recording under upon the willing buyer/willing between individual record companies the section 114 business to business seller standard. Report at 98—99. Thus, and background music services es as a exemption. the Panel rejected AEI/DMX's proposal benchmark for setting the relevant The section 112 license is without to set a low rate based upon its finding section 112 rates even though, in some question for the benefit of all services that these entities have always paid instances, the license conveyed some operating under the business to business substantial royalties to record exemption and not just DMX/AEI. A companies in exchange for the use of its 's A background music service is a type of rate tailored only to meet the specific complete catalogue. Report at 119. Business Establishment Service that complies and needs of a single service would its delivers music to business establishments who play by the music for the enjoyment of their customers. "z RIAA supports the Panel's determinatin, Among the license agreements considered by the s's RIAA points out, insufficient evidence nothing tha the legislative history makes clear that Panel were those negotiated between the major exited to support his approach and accommodate the purpsoe of the license is "to create fir and record labels and AEI, DMX, Muzak, Play Network, DMX/AEI's proposal. RIAA reply at 15, citing Panel efficient licensing mechanisms," RIAA Reply at 20, Inc., and Radio Programming and Management lnc. report at 118-10/9. citing H.R. Conf. Rep. 105-798 at 79-80 {1998). Report at 123-124. Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45265

rights to the licensee beyond the uncertainty whether there was a legal RIAA argues that a $500 minimum is reproduction and distribution of the obligation to pay anything for the too low and contradicts the record sound recording. The Panel was not satellite transmissions they covered, evidence, citing the existence of troubled by this observation, however, reflect a lower rate does not change the significantly higher rates in many of the because it found that in all cases the outcome. See Report at 124. As RIAA industry agreements and the lack of any right to copy and distribute the works points out, the rate in one of these agreement with a minimum as low as was by far the most important right for agreements was reset at a substantially $500. RIAA Petition at 46-47. RIAA which the licensee paid royalties. higher rate once the initial contract with further contends that the CARP by its Moreover, it noted that the rates did not the lower rate expired. RIAA Reply to own reasoning should set a significantly fluctuate through the year even when a AEI/DMX at 25, fn 25. Nor is there any higher minimum fee where, as here, the service altered its method for delivering reason to reject the Panel's ephemeral rate is based on a percentage- music. Thus, the Panel used the rates determination, as DMX/AEI contends, of-revenue model. Id. at 49. The reflected in these licenses to establish a because.the Panel failed to adjust for the Copyright Owners are concerned that a range of rates (10-15% of gross promotional value to the record low minimum rate will increase "the proceeds) for consideration. See Report companies or bring these rates into line risk that a service, especially a new one, at 117; see e.g., RIAA Reply to AEI/DMX with those set for Subscription Services will make a large number of ephemeral at 2. From this data, it found that in the previous proceeding. As the Panel copies and not generate revenues, "background music companies and stated on several occasions, it is effectively giving the service a blanket record companies would agree to a unnecessary to adjust a marketplace- license for free." Id. Consequently, the royalty of at least 109o of gross negotiated rate for the promotional Copyright Owners ask the Librarian to proceeds," and set the rate accordingly. value that flows to the record companies adopt their proposal and set the Report at 126. because that benefit would already be minimum fee for use of the ephemeral RIAA agrees with the Panel's reflected in the contract price, if it were license at rate no lower than $50,000. approach, and that it was appropriate important to the parties. DMX/AEI objects to RIAA's request for the Panel not to consider contracts Likewise, DMX/AEI's second premise for a higher minimum fee. It maintains for ephemerals made in the course of for rejecting the Panel's determination that RIAA requested rate is inconsistent webcasting because these businesses are must also be discarded. It argued that with record evidence, which establishes not comparable with Business the Panel set an arbitrarily high rate for that either DMX/AEI currently pays Establishment Services. They serve Business Establishment Services when [material redacted subject to a protective different customers and operate under compared to the rate set for order] in its direct licensing agreements different economic business models Subscription Services in an earlier with the major labels for On-Premises with different delivery methods. For proceeding. DMX/AEI Petition at 19-20. services or that it is disproportionately example, Business Establishment As discussed in a previous section, see high when compared with the minimum Services make reproductions of sound section IV.3, rates set for Subscription fees paid by other members of the recordings and deliver them via cable or Services in a prior proceeding are just background music service industry. satellite for use by the establishment for not comparable to rates under DMX/AEI Reply at 7. Accordingly, AEI/ the enjoyment of their customers. These consideration in this proceeding. DMX urges the Librarian not to entertain differences are further underscored by Marketplace rates for making the RIAA's request. transactions in the marketplace. RIAA reproductions of sound recordings for An examination of the relevant notes that within a single license with use by a Business Establishment Service agreements reveals that almost all of one business entity, it negotiated a have no established relationship to rates these agreements have a substantial separate rate for webcasting ephemeral set under a totally different standard for minimum fee for the making of copies and a separate rate for ephemeral the public performance of sound ephemeral recordings and that all of copies used by the Business recordings by Subscription Services. those minimum fees are considerably Establishment Service. RIAA reply at There is no established nexus between greater than the $500 minimum 24-25. The fact that RIAA negotiated the industries, the marketplaces in proposed by the CARP. Consequently, separate rates for the making of which they operate, or the rights for the Panel's decision to adopt a $500 ephemeral recordings for different which the rates are set. To make any minimum fee when no contract services supports a finding that the adjustments to the ephemeral rate based considered by the Panel contained a businesses are not comparable. on the rate for the digital performance minimum fee as low as $500 is arbitrary. Therefore, it was not arbitrary for the rate adopted for the Subscription The minimum fees in the agreements Panel to decline to consider the Services in a previous proceeding before the CARP were by and large ephemeral rates set forth in the licenses would itself be patently arbitrary. significantly higher than the $500 fee between the webcasters and the record b. Minimum fee. The statute also proposed by the CARP and should have companies when establishing a rate for requires the Panel to set a minimum fee served as the guiding principle in Business Establishment Serv'ices. for use of the license. Using the same setting the minimum fee for the Moreover, an examination of the licenses, it determined that the Business Establishment Services, record evidence clearly shows that the minimum fee should be $500 a year especially in light of the Panel's earlier 10'f revenues rate set by the Panel is based on its observation that most, observation that a percentage of revenue not an arbitrary figure. RIAA Exhibits 9 although not all, willing buyers have not fee requires the establishment of a DR, 10 DR, 11 DR, 12 DR, 13 DR, 14 DR, agreed to a fee approaching RIAA's substantial minimum fee to offset the 26 DR, 27 DR, 28 DR, 60-A DR, 66 DR— proposed rate of $50,000 a year and that risk that a start-up Service with little X, Knittel Rebuttal Ex. 22; Knittel some agreements include no minimum revenue could operate without paying W.D.T. 14—15. It represents the low end fee at all. Because there is no adequate royalty fees for use of the of the range of rates set forth in the discernable trend in the licenses, the license. Moreover, RIAA notes that each agreements between the major record Panel chose to adopt the same fee it contract before the CARP was between labels and Business Establishment proposed for the webcasting licenses a Business Establishment Service and a Services. The fact that two agreements, because it is calculated to cover at least single record label. It then makes the negotiated during a period of the administrative costs of the license. argument that "[i]f a business 45266 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

establishment service is willing to pay reasoned that such considerations were 1. Disputed Terms a minimum fee [significantly higher "not part of the governing standard for than the The parties were unable to reach a minimum fee proposed by the the Panel, nor [were they) a matter on consensus with Register] for access to just one label's respect to two issues: (1) which [the Panel) would have either The incorporation of specific definitions sound recordings, the value of the record evidence or institutional blanket license for the terms, "Affiliated," "AM/FM to all copyrighted expertise." Consequently, the Panel streaming," "Broadcaster," "Non- recordings must be higher." RIAA and made no determination pertaining to Public;" and {2) the designation of an Petition at 46. Based on this evidence, administrative efficiency, choosing the Panel should have agent for unaffiliated copyright owners. set the minimum instead to defer to the expertise of the a. Definitions. The Panel fee for the section 112 license carefully as it Librarian. Report at 129. considered the utility of incorporating applies to Business Service the Establishments For the most part, the terms proposed proposed terms for Affiliated," at a significantly higher "Alvl/FM streaming," "Broadcaster," level, and it was arbitrary not to have by the Panel are those to which all parties to the CARP proceeding have and "Non-Public." It decided to reject done so. the webcasters" The Register notes that minimum agreed in negotiations. For this reason, request to adopt the fees disputed terms and definitions, have been as low as $5,000 and as high the Panel accepted all terms on which noting as the parties agreed, finding that where that the terms were not applicable to the the $50,000 minimum proposed by rate structure RIAA. The of the there was agreement, the terms meet the ultimately adopted by the purposes minimum Panel. The Parties have filed no fee, however, are to cover the costs of statutory standard under which these administration and terms objection on this point and the Register insure an adequate must be set. Moreover, the Panel finds no return to the owners found there was reason to include a definition copyright based that evidence in the of these terms in the regulations. upon the value of the right with respect record to support adoption ofmost of Panel's to the overall Notwithstanding the decision fee for use of the license. these terms. as to these terms, it did incorporate For these reasons, the Register proposes The Register is skeptical of other terms a minimum fee of the that were necessary for the $10,000 per Licensee. proposition that terms negotiated administration of the license. The The fee is at the low end of by the range parties in the context of a CARP proposed definitions for these of negotiated minimum fees and is in additional line with DMX/AEI's proceeding are necessarily evidence of terms are based upon own valuation of submissions from the license at 10,000 terms that a willing buyer and a willing the parties made at

$ per year. seller have the Panel's request. See, Admittedly this fee would negotiated in the Services'ubmission appears high when of Definitions; Proposed compared with the minimum fee for the marketplace. Especially when those terms relate to administration of the Definitions of the Recording Industry eligible nonsubscription services, but it Association of serves to balance receipt and distribution ofroyalties by America, Inc. (Feb. 12, the risk associated 2002). Again, no filed with a collectives that are artificial (but party has an setting statutory fee based upon objection to the Panel's decision to a percentage of revenues instead of a fee necessary) creations of the statutory license process, rather than entities propose additional terms the purpose of that would charge a specific fee for each which is make the reproduction. likely to be created in an agreement regulatory framework between a copyright owner and a clearer and more functional. 17. Effective Period for Proposed Rates licensee, the fiction that those terms b. Designated Agent for Unaffiliated The rates and terms the reflect the reality of the marketplace Copyright Owners. Read literally, proposed by is section 114 parties were the same for each time difficult to accept. appears to require that Services pay the statutory royalties period under consideration by the Not all ofthe terms recommended Panel. Consequently, the Panel by directly to each Copyright Owner. As a the Panel are terms that the Register practical matter, it would be impractical proposed, and the parties agreed, that would have adopted if her task were to the same rates and terms would for a Service to identify, locate and pay apply determine the most reasonable terms each to both periods: October 1998 individual Copyright Owner whose (1) 28, governing payment of royalties. works it (the effective date of the DMCA) through performed. As a result, in the December However, in light of the standard of administration of the predecessor 31, 2000; and (2) January 1, review, the 2001, through December Register recommends statutory license for noninteractive 31, 2002. The accepting the terms Register finds that it was not arbitrary adopted by the subscription services, a Collective was for the Panel Panel except in the relatively few appointed to receive and distribute all to propose the same rates instances where Panel's and terms for both periods under the decision royalties. The RIAA has served as the consideration. was either arbitrary or not feasible. See Collective for the nonsubscription Report at 129 ("we must defer to the services. B. Terms expertise of the Librarian the final In this proceeding, the Parties Sections 112(e)(4) and 114((f)(2)(B) evaluation of the administrative proposed and the CARP agreed to a require that the CARP propose and the feasibility of terms which willing buyers modification of the single-collective Librarian adopt terms for administering and willing sellers would agree to in model. Licensees making transmissions payment for the two statutory licenses. marketplace negotiations"). The of a public performance of a sound The Panel stated that, as with rates, the discussion that follows addresses, first, recording pursuant to the statutory standard for setting these terms is what the terms recommended by the Panel license in section 114 and/or making the willing seller and the willing buyer that one or more parties have asked the ephemeral recordings of these works would have negotiated in the Librarian to reject. Following that under the statutory license in section marketplace. The Panel did not interpret discussion, the Register discusses those 112{a) would make all payments owed the standard to include necessarily terms recommended the Panel under these licenses to the designated by that, 44 setting terms that "represent the although they are acceptable to the "Receiving Agent." The Receiving optimum alternative from the parties, she proposes to modify or reject, 4' standpoint of administrative "Receiving Agent" is the agent designated by because they are arbitrary or contrary to the Librarian ofCongress through the rate setting convenience and workability." It law. process for the collection of the royalty fees from Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45267

Agent would then make further the agent for unaffiliated Copyright and equal control of copyright owner distribution of the royalty fees to the Owners, but Copyright Owners and and performer representatives with an two Designated Agents as who would Performers asked the Panel to designate interest in maintaining an efficient then distribute the royalty fees among SoundExchange as the agent for those operation that will distribute the the Copyright Owners and Performers in copyright owners. maximum possible license fees, that accordance with the methodology set After carefully considering the role of SoundExchange is a nonprofit forth in the regulations. the Designated Agent for unaffiliated organization so that no copyright The CARP accepted the proposal of copyright owners and the record owner's or artist's royalty share will be the parties to designate a single evidence, the Panel made a diminished by anything other than Receiving Agent, SoundExchange, in determination to name SoundExchange necessary distribution costs, and that order to maximize administrative as the Designated Agent for those SoundExchange is experienced and has efficiencies for the Copyright Owners copyright owners who fail to expressly demonstrated its commitment to and Performers, on the one hand, and designate either SoundExchange or RLI identifying, finding and paying Licensees, on the other. SoundExchange as their agent to receive and distribute performers during its distribution of is a nonprofit organization formed by royalties on their behalf. The primary Section 114 and 112 subscription RIAA for the purpose of administering reason for this designation was the service statutory license fees."); see also the sections 112 and 114 statutory preference expressed by the Copyright RIAA Reply at 83. over Owners licenses. It has 280 member and the Performers. The Panel The CARP's decision to designate affiliated reasoned Services companies, with more than that the had no real SoundExchange as the agent for 2,000 record labels accounting for over stake in deciding this issue because their unaffiliated copyright owners is fully 909o of the sound recordings lawfully responsibilities and direct interest the record evidence and, end with the fees supported by sold in the United States. W.D.T. at 4 payment of the royalty consequently, it is not arbitrary. First, (Rosen). SoundExchange is governed by to the Receiving Agent. Moreover, AFM and the fact that Copyright Owners and a board comprised of representatives of AFTRA, which represent artists commend to who are among the beneficiaries of the Performers SoundExchange Copyright Owners and Performers and, the Panel is direct evidence of their license, expressed a strong preference under a recent reorganization, the preference for a non-profit organization Copyright Owners and artists for the designation of SoundExchange as the agent in these instances. The that has already invested heavily in a representatives will have equal control system designed to locate and over the SoundExchange Board. AFM/ Copyright Owners made this choice pay based on the non-profit status of Copyright owners and Performers. It AFTRA PFFCL g 6. would be arbitrary to their

In addition to its role as a Receiving SoundExchange, its experience with ignore

wishes where, in fact, the alternative Agent, the CARP accepted the Parties'roposal royalty payments, and the fact that that both and SoundExchange has agreed to a agent represents primarily broadcasters, SoundExchange television stations, and other Royalty Logic, Inc. ("RLI") serve as reorganization that gives artists Licensees—not Licensors. See AFM/ Designated Agents. RLI is a for profit substantial control over its operations. subsidiary of Music Inc. and The Panel agreed with the reasons AFTRA PFFCL concerning terms l 13. Reports, is was created to offer a articulated by the Copyright Owners Second, SoundExchange a non-profit competitive collective will deduct alternative to SoundExchange. W.D.T. at and Performers and found that the that only necessary distribution costs. On the 2 (Gertz). The purpose of having two probable outcome of a marketplace designated agents is to provide negotiation would have been the other hand, RLI, the entity competing Owners with the of selection of SoundExchange. for the agency designation, is a for-profit Copyright option organizat'ion whose acknowledged electing to receive their royalty Broadcasters contest the Panel's goal distribution from either SoundExchange decision to designate SoundExchange as is to make a profit. In fact, RLI has suggested that it needs the designation or RLI. The Receiving Agent will the agent for unaffiliated copyright from the CARP in to allocate royalties to the two Designated owners. They assert that there is no order generate enough revenues to make it worthwhile Agents based on the Copyright Owner's record evidence to support the Panel's designation.'s observation that this was the inevitable to take on the role of an agent for However, the parties could not agree outcome of marketplace negotiations, in purposes of making distributions of on which Designated Agent would spite of the actual requests made by statutory license royalty fees. See distribute funds to Copyright Owners Copyright Owners who participated in Services Proposed Findings (12/18/01) who failed to make an election. The this proceeding. Broadcasters Petition at at 'l( 16. In addition, RLI has been unable Webcasters proposed that RLI be named 59-60. to say just how much it expects to The Copyright Owners and deduct as reasonable costs, making it the Licensees operating under the sections 112 and Performers disagree, and assert that impossible to ascertain whether 114 licenses. unlike the Licensees whose only designation of RLI would be in the best ss A "Designated Agent" is sn agent designated by concern is whom to pay and when, interest of the unaffiliated copyright .the Librarian of Congress through the same rate copyright owners and performers have a owners. Third, Performers and setting process who receives royalty fees paid for vital interest in fees Owners have a direct use of the statutory licenses from the Receiving how their royalty Copyright Agent and makes further distributions of these fees are collected and distributed and have governance role in the operation of to Copyright Owners and Performers. expressed a strong preference for SoundExchange, thereby insuring their "The Register is skeptical of the benefit of this SoundExchange as the designated agent. interests are not neglected or two-tier structure, which adds expense and See RIAA Reply at 8'l; AFM/AFTRA overshadowed by the interests of the administrative burdens to a process the purpose of at 2. which is to make prompt, efficient and fair Reply Certainly, Performers believe agent. AFM/AFTRA Reply at 4; AFM/ payments of royalties to Copyright Owners and that SoundExchange will make fair and AFTRA PFFCL concerning terms 'Jl 6. Performers with a minimum of expense. However, equitable distributions and not deduct Performers have expressed strong the Register cannot say that the Panel's decision, additional costs beyond those necessary concerns about the designation of an presumably based on the conclusion that competition among Designated Agents will result in costs incurred to effectuate a agent who has no mechanism or better service to Copyright Owners and Performers, distribution. AFM/AFTRA Reply at 2—3 apparent interest in providing the is arbitrary. ("SoundExchange is subject to the joint Copyright Owners and Performers with 45268 Federal Register/Vol. 67, No. 130/Monday, july 8, 2002/Rules and Regulations

a means to voice their concerns. See agreement." DMX/AEI Reply at 3. contemplated by the Panel or by the AFM/AFTRA PFFCL concerning terms RIAA's proposed definition of "gross parties to such agreements. Because the 'j( 9 (noting that designation of RLI as the proceeds" would include fees generated record fails to enumerate the types of agent for unaffiliated copyright owners by equipment rental, maintenance revenue that may be received in kind, would have the undesirable effect of services, advertising of all kinds, and the Register finds it unwise to include forcing these non-members "into an revenues payable to a licensee from any even an illustrative list when there is agency relationship with an entity that source in connection with the licensee's little evidence of what specific types of not only is not governed by Copyright background music service. Id. at 5. revenues should be considered in the Owners and Performers, but also is not DMX/AEI argues that such a definition calculation of "gross proceeds." Thus, even required to obtain their guidance is utterly contrary to the normal practice the definition of "gross proceeds" shall and input regarding policies, procedures of using proceeds derived solely from be as follows: or distribution methodologies." ). the delivery of copyrighted sound "Gross proceeds" shall mean ell fees and For all the foregoing reasons, the recordings to business establishments. payments, including those made in kind, Register concludes that the CARP was As a general principle, terms received from any source before, during or not arbitrary in designating pertaining to a statutory license must be aiter the License term which are derived from SoundExchange as the agent for defined with specificity. At first blush, the use of copyrighted sound recordings unaffiliated copyright owners. Of the the proposed definition of "gross pursuant to 17 U.S.C. 112(e) for the sole four factors considered by the Panel, proceeds" does not appear to meet this purpose of facilitating a transmission to the each weighs in favor of SoundExchange. standard, merely reciting that a Business public a performance of a sound recording Of course, any Copyright Owner or Establishment Service must under the limitation on the exclusive rights pay a sum specified in section 114(d)(1)(c)(iv). Performer can affirmatively choose RLI equal to ten percent of the licensee's to act on its behalf as a Designated gross proceeds derived from use of the 2. Terms Not Disputed by the Parties Agent. musical programs that are attributable to c. Gross proceeds. As discussed copyrighted recordings. However, a. Limitation ofLiability. One of the earlier, the Panel proposed the adoption terms proposed by the Parties and record evidence suggests the definition "A of a rate for Business Establishment may be as simple as the CARP's adopted by the CARP was that Services making ephemeral recordings characterization of the term. Barry Designated Agent shell have no liability under section 112 at 10% of gross Knittel,s~ in discussing the promotional for payments made in accordance with proceeds. The Panel recognized the funds established for the benefit of the this subsection with respect to disputes necessity of also formulating a record companies from gross proceeds, between or among recipients." The definition of "gross proceeds" in order stated that the money placed into these Parties explained that the purpose of to make the rate workable. To meet this accounts comes from the company's this provision was to "mak[e] clear that need, it opted to incorporate, with gross revenues, and that these revenues so long as a Designated Agent complies minor modifications to accommodate are generated from all the billings for with the requirements adopted by the the section 112 license, the definition music. Tr. 8384 (Knittel). This statement Copyright Office for distributing used in many of the background music suggests that the determination of what royalties, then a beneficiary of statutory agreements even though the definition constitutes "gross revenues" is not a royalties cannot sue such Designated is less than clear on its face as to what mystery and that. it is merely the amount Agent for payments made in accordance constitutes gross proceeds. The lack of the Business Establishment Services 'eceive with Copyright Office regulations. Any specificity, however, did not trouble the from their customers for use of dispute among recipients should be Panel because it expected the parties to the music. This approach, however,. resolved among themselves." adopt the understandings within the does not necessarily appear to capture The Register understands the desire of industry developed during the normal in-kind payments of goods, free SoundExchange and RLI to insulate course of dealings. themselves from liability in cases where Panel's advertising or other similar payments RIAA does not share the view. for use of license. Copyright Owners or Performers dispute It the See RIAA Petition objects to the proposed definition of at 54. the Designated Agent's allocation of "gross proceeds," arguing that the Consequently, the Register proposes royalties. The Copyright Office's provision fails utterly to define the term to expand on the CARP's approach and experience with distribution in any meaningful way. It also contends adopt a definition of "gross proceeds" proceedings for the statutory licenses for that it is arbitrary to rely on industry which clarifies "gross proceeds" which royalties are initially paid to the industry's that practices to flesh out the shall include all fees and payments from Copyright Office provides ample understanding of the term when no any source, including those made in evidence that individual copyright record evidence exists about these kind, derived from the use of owners and performers often believe To practices. remedy this situation, copyrighted sound recordings to they are being paid less than their fair RIAA proposes that the Librarian adopt facilitate the transmission of the sound share of statutory license royalties, and definition "gross proceeds" the of for a recording pursuant to the section 112 it is natural for a Designated Agent to Business Establishment Service that is license. See RIAA Exhibit No. 60A DR. wish to avoid having to defend against set forth in the agreement between (Second Webcasting Performance and such claims. SoundExchange and MusicMusicMusic Webcasting Moreover, as has become apparent in ("MMM"). and Business Establishment RIAA Exhibit No. 60A. RIAA Ephemeral Recording License the course of the pending rulemaking asserts that this is the only record Agreement). The Register finds it proceeding relating to notice and evidence on this point. RIAA petition at necessary to expand upon the proposed recordkeeping for the use of sound 52-54. definition to avoid confusion on recordings under the statutory licenses, DMX/AEI rejects RIAA's suggestion any this point and not as a means to the information that Licensees will be that the Librarian a definition capture adopt additional revenue streams not providing to the Designated Agents from an agreement with MMM, "an about which (and how many) sound unsophisticated licensee, who its by ss Barry Knitteb formerly President of AEI Music recordings they have performed will be own admission is unlikely to pay any Markets—Worldwide is now DMX/AEt's Senior far from perfect, and the Designated significant royalties pursuant to the Vice President of Business Affairs Worldwide. Agents necessarily will have to make Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45269 difficult judgments in determining how Recordings, 66 FR 38226, 38228 (july as permitting a Designated to allocate Agent to royalties. If the Designated 23, 2001).sa deduct from the royalty pool any costs Agents had comprehensive information The Register also proposes that the of participating in a CARP proceeding. identifying each and every performance Librarian adopt a term that provides a Such activity is beyond the scope of transmitted by a Licensee, and each and Designated Agent with an optional collection and distribution of royalties. every Copyright Owner and Performer mechanism pursuant to which the Of course, Copyright Owners and for each performance, in theory they Designated Agent may request that the Performers may enter into agreements could pay each Copyright Owner and Register provide a written opinion with a Designated Agent permitting Performer his or her precise share of stating whether the Agent's such deductions, but a Designated royalties. In the real world—or at least methodology for distributing royalty Agent may not make such deductions for the remainder of the period for payments to nonmembers meets the from royalties due to unaffiliated which this proceeding is setting rates requirements of the terms for Copyright Owners and Performers or distribution set forth and terms—some Copyright Owners and in the those who have simply designated a Performers inevitably will receive implementing regulations. Although Designated Agent without specifically less such an opinion the than their precise share of the royalty by Register would agreeing to permit such deductions.ee not be binding on a court c. pool, and others will receive more than evaluating a Ephemeral Recording. The Register claim against a Designated recommends their precise share. The Agent, it can that a definition of Designated be assumed that a court would find the "Ephemeral Recording" Agents should not be held be added to the to an opinion of the Register persuasive. definitions. This definition impossibly high standard of care. incorporates The Register anticipates that under by reference the requirements set forth Unfortunately, neither the CARP nor this scheme, a Designated Agent that in section 112(e). the Librarian have the power to excuse acts conscientiously and in good faith in In a related provision, the Register has a Designated Agent (or, for that matter, the distribution of royalties will not be harmonized the language of tf5 261.3(b) anyone else) from liability for a breach found liable to a Copyright Owner or and (c) and makes clear that of a legal obligation. If a Designated Performer who is dissatisfied with his or beneficiaries of the statutory license for Agent has in fact wrongfully withheld her share of the distribution. ephemeral recordings may make any b. or underpaid royalties to a Deductions from Royalties for number of ephemeral recordings so long Copyright Designated Agent's Owner or Performer, the law may Costs. The parties as they are made for the sole purpose of had proposed, and the CARP provide a remedy to the Copyright agreed, facilitating the statutory licensees Owner or Performer. that Designated Agents be'permitted to permitted transmissions of deduct from the royalties paid to performances of sound recordings. The Although the Librarian cannot excuse Copyright Owners and Performers regulatory text the proposed by the parties Designated Agents from potential "reasonable costs incurred in the and accepted the Panel liability, by provided that he can adopt terms that licensing, collection and distribution of for Business Establishment Services, the provide a mechanism that will make the royalties paid by Licensees * * * section 112 royalty shall be paid "[flor claims by disgruntled Copyright Owners and a reasonable charge for the making of unlimited numbers of or Performers less likely, or at least less . administration." The Register ephemeral recordings in the operation viable. The Register therefore recommends that the provision of broadcast services pursuant to the recommends permitting deductions that in place of the ultra for costs incurred Business Establishment exemption vires provision excusing the Designated in licensing be removed from this contained in 17 U.S.C. 114(d)(1)(C)(iv)," Agents from any liability, the Librarian provision. See g 261.4(i). Although a (emphasis added), but that for provide that the Designated Agents must Designated Agent may happen to engage webcasters, the section 112 royalty shall submit to the Copyright Office a in licensing activities, licensing per se is be paid "[f)or the making of all detailed description of their not among the responsibilities of a ephemeral recordings required to methodology for distributing royalty Designated Agent under the terms of the facilitate their internet transmissions." payments to nonmembers. This statutory license. The purpose of the A literal reading of section 112(e) information will be made Designated Agent is to receive and might lead to the conclusion that the available to distribute the public, and Owner the statutory royalty fees. ephemeral recording statutory license any Copyright or There is no Performer who believes the justification for permitting permits only the making of a single a Designated Agent to deduct methodology is unfair will have costs ephemeral recording, but the statute an incurred in licensing activity from the qualifies opportunity to raise an objection with that provision by stating statutory royalties, and the CARP's "(unless the terms and the Designated Agent prior to the conditions of the acquiescence in this term was therefore statutory license allow for more)," distribution, thereby giving the and arbitrary. the legislative history makes clear that Designated Agent the opportunity to There was also a suggestion in the terms established address the by the Librarian in problem before the testimony presented to the CARP that it this proceeding may include terms Copyright Owner or Performer has would be proper for a Designated Agent permitting the making of additional suffered any alleged harm. This to deduct from statutory royalties its provision is modeled on a provision costs incurred as a participant in a as The Register is also troubled by the parties proposed by the parties to the previous CARP proceeding. Tr. 11891 — '11893 permitting a Designated Agent to deduct "a CARP to (Williams). reasonable charge for administration" which is proceeding establish rates and Nothing in It 261.4(i), included "to terms for including the permit a for-profit Designated Agent noninteractive subscription references to "reasonable to make a reasonable profit on royalty collection services under section 114. See costs incurred in the collection and and distribution on top of the direct expenses that proposed 37 CFR 260.3(e), in Notice of distribution of the royalties paid by may be incurred in licensing, collection and distribution." — Proposed Rulemaking, Determination Licensees," can properly be construed Appendix B, p. B 13. But in light of of the parties'cceptance and the CARP's adoption of Reasonable Rates and Terms for the a procedure permitting multiple Designated Agents, 's A similar Public Performance of Sound provision is recommended with including a for-profit Designated Agent, the Register respect to the methodology for allocating royalties reluctantly cannot conclude that the provision is among Designated Agents. arbitrary. 45270 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations ephemeral recordings. H.R.Rep. 105- under current conditions it is accepted by the Panel provide that the 796, at 89. Therefore, it is appropriate administratively unfeasible. Receiving Agent allocate royalty that the terms make clear that statutory As the parties recognized in their payments to Designated Agents "on a licensees may make more than one commentary on this provision, "The reasonable basis to be agreed among the ephemeral recording to accomplish the parties do not know either the payment Receiving Agent and the Designated purposes of the statutory license. methodology that will be used to Agents," and that the Designated Agents The reference to "all" ephemeral calculate royalties or the types of distribute royalty payments "on a recordings "required" to facilitate information that will be reported by reasonable basis that values all webcasters" transmissions, and the Licensees. Such determinations cannot performances by a Licensee equally." reference to "unlimited" recordings for be made before the conclusion of this The Panel accepted these terms, but Business Establishment Services" proceeding and the Notice and observed that a "determination of how "operation", are arguably inconsistent Recordkeeping Proceeding." Appendix royalty payments should be apportioned with each other and somewhat B, p. B-10. However, they assumed that between the Designated Agents cannot ambiguous. To clarify that the scope of the Receiving Agent and the Designated be made until the parties know the rate the section 112 statutory license is Agent could agree on a "reasonable structure adopted by the CARP (in the similar for both types of service, and to allocation method" even in the absence first instance) and the Librarian of more accurately reflect the appropriate of any firm data. Congress (on review) and the outcome scope of that license, the Register The Register is skeptical. It is of the Notice and Recordkeeping recommends that the regulatory apparent at this point in the rulemaking Proceeding." Appendix B, at p. B-10.

language provide, in the case of on notice and recordkeeping that Similarly, the Panel remarked that "The webcasters, "ff)or the making of any obtaining accurate reports of Licensees'se terms do not specifically provide how a number of ephemeral recordings to of sound recordings will be difficult, Designated Agent should allocate facilitate the Internet transmission of a particularly during the first few months. royalties among parties entitled to sound recording," and in the case of Moreover, the initial reports of use wifl receive such royalties because such Business Establishment Services, "[fjor require reporting on less than a monthly allocation will depend upon the rate the making of any number of ephemeral basis, making it impossible in many structure adopted by the CARP (in the recordings in the operation of a service instances for the Receiving Agent to first instance) and by the Librarian of pursuant to the Business Establishment make any determination whatsoever as Congress (on review) and may be exemption." (Emphasis added). to a Designated Agent's allocated share affected by the types of reporting d. Definition of Listener". The during at least the first month or two in requirements that are adopted by the definitions of "Aggregate Tuning which royalties are paid. Reports on Copyright Office in the Notice and Hours" and "Performance" both include past use of sound recordings (i.e., from Record-keeping Proceeding for eligible references to a "listener" or to October 28, 1998, to the present) will nonsubscription transmissions and "listeners." It is not clear from the text present an even more formidable business establishment services." Id., p. of these definitions whether each person challenge. It is difficult to imagine that B-12. who is hearing a performance is a 20 days after the Receiving Agent has The Register recommends that the "listener" even if all the persons hearing received the first royalty payments from provisions for allocation of royalty the performance are listening to the Licensees, the Receiving Agent and the payments among Designated Agents and same machine or device (e.g., two or Designated Agent will have any reliable for allocation of royalties among parties more persons listening to a performance information from which they can entitled to receive such royalties be rendered on a single computer). Clearly ascertain how the proceeds should be clarified, making explicit the the intent is that all persons listening to allocated. The Register therefore relationship between the notice and a performance on a single machine or recommends that the proposed recordkeeping regulations and the device constitute, collectively, a single requirement that payment be made allocation of royalties. Each of these "listener," because "listener" is used within 20 days of the day on which the provisions should provide that the here to assist in defining what Licensee's payment is due be replaced method of allocation shall be based constitutes a single performance. by a requirement that the payment be upon the information provided by the Indeed, it would be difficult to made "aa expeditiously as is reasonably Licensee pursuant to the regulations implement an interpretation that possible," a more flexible term that governing records of use of counted all individuals in such recognizes the difficulty in establishing performances. circumstances as separate "listeners." a specific deadline. The Register The Register has some trepidation Accordingly, the Register recommends cautions that during the first few about the provision in g 261.4(a), including a definition that provides that months of operation of the system of proposed by the Parties and if more than one person are listening to reporting and or royalty payment, recommended by the CARP, that a transmission made to a single machine "expeditious" payment under the provides that apportionment among or device, those persons collectively circumstances may be a matter of many Designated Agents "shall be made on a constitute a single listener. weeks, if not months. reasonable basis that uses a e. Timing ofPayment by Receiving It can reasonably be expected that for methodology that values all Agent to Designated Agent. The terms future periods governed by future performances equally and is agreed proposed by the Parties and accepted by CARPs or negotiated agreements, more upon among the Receiving Agent and the CARP included a provision stringent requirements of prompt the Designated Agents." (Emphasis requiring that the Receiving Agent pay payment will be appropriate. But it added). The regulation does not provide a Designated Agent its share of any must be recognized that in this initial, what happens in the event that the royalty payments received from a transitional period, delays will be Receiving Agent and the Designated Licensee within 20 days after the day on inevitable. Agents cannot agree on an allocation which the Licensee's payment is due. f. Allocation ofRoyalties among methodology. One could recommend a While the Register recognizes that such Designated Agents end Among provision that gives the ultimate a provision would, in principle, be Copyright Owners ond Performers. The decisionmaking power to one of the unobjectionable, she concludes that terms proposed by the Parties and parties or to a third party, but instead, Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45271

the Register proposes the addition of of Copyright Owners and Performers, Librarian, since section 802(g) only $ 261.4(1), which would simply provide which could number in the tens of refers to the decision of the Librarian. that in the event of a stalemate, "either thousands." Appendix B at p. B-24.'The Thus, this provision has been the Receiving Agent or a Designated commentary suggests that it would be interpreted as providing the Librarian Agent may seek the assistance of the impracticable for a Designated Agent to with discretion in setting the effective Copyright Office in resolving the be subject to audit from individual date. Moreover, the courts have held dispute." Performers. Apart from reproducing the that an agency normally retains g. Choice ofDesignated Agent by Parties'ommentary, the Panel offered considerable discretion to choose an Performers. A literal reading of the no observations on this point. effective date, where, as here, the statute terms recommended by the Panel would The Register fails to understand how authorizing agency action fails to permit a Copyright Owner to select the it would be "impracticable" to permit specify a timetable for effectiveness of Designated Agent of its choice, but Performers, who depend on a decisions. BIAA v. CRT, 662 F.2d. 1, 14 would require a Performer to accept the Designated Agent for their royalty (D.C. Cir. 1981). Designated Agent selected payments, to initiate an by the audit of the In setting an effective Copyright Owner; and the Panel's Designated Agent when the date, the report Copyright Register has considered the of appears to agree with this interpretation. Owners may do so. The Designated impact Agent is the rate on the Licensees and the Report at 132. However, the Report does given sufficient protection by administrative burden not articulate reason for virtue of the provision that it can be on the Office in any the promulgating regulations to insure decision to deprive Performers of the subject to only a single audit in a effective administration of the license. same right to choose that is given to calendar year, by the provision that the Copyright Owners, and the party requesting the audit must bear the Clearly, there will be a burden on many commentary Licensees who, law, are in B presumably considerable costs by required to Appendix is silent as welk of the make As the Panel acknowledged, audit, and by the provision that full payment of all royalties owed any for transmissions "Copyright owners and performers, on audit "shall be binding on all Copyright made since the the other hand, have a direct and vital Owners and Performers." eo The effective date of the DMCA, October 28, interest in who distributes royalties to Register, therefore, recommends that the 1998, on or before the 20th day of the them and how that entity operates" audit provisions be amended to permit month next succeeding the month in Report at 132 (emphasis added). The not only Copyright Owners, but also which the royalty rate is set. Moreover, Register agrees. It was arbitrary to Performers, to initiate an audit. the Copyright Office is in the midst of permit Copyright Owners to make an i. Effective date. Section 114(f)(4)(C). promulgating rules governing records of election that Performers are not states that payments in arrears for the use that will be used to make permitted to make. The Register can performance of sound recordings prior distribution of royalty fees in conceive of no reason why Performers to the setting of a royalty rate are due accordance with the terms of payment. should not be given the same choice. on a date certain in the month following Consequently, the Register proposes Accordingly, the Register recommends the month in which the rate is set. The an effective date of September 1, 2002, that g 261.4 be amended to provide that effective date of the rates, however, is which will require the Licensees to a Copyright Owner or a Performer may not necessarily the date of publication make full payment of the arrears on October make such an election. See (t 261.4(c) of in the Federal Register. The Librarian 20, 2002. Payment for the the recommended regulatory text. has often set the effective date of a rate month of September shall be due on or The Register has also inserted a several months after the initial before November 14, 2002, the forty- housekeeping amendment to provide announcement of the decision. See fifth (45th) day after the end of the that for administrative convenience, a Determination of Reasonable Rates and month on which the rate becomes Copyright Owner's or Performer's Terms for Subscription Services, 63 FR effective, in accordance with the term designation of a Designated Agent shall 25394 (May 8, 1998) (setting the proposed by the parties and adopted by not be effective until 30 days have effective date for the rate for the CARP. Similarly, all subsequent passed. subscription services three weeks after payments shall be due on the 45th after h. Performers'Bight to Audit. The the date of publication of the final order the end of each month for which terms proposed by the Parties and in the Federal Register); Rate royalties are owed. This payment accepted by the CARP provided that a Adjustment for the Satellite Carrier schedule provides the Licensees with Copyright Owner may conduct an audit Compulsory License, 62 FR 55742 additional time to make the initial of a Designated Agent. These provisions (October 28, 1997) (announcing an payment and any necessary adjustments also include safeguards to ensure that a effective date of January 1, 1998, set to in their business operations to meet Designated Agent is not subjected to coincide with the next filing period of their copyright obligation. the more than one audit in a calendar year. statements of account). V. Conclusion However, the terms do not provide Section 802(g) provides that the that Performers have a similar right to effective date of the new rates is "as set Having fully analyzed the record in conduct an audit of a Designated Agent, forth in the decision." 17 U.S.C. 802(g). this proceeding, the submissions of the despite the fact that Performers, like The Register has interpreted the term parties, the Register of Copyrights Copyright Owners, depend upon the "decision" to mean the decision of the recommends that the Librarian adopt Designated Agent to make fair and the statutory rates for the transmission

timely royalty payments. The » lt is noteworthy that although the Parties were of a sound Parties'ommentary recording pursuant to section in B unwilling to give Performers a right to initiate an Appendix states that audit. 114, and the making of ephemeral audit rights are limited to they did not hesitate to provide that Copyright Performers will be bound by an audit initiated by phonorecords pursuant to section Owners "rather than the entire universe a Copyright Owner. 112(e), as set forth below: 45272 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

SUMMARY OF ROYALTY RATES FOR SECTION 114(F)(2) AND 112(E) STATUTORY LICENSES

Type of DMCA—Complaint service Performance fee Ephemeral (per performance) license fees 1. Webcaster and Commercial Broadcaster: All Internet transmlsslons, including simultaneous internet retrans- 0.07 II 8.8% of Performance Fees Due. missions of over-the-air AM or FM radio broadcasts. 2. Non-CPB, Non-Commercial Broadcaster: (a) Simultaneous internet retransmlsslons of over-the-air AM or 0.02lf 8.8% of Performance Fees Due. FM radio broadcasts. (b) Other internet transmlsslons, including up to two side channels 0.02(t 8.8% of Performance Fees Due. of programming consistent with the public broadcasting mission of the station. (c) Transmlsslons on any other side channels ...... „...... 0.07II 8.8% of Performance Fees Due. 3. Business Establishment Service: For digital broadcast transmlsslons of sound recordings pursuant Statutorily Exempt 10% of Gross Proceeds. to 17 U.S.C. 114(d)(1)(C)(lv). 4. Minimum Fee: (a) Webcasters, commercial broadcasters, and non-CPB, non- $500 per year for each licensee. commercial broadcasters. (b) Business Establishment Services . $ 10,000

In addition, the Register recommends PART 261 —RATES AND TERMS FOR li 261.2 Definitions. that the Librarian adopt the terms of ELIGIBLE NONSUBSCRIPTION For purposes of this part, the payment proposed by the CARP, as TRANSMISSIONS AND THE MAKING following definitions shall apply: modified in the recommendation, and OF EPHEMERAL REPRODUCTIONS Aggregate Tuning Hours mean the set September 1, 2002, as the effective total hours of programming that the date for the Sec. statutory rates and the terms 261.1 General. Licensee has transmitted over the of payment. 261.2 Definitions. Internet during the relevant period to all end users within VI. The Order of the Librarian of 261.3 Royalty fees for public performance the United States from of sound and for all channels and Congress recordings ephemeral stations that provide recordings. audio programming consisting, in whole 261.4 Terms for making payment of royalty or in part, of eligible nonsubscription Having duly considered the fees aud statements of account. recommendation of the Register of transmissions. By way of example, if a 261.5 Confidential information. service Copyrights regarding the Report of the 261.6 Verification of statements of account. transmitted one hour of Copyright Arbitration Panel 261.7 Verification of royalty payments. programming to 10 simultaneous Royalty in listeners, the service's the matter to set rates and terms for 261.8 Unclaimed funds. Aggregate Tuning Hours would 10. Licensees Authority: 17 U.S.C. equal Likewise, if one making certain digital 112(e), 114, 801(b)(1). listener listened performances of sound to a service for 10 recordings under 261.1 General. hours, the service's section 114(d)(2) and those g Aggregate Tuning making Hours would equal 10. ephemeral recordings under section (a) This part 261 establishes rates and terms of Business Establishment Service is a 112(e), the Librarian of royalty payments for the public Congress fully performance of sound Licensee that is entitled to transmit to endorses and adopts her recordings in certain digital transmissions by certain the public a performance of a sound recommendation to accept the Panel's Licensees in accordance with the recording under the limitation on decision in part and reject it in part. For provisions of 17 U.S.C. 114, and the exclusive rights specified by 17 U.S.C. the reasons stated in the Register's making of ephemeral recordings by 114(d)(1)(C)(iv) and that obtains a recommendation, the Librarian is certain Licensees in accordance with the compulsory license under 17 U.S.C. exercising his authority under 17 U.S.C. provisions of 17 U,S.C. 112(e). 112(e) to make ephemeral recordings for 802(f) and is issuing this order, and (b) Licensees relying upon the the sole purpose of facilitating those amending the rules of the Library and statutory license set forth in 17 U.S.C. exempt transmissions. the Copyright Office, announcing the 114 shall comply with the requirements Commercial Broadcaster is a Licensee new royalty rates and terms of payment of that section and the rates and terms that owns and operates a terrestrial AM for the sections 112 and 114 statutory of this part. or FM radio station that is licensed by licenses. (c) Licensees relying upon the the Federal Communications statutory license set forth in 17 U.S.C. Commission to make over-the-air List of Subjects in 37 CFR Part 261 112 shall comply with the requirements broadcasts, other than a CPB-Affiliated of that section and the rates and terms or Non-CPB-Affiliated, Non-Commercial Copyright, Digital audio of this transmissions, part. Broadcaster. Performance right, (d) Notwithstanding the schedule of Owner Recordings. Copyright is a sound recording rates and terms established in this part, copyright owner who is entitled to Final Regulation the rates and terms of any license receive royalty payments made under agreements entered into by Copyright this part pursuant to the statutory In consideration of the foregoing, part Owners and services within the scope of licenses under 17 U.S.C. 112(e) or 114. 261 of 37 CFR is added to read to as 17 U.S.C. 112 and 114 concerning Designated Agent is the agent follows: eligible nonsubscription transmissions designated by the Librarian of Congress shall apply in lieu of the rates and terms for the receipt of royalty payments made of this part. pursuant to this part from the Receiving Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45273

Agent. The Designated Agent shall make (2) A performance of a sound pursuant to 17 U.S.C. 112(e) shall be as further distribution of those royalty recording for which the service has follows: payments to Copyright Owners and obtained license from the'reviously (1) Webcaster and Commercial

Performers that have been identified in copyright owner of such sound Broadcaster Performance Royalty. For g 261.4(c). recording; and'3) all Internet transmissions, including Ephemeral Recording is a An incidental performance that simultaneous Internet retransmissions phonorecord created solely for the both: (i) Makes no more than incidental of over-the-air AM or FM radio purpose of facilitating a transmission of use of sound recordings including, but broadcasts, a Webcaster and a a public performance of a sound not limited to, brief musical transitions Commercial Broadcaster shall pay a recording under the limitations on in and out of commercials or program section 114(f) performance oyalty of exclusive rights specified by 17 U.S.C. segments, brief performances during 0.07g per performance. 114(d)(1)(C)(iv) or under a statutory news, talk and sports programming, (2) Non-CPB, Non-Commercial license in accordance with 17 U.S.C. brief background performances during Broadcaster Performance Royalty. 114(f), and subject to the limitations disk jockey announcements, brief (i) For simultaneous Internet specified in 17 U.S.C. 112(e). performances during commercials of retransmissions of over-the-air AM or Gross proceeds mean all fees and sixty seconds or less in duration, or FM broadcasts by the same radio station, a non-CPB, Non-Commercial payments, as used in g 261.3(d), brief performances during sporting or those made received other public events; and Broadcaster shall pay a section 114(f) including in kind, performance from any source before, during or after (ii) Other than ambient music that is royalty of 0.02g per the License term which are derived from background at a public event, does not performance. contain an entire sound recording and (ii) For other Internet transmissions, the use of copyrighted sound recordings including to two side channels of pursuant to 17 U.S.C. 112(e) for the sole does not feature a particular sound up recording of more than thirty seconds programming consistent with the purpose of facilitating a transmission to mission of the station, a Non-CPB, Non- the public of a performance of a sound (as in the case of a sound recording used as a theme song). Commercial Broadcaster shall pay a recording under the limitation on the section performance of exclusive rights specified in section Performer means the respective 114(f) royalty independent administrators identified 0.02g per performance. 114(d)(1)(c)(iv). (iii) For Internet transmissions on Licensee is: (1) A person or entity that in 17 U.S.C. 114(g)(2)(A) and (B) and the parties identified in 17 U.S.C. other side channels of programming, a has obtained a compulsory license Non-CPB, Non-Commercial Broadcaster under 17 U.S.C. 112 or 114 and the 114(g)(2) (C). Receiving Agent is the agent shall pay a section 114(f) performance implementing regulations therefor to royalty of 0.07g per performance. make eligible non-subscription designated by the Librarian of Congress for the collection of royalty payments (b) Estimate ofPerformance. Until transmissions and ephemeral December 31, 2002„a Webcaster, recordings, or made pursuant to this part by Licensees distribution of Commercial Broadcaster, or Non-CPB, (2) A person or entity entitled to and the those royalty Non-Commercial to Designated Agents, and Broadcaster may transmit to the public a performance of payments estimate its total number of a sound recording under the limitation that has been identified as such in 261.4(b). The Receiving Agent performances if the actual number is not on exclusive rights specified by 17 g may available. Such estimation also be a Designated Agent. shall be U.S.C. 114(d)(1)(C)(iv) and that has based on multiplying the total number obtained a compulsory license under 17 Side channel is a channel on the Web Site of a Commercial Broadcaster or a of Aggregate Tuning Hours by 15 U.S.C. 112 to make ephemeral performances per hour (1 performance recordings. Non-CPB, Non-Commercial Broadcaster, which channel transmits eligible non- per. hour in the case of transmissions or Listener is a recipient of a retransmissions of radio station transmission of a public performance of subscription transmissions that are not over-the-air programming reasonably classified as a sound recording made by a Licensee simultaneously transmitted by the Licensee. news, business, talk or sports, and 12 or a Business Establishment Service. performances per hour in the case of However, if more than one person is Webcasteris a Licensee, other than a

Commercial Broadcaster, Non-CPB, transmissions or retransmissions of all listening to a transmission made to a other radio station programming). single machine or device, those persons Non-Commercial Broadcaster or'usiness Establishment Service, that (c) Webcaster and Broadcaster collectively constitute a single listener. makes eligible non-subscription Ephemeral Recordings Royalty. For the Non-CPB, Non-Commercial making of any number of ephemeral Broadcaster is a Public Broadcasting transmissions of digital audio programming over the Internet through recordings to facilitate the Internet Entity as defined in 17 U.S.C. 118(g) transmission of a sound recording, each that is not qualified to receive funding a Web Site. Web Site is a site located on the World Webcaster, Commercial Broadcaster, from the Corporation for Public end and Non-CPB, Non-Commercial Broadcasting Wide Web that can be located by an pursuant to the criteria set a Uniform Broadcaster shall pay a section 112(e) forth in 47 U.S.C. 396. user through principal Resource Locator (a "URL"), e.g., royalty equal to 8.89o of their total Performance is each instance in www.xxxxx.corn. performance royalty. which any portion of a sound recording (d) Business Establishment Ephemeral is publicly performed to a listener via a g 261.3 Royalty fees for public Recordings Royalty. For the making of Web Site transmission or retransmission performances of sound recordings and for any number of ephemeral recordings in (e.g. the delivery of any portion of a ephemeral recordings. the operation of a service pursuant to single track from a compact disc to one (a) For the period October 28, 1998, the Business Establishment exemption listener) but excluding the following: through December 31, 2002, royalty contained in 17 U.S.C. 114(d)(1)(C)(iv), (1) A performance of a sound rates and fees for eligible digital a Business Establishment Service shall recording that does not require a license transmissions of sound recordings made pay a section 112(e) ephemeral (e.g., the sound recording is not pursuant to 17 U.S.C. 114(d)(2), and the recording royalty equal to ten percent copyrighted); making of ephemeral recordings (10 /o) of the Licensee's annual gross t 45274 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

proceeds derived from the use in such designation is made, Royalty Logic, Inc. is reasonably possible following receipt service of the musical programs which and SoundExchange are designated as of the Licensee's royalty payment and are attributable to copyrighted Designated Agents to distribute royalty statement of account as well as the recordings. The attribution of gross payments to Copyright Owners and Licensee's Report of Use of Sound proceeds to copyrighted recordings may Performers entitled to receive royalties Recordings under Statutory License for be made on the basis of: under 17 U.S.C. 114(g)(2) from the the period to which the royalty payment (1) For classical programs, the performance of sound recordings owned and statement of account pertain, with proportion that the playing time of by such Copyright Owners. such allocation to be made on the basis copyrighted classical recordings bears to (c) SoundExchange is the Designated determined as set forth in paragraph (a) the total playing time of all classical Agent to distribute royalty payments to ofthis section. The Receiving Agent and recordings in the program, each Copyright Owner and Performer the Designated Agent shall agree on a (2) For all other programs, the entitled to receive royalties under 17 reasonable basis on the sharing on a pro- proportion that the number of U.S.C. 114(g)(2) from the performance of rata basis of any incremental costs copyrighted recordings bears to the total sound recordings owned by such directly associated with the allocation number of all recordings in the program. Copyright Owners, except when a method. A final adjustment, if (e) Minimum fee. (1) Each Webcaster, Copyright Owner or Performer has necessary, shall be agreed and paid or Commercial Broadcaster, and Non-CPB, notified SoundExchange in writing of an refunded, as the case may be, between Non-Commercial Broadcaster licensed election to receive royalties from a the Receiving Agent and a Designated to make eligible digital transmissions particular Designated Agent. With Agent for each calendar year no later and/or ephemeral recordings pursuant respect to any royalty payment received than 180 days following the end of each to licenses under 17 U.S.C. 114(f) and/ by the Receiving Agent from a Licensee, calendar year. or 17 U.S.C. 112(e) shall pay a minimum a designation by a Copyright Owner or (h) The Designated Agent shall fee of $500 for each cale'ndar year, or Performer of a particular Designated distribute royalty payments on a part thereof, in which it makes such Agent must be made no later than thirty reasonable basis that values all transmissions or recordings. days prior to the receipt by the performances by a Licensee equally (2) Each Business Establishment Receiving Agent of that royalty based upon the information provided by Service licensed to make ephemeral payment. the Licensee pursuant to the regulations recordings pursuant to a license under (d) Commencing September 1, 2002, a governing records of use of 17 U.S.C. 112(e) shall pay a minimum Licensee shall make any payments due performances; Provided, however, that fee of $10,000 for each calendar year, or under $ 261.3 to the Receiving Agent by Copyright Owners and Performers who part thereof, in which it makes such the forty-fifth (45th) day after the end of have designated a particular Designated recordings. each month for that month. Agent may agree to allocate their shares Concurrently with the delivery of of the royalty payments among $ 261.4 Terms for making payment of payment to the Receiving Agent, a royalty fees and statements of account. themselves on an alternative basis. Licensee shall deliver to each (i)(1) A Designated Agent shall A Licensee shall make (a) the royalty Designated Agent a copy of the provide to the Register of Copyrights: payments due under g 261.3 to the statement of account for such payment. (i) A detailed description of its Receiving Agent. If there are more than A Licensee shall pay a late fee of 0.75% methodology for distributing royalty one Designated Agent representing per month, or the highest lawful rate, payments to Copyright Owners and Copyright Owners or Performers whichever is lower, for any payment Performers who have not agreed to an entitled to receive any portion of the received by the Receiving Agent after alternative basis for allocating their royalties paid by the Licensee, the the due date. Late fees shall accrue from share of royalty payments (hereinafter, Receiving Agent shall apportion the the due date until payment is received "non-members"), and any amendments royalty payments among Designated by the Receiving Agent. thereto, within 30 days of adoption and Agents using the information provided (e) A Licensee shall make any no later than 60 days prior to the first by the Licensee pursuant to the payments due under g 261.3 for distribution to Copyright Owners and regulations governing records of use of transmissions made between October Performers of any royalties distributed performances for the period for which 28, 1998, and August 31, 2002, to the pursuant to that methodology; the royalty payment was made. Such Receiving Agent by October 20, 2002. (ii) Any written complaint that the apportionment shall be made on a (fl A Licensee shall submit a monthly Designated Agent receives from a non- reasonable basis that uses a statement of account for accompanying member concerning the distribution of methodology that values all royalty payments on a form prepared by royalty payments, within 30 days of performances equally and is agreed the Receiving Agent after full receiving such written complaint; and upon among the Receiving Agent and consultation with all Designated Agents, (iii) The final disposition by the the Designated Agents. Within 30 days The form shall be made available to the Designated Agent of any complaint of adoption of a methodology for Licensee by the Receiving Agent. A specified by paragraph (i)(1)(ii) of this apportioning royalties among statement of account shall include only section, within 60 days of such Designated Agents, the Receiving Agent such information as is necessary to disposition. shall provide the Register of Copyrights calculate the accompanying royalty (2) A Designated Agent may request with a detailed description of that payment. Additional information that the Register of Copyrights provide methodology. beyond that which is sufficient to a written opinion stating whether the (b) Until such time as a new calculate the royalty payments to be Agent's methodology for distributing designation is made, SoundExchange, paid shall not be required to be royalty payments to non-members meets an unincorporated division of the included on the statement of account. the requirements of this section. Recording Industry Association of (g) The Receiving Agent shall make (j) A Designated Agent shall distribute America, Inc., is designated as the payments of the allocable share of any such royalty payments directly to the Receiving Agent to receive statements of royalty payment received from any Copyright Owners and Performers, account and royalty payments from Licensee under this section to the according to the percentages set forth in Licensees. Until such time as a new Designated Agent(s) as expeditiously as 17 U.S.C. 114(g)(2), if such Copyright Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations 45275 Owners and Performers provide the (d) Except as provided in paragraph collection, and distribution of Designated Agent with adequate royalty (c) of this section and as required by payments shall be kept for a information necessary to identify the period of law, access to Confidential Information not less than three (3) years. correct recipient for such payments. shall be limited to, and in the case of However, Performers and Copyright paragraphs (d)(3) and (d)(4) of this i(261.6 Verification of statements of Owners may jointly agree with a section shall be provided upon request, account. Designated Agent upon payment subject to resolution of any relevance or (a) General. This section prescribes protocols to be used by the Designated burdensomeness concerns and general rules pertaining to the Agent that provide for alternative reimbursement of reasonable costs verification of the statements of account arrangements for the payment of directly incurred in responding to such by the Designated Agent. royalties to Performers and Copyright request, to: (b) Frequency of verification. A Owners consistent with the percentages (1) Those employees, agents, Designated Agent may conduct a single in 17 U.S.C. 114(g)(2). consultants and independent audit of a Licensee, upon reasonable (k) A Designated Agent may deduct contractors of the Receiving Agent or a notice and during reasonable business from the royalties paid to Copyright Designated Agent, subject to an hours, during any given calendar year, Owners and Performers reasonable costs appropriate confidentiality agreement, for any or all of the prior three (3) incurred in the collection and who are engaged in the collection and calendar years, and no calendar year distribution of the royalties paid by distribution of royalty payments shall be subject to audit more than once. Licensees under 5 261.3, and a hereunder and activities directly related (c) Notice ofintent to audit. A reasonable charge for administration. thereto, who are not also employees or Designated Agent must submit a notice (I) In the event a Designated Agent officers of a Copyright Owner or of intent to audit a particular Licensee and a Receiving Agent cannot agree Performer, and who, for the purpose of with the Copyright Office, which shall upon a methodology for apportioning performing such duties during the publish in the Federal Register a notice royalties pursuant to paragraph (a) of ordinary course of employment, require announcing the receipt of the notice of this section, either the Receiving Agent access to the records; intent to audit within thirty (30) days of or a Designated Agent may seek the (2) An independent and qualified the filing of the Designated Agent's assistance of the Copyright Office in auditor, subject to an appropriate notice. The notification of intent to resolving the dispute. confidentiality agreement, who is audit shall be served at the same time authorized to act on on the g 261.5 Confidential information. behalf of the Licensee to be audited. Any such Receiving Agent or a Designated Agent audit shall be conducted by an (a) For purposes of this part, with respect to the "Confidential Information" verification of a independent and qualified auditor shall Licensee's statement of account identified in include the statements of account, the notice, and shall be any pursuant to g 261.6 or on behalf a binding information contained therein, of on all Designated Agents, and Copyright Owner or Performer with all Copyright Owners and Performers. including the amount of royalty respect to the verification and of royalty (d) Acquisition and retention of payments, any information payments pursuant to 261.7; records. The Licensee shall pertaining to the statements g use of account (3) In connection with future commercially reasonable efforts to reasonably designated as confidential by Copyright Arbitration Royalty Panel obtain or to the Licensee submitting provide access to any the statement. proceedings under 17 U.S.C. 114(f)(2) relevant books and records maintained (b) Confidential Information shall not and 112(e), under an include documents appropriate by third parties for the purpose of the or information that protective order, attorneys, consultants audit and at the time of delivery to retain such records for a the Receiving and other authorized agents of the period of not less Agent or a Designated Agent are than three (3) years. public parties to the proceedings, Copyright The Designated Agent knowledge. The Receiving or requesting the Agent a Arbitration Royalty Panels, the verification procedure shall retain the Designated Agent that claims the benefit Copyright Office or the of this courts; and report of the verification for a period of provision shall have the burden (4) In connection with bona fide not less of proving that the than three (3) years. disclosed royalty disputes or claims or among (e) Acceptable information was by verification procedure. public knowledge. Licensees, the Receiving Agent, An audit, including underlying (c) In no event shall the Receiving Copyright Owners, Performers Agent or or the paperwork, which was performed in the Designated Agent(s) use any Designated Agent(s), under an Confidential Information ordinary course of business according to for any appropriate confidentiality agreement or generally accepted auditing standards purpose other than royalty collection protective order, attorneys, and distribution and consultants by an independent and qualified activities directly and other authorized agents of the auditor, shall serve as related thereto; Provided, however, that an acceptable parties to the dispute, arbitration panels verification procedure for all Designated the Designated Agent may report or the courts. Confidential Agents with respect to the information Information provided on (e) The Receiving Agent or Designated that is within the statements of account under this scope of the audit. part in Agent(s) and any person identified in (f) Consultation. Before rendering a aggregated form, so long as Confidential paragraph (d) of this section shall written Information report to a Designated Agent, pertaining to any Licensee implement procedures to safeguard all except where the auditor or of Licensees has a group cannot directly or Confidential Information using a reasonable basis to suspect fraud and indirectly be ascertained or reasonably reasonable standard of care, but no less disclosure approximated. would, in the reasonable All reported aggregated than the same degree of security used to opinion of the auditor, Confidential Information from prejudice the Licensees protect Confidential Information or investigation of such suspected fraud, within a class of Licensees shall similarly sensitive information the concurrently auditor shall review the tentative be made available to all belonging to such Receiving Agent or written findings of the audit Licensees then in such with the class. As used in Designated Agent(s) or person. appropriate agent or employee of the this paragraph, the phrase "class of (f) Books and records of a Licensee, Licensees" Licensee being audited in order to means all Licensees paying the Receiving Agent and of a Designated remedy any factual errors fees pursuant to and clarify g 261.4(a). Agent relating to the payment, any issues relating to the audit; 45276 Federal Register/Vol. 67, No. 130/Monday, July 8, 2002/Rules and Regulations

Provided that the appropriate agent or the filing of the notice. The notification requesting the verification procedure employee of the Licensee reasonably of intent to audit shall be served at the shall pay the cost of the procedure, cooperates with the auditor to remedy same time on the Designated Agent to be unless it is finally determined that there promptly any factual errors or clarify audited. Any such audit shall be was an underpayment of ten percent an issues raised by the audit. conducted by an independent and (10%) or more, in which case the (g) Costs of the verification procedure. qualified auditor identified in the Designated Agent shall, in addition to The Designated Agent requesting the notice, and shall be binding on all paying the amount of any verification procedure shall pay the cost Copyright Owners and Performers. underpayment, bear the reasonable costs of the procedure, unless it is finally [d) Acquisition and retention of of the verification procedure; Provided, determined that there was an records. The Designated Agent making however, that a Designated Agent shall of ten percent or the shall use underpayment (10%) royalty payment not have to pay any costs of the more, in which case the Licensee shall, commercially reasonable efforts to verification procedure in excess of the the amount obtain to in addition to paying of any or to provide access any amount of any underpayment unless the underpayment, bear the reasonable costs relevant books and records maintained underpayment was more than twenty of verification procedure; Provided, third parties for the of the the by purpose percent (20%) of the amount finally however, that a Licensee shall have audit retain such records for a not and determined to be due from the to costs of the verification period of not less than three years. pay any (3) Designated and more than procedure in excess of the amount of The Copyright Owner or Performer Agent any underpayment unless the requesting the verification procedure $5,000.00. of underpayment was more than twenty shall retain the report the verification g 261.8 Unclaimed funds. percent (20%) of the amount finally for a period of not less than three (3) determined to be due from the Licensee years. If a Designated Agent is unable to and more than $ 5,000.00. (e) Acceptable verification procedure. identify or locate a Copyright Owner or An audit, including underlying Performer who is entitled to receive a g 261.7 Verification of royalty payments. paperwork, which was performed in the royalty payment under this part, the (a) General. This section prescribes ordinary course of business according to Designated Agent shall retain the general rules pertaining to the generally accepted auditing standards required payment in a segregated trust verification by any Copyright Owner or by an independent and qualified account for a period of three (3) years Performer of royalty payments made by auditor, shall serve as an acceptable from the date of payment. No claim to a Designated Agent; Provided, however, verification procedure for all parties such payment shall be valid after the that nothing contained in this section with respect to the information that is expiration of the three (3) year period. shall apply to situations where a within the scope of the audit. After the expiration c f this period, the Copyright Owner or a Performer and a (f) Consuitation. Before rendering a unclaimed funds of the Designated Designated Agent have agreed as to written report to a Copyright Owner or Agent may first be applied to the costs proper verification methods. Performer, except where the auditor has directly attributable to the (b) Frequency of verification. A a reasonable basis to suspect fraud and administration of the royalty payments a Performer Copyright Owner or may disclosure would, in the reasonable due such unidentified Copyright conduct a single audit of a Designated opinion of the auditor, prejudice the Owners and Performers and shall Agent upon reasonable notice and investigation of such suspected fraud, thereafter be allocated on rata reasonable business hours, a pro during the auditor shall review the tentative basis among the Designated Agents(s) to during any given calendar year, for any written findings of the audit with the calendar be used to offset such Designated or all of the prior three (3) appropriate agent or employee of the other of collection and and no calendar shall be order Agent(s) costs years, year Designated Agent being audited in distribution of the royalty fees. subject to audit more than once. to remedy any factual errors and clarify (c) Notice ofintent to audit. A any issues relating to the audit; Dated: June 20, 2002. Copyright Owner or Performer must Provided that the appropriate agent or Marybeth Peters, submit a notice of intent to audit a employee of the Designated Agent Register of particular Designated Agent with the Copyrights. reasonably cooperates with the auditor James H. Billington, Copyright Office, which shall publish in to remedy promptly any factual errors or the Federal Register a notice clarify any issues raised by the audit. The Librarian of Congress. — 8:45 announcing the receipt of the notice of (g) Costs of the verification procedure. [FR Doc. 02 16730 Filed 7-5-02; am] intent to audit within thirty (30) days of The Copyright Owner or Performer BILLING CODE 1410-33-P IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT

INTERCOLLEGIATE BROADCAST ) SYSTEM, et al., ) ) Petitioners ) ) ) No. 02-1220 ) JAMES H. BILLINGTON, Librarian ) of Congress, ) ) Respondent. ) ) )

CERTIFICATE OF SERVICE

I hereby certify that on August 7, 2002, I served two copies of the foregoing "MOTION

OF THE RESPONDENT, THE LIBRARIAN OF CONGRESS, TO DISMISS THE PETITION

FOR REVIEW FOR LACK OF STANDING" upon the following named counsel for petitioners, via hand delivery:

William Malone James R. Hobson Miller and Van Eaton, P.L.L.C. 1155 Connecticut Avenue, ¹ 1000 Washington, D.C. 20036-4320 Attorneys for Joint Petitioners and one copy, via first class mail, postage pre-paid, upon the following other counsel involved in the administrative proceeding:

Kenneth L. Steinthal/ R. Bruce Rich Bruce G. Joseph Bruce S. Meyer/Adam I. Cohen John E. Barry Fiona Schaeffer/Randi W. Singer Wiley, Rein & Fielding Weil, Gotschal 4 Manges LLP 1776 K Street, N.W. 767 Fifth Avenue Washington, D.C. 20006 New York, NY 10153 Barry I. Slotnick Patricia Polach LOEB & LOEB Bredhoff & Kaiser, PLLC 345 Park Avenue 805 Fifth Street, N.W. New York, NY 10154 Suite 2000 Washington, D.C. 20006 Washington, D.C. 20005

Kenneth M. Kaufman Robert Allen Garrett/ Ronald A. Schechter Skadden, Arps, Slate, Julie L. Sigall/Michele Woods/Brad R. Newberg Meagher & Flom LLP Arnold & Porter 1440 New York Avenue, N.W. Twelfth Street, N.W. Washington, DC 20005-2111 Washington, D.C. 20004

David R. Berz Arthur Levine Sandra M. Aistars Finnegan, Henderson, Farabow„ Weil, Gotshal & Manges, LL Garrett & Dunner 1615 L Street, N.W., Suite 700 1300 I Street, N,W. Washington, D.C. 20036 Washington, D.C, 20005

Lana Kay Jones Office of the General Counsel Associate General Counsel Infinity Broadcasting Corporation Library of Congress 40 West 57th Street James Madison Building, Room LM-601 New York, NY 10019 101 Independence Avenue, SE Washington, DC 20559-6000

David Carson General Counsel Tanya Sandros Mike Hughes Copyright Office 101 Independence Ave. S.E Room 403 Washington, D.C. 20559

Mark W. Penn Counsel for Respondent, the Librarian of Congress