Refunds Under the Cable Statutory License, 1755-1759 [2013-00171]

Agencies

• Library of Congress
• Copyright Office

[Federal Register Volume 78, Number 6 (Wednesday, January 9, 2013)]
[Rules and Regulations]
[Pages 1755-1759]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00171]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. 2010-3]


Refunds Under the Cable Statutory License

AGENCY: Copyright Office, Library of Congress.

ACTION: Final rule.

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SUMMARY: The Copyright Office is amending its regulations to clarify 
its practices for providing refunds of cable royalties under the 
provisions of the Satellite Television Extension and

[[Page 1756]]

Localism Act of 2010 (``STELA''). A cable operator must pay royalties 
to and file Statements of Account with the Office every six months in 
order to use the statutory license that allows for the retransmission 
of over-the-air broadcast signals under 17 U.S.C. 111. STELA allows a 
cable operator to calculate its royalty obligation for the carriage of 
distant signals on a community-by-community basis for accounting 
periods beginning on or after January 1, 2010, instead of calculating 
its royalty obligation based on the system as a whole. STELA also 
states that a cable operator shall not be subject to an infringement 
action if it used the subscriber group methodology to calculate its 
royalty obligation in a Statement filed prior to the effective date of 
STELA. Although a cable operator cannot be held liable for using the 
subscriber group methodology, the regulation clarifies that a cable 
operator's obligation to pay for the carriage of distant signals prior 
to the effective date of STELA was determined on a system-wide basis. 
Therefore, refunds for an overpayment of royalty fees on a Statement 
filed prior to the effective date of STELA will be made only when a 
cable operator has satisfied its outstanding royalty obligations (if 
any), including the obligation to pay for the carriage of each distant 
signal on a system-wide basis.

DATES: Effective Date: February 8, 2013.

FOR FURTHER INFORMATION CONTACT: Tanya Sandros, Deputy General Counsel, 
or Erik Bertin, Attorney Advisor, Copyright GC/I&R, P.O. Box 70400, 
Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202) 707-
8366. All prior Federal Register notices and comments in this docket 
are available at https://www.copyright.gov/docs/stela/comments/.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 111 of the Copyright Act (``Act''), Title 17 of the United 
States Code (``Section 111''), allows cable operators to retransmit the 
performance or display of a work embodied in a primary transmission 
made by a television or radio station licensed by the Federal 
Communications Commission (``FCC''). In order to use this statutory 
license, cable operators are required to pay royalty fees to the 
Copyright Office on a semi-annual basis. The Office invests these 
royalties in United States Treasury securities pending distribution of 
the funds to those copyright owners who are entitled to receive a share 
of the fees. In 2010, Congress enacted the Satellite Television 
Extension and Localism Act of 2010 (``STELA''), Public Law 111-175, 
which inter alia changed the methodology for calculating royalty 
obligations under Section 111.
    Generally speaking, the royalty fee for retransmitting a distant 
broadcast signal is based on a percentage of the gross receipts 
generated by a cable system. Under the licensing framework established 
by Congress in 1976, cable operators were required to pay for every 
distant broadcast signal that they carried on their system without 
regard to whether a particular signal was received by or made available 
to all of the subscribers within a particular community. Cable 
operators often referred to the signals that subscribers could not 
receive as ``phantom signals,'' because the operator's royalty 
obligation was calculated based solely on the number and type of 
signals (e.g., local vs. distant or permitted vs. non-permitted) 
carried by a cable system, even if the operator did not provide a 
particular signal to all of its subscribers. The Office and the cable 
industry have been aware of this issue for more than 25 years, but it 
did not receive legislative attention until 2010.
    Section 104 of STELA changed the methodology for calculating the 
royalty fees that a cable operator must pay in order to use the 
statutory license. The royalty fee is based on the communities where a 
cable system actually offers distant broadcast signals, instead of 
calculating royalties based on carriage of the signals throughout the 
system as a whole. As a result, the controversy surrounding phantom 
signals has been eliminated. Specifically, STELA amended Section 
111(d)(1) of the Copyright Act to state that if a cable system provides 
distant broadcast signals to some, but not all, of the subscribers 
served by that system, the gross receipts and distant signal equivalent 
values for each signal may be based on the subscribers in those 
communities where the signal is actually provided. See 17 U.S.C. 
111(d)(1)(C)(iii).
    STELA also amended Section 111(d)(1)(D) to state that:

    A cable system that, on a statement submitted before the date of 
the enactment of the Satellite Television Extension and Localism Act 
of 2010, computed its royalty fee consistent with the methodology 
under subparagraph (C)(iii), or that amends a statement filed before 
such date of enactment to compute the royalty fee due using such 
methodology, shall not be subject to an action for infringement, or 
eligible for any royalty refund or offset, arising out of its use of 
such methodology on such statement.

In other words, a cable operator cannot be held liable for using the 
subscriber group methodology to calculate its royalty obligation on any 
Statement of Account filed prior to the enactment of STELA (including 
any amended Statement).\1\ However, the legislation makes clear that a 
cable operator shall not be entitled to any refund or offset based on 
the fact that it used the subscriber group methodology on a Statement 
or amended Statement filed prior to the date of enactment.
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    \1\ Although the President signed STELA into law on May 27, 
2010, the statute states that the date of enactment shall be deemed 
to be February 27, 2010. See Public Law 111-175, Sec.  307(a), 124 
Stat. 1257 (May 27, 2010).
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    On October 4, 2010, the Office published a notice of proposed 
rulemaking and request for comment on a regulation that would implement 
Section 111(d)(1)(D) of the Copyright Act. See 75 FR 61116. The Office 
explained that the proposed regulation would confirm that a cable 
operator's obligation to pay for the carriage of distant signals prior 
to the effective date of STELA was determined on a system-wide basis. 
It would also confirm that the Office will not issue refunds for a 
Statement filed before the 2010/1 accounting period, unless the cable 
operator has satisfied its outstanding royalty obligations (if any), 
including the obligation to pay for the carriage of distant signals on 
a system-wide basis.\2\
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    \2\ The Office is aware of at least two situations where a cable 
operator initially calculated its royalty obligation using the 
subscriber group method, and then in response to an inquiry from the 
Licensing Division, changed its Statement of Account to calculate 
its royalties using the system-wide method. The operator then 
requested a refund for an overpayment that was unrelated to the 
issue of phantom signals. The Office issued a refund in both cases, 
because the amount paid on the initial Statement of Account exceeded 
the amount due for the phantom signals.
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    The Office explained that a number of cable operators have 
requested refunds for overpayments that they allegedly made on 
Statements filed prior to the enactment of STELA. In most cases, the 
refund request was made in response to an inquiry from the Licensing 
Division concerning a questionable or missing entry in the operator's 
filing, such as identifying a local signal as a distant signal for the 
2009/2 accounting period or an earlier accounting period.\3\ In

[[Page 1757]]

those cases where the operators used the subscriber group methodology 
to calculate their royalty obligations, instead of calculating 
royalties on a system-wide basis, the Licensing Division has declined 
to issue a refund because there appears to be a balance due--rather 
than an overpayment--on their Statements.
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    \3\ Refund requests may also originate with the cable system. 
The Office is aware of at least one situation where a cable operator 
initiated and submitted a timely formal amendment to its initial 
2009/2 Statement of Account requesting a refund before the Statement 
was examined by the Licensing Division. However, in this case, the 
Licensing Division is unable to ascertain whether a refund is due 
because the operator used the subscriber group methodology in its 
initial and its amended filing and, as a result, the extent of the 
royalty fees that the cable operator owed for the system-wide 
carriage of all signals is unclear.
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II. The Timeliness of the Refund Requests

A. Comments

    The Office received comments and reply comments from the National 
Cable & Telecommunications Association (``NCTA'') and the Motion 
Picture Association of America, Inc., on behalf of its member 
companies, and other producers and/or syndicators of movies, programs, 
and specials broadcast by television stations (collectively, the 
``Program Suppliers''). The Office also received reply comments from a 
group of Copyright Owners who, like Program Suppliers, are the 
beneficiaries of the royalties collected under the statutory 
license.\4\
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    \4\ This group includes the Joint Sports Claimants (professional 
and college sports programming); Commercial Television Claimants 
(local commercial television programming); Devotional Claimants 
(religious television programming); Canadian Claimants (Canadian 
television programming); and Music Claimants (musical works included 
in television programming).
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    In their initial comments, the Program Suppliers asserted that most 
of the refund requests should be denied because they appear to be 
untimely. The Copyright Owners expressed the same view. See Program 
Suppliers Comment at 3-4; Copyright Owners Reply at 1-2.
    The Office's current regulations state that a cable operator may 
request a refund ``before the expiration of 60 days from the last day 
of the applicable Statement of Account filing period, or before the 
expiration of 60 days from the date of receipt at the Copyright Office 
of the royalty payment that is the subject of the request, whichever 
time period is longer.'' 37 CFR 201.17(m)(3)(i). The Program Suppliers 
stated that this regulation bars many of the refund requests at issue 
in this proceeding, because the cable operators made their requests 
more than 60 days after they filed their Statements and their royalty 
payments with the Office. Program Suppliers Comment at 3-4. However, 
the Program Suppliers took a different position in their reply 
comments. Although they urged the Office ``to continue to enforce [the 
60 day] rule,'' the Program Suppliers stated that refund requests 
should be permitted where--as here--a cable operator requests a refund 
in response to a communication from the Licensing Division, even if 
that request is made more than 60 days after the deadline. Program 
Suppliers Reply at 1, 2.
    The NCTA expressed the same view. Both the Program Suppliers and 
the NCTA contended that the current regulations do not allow cable 
operators to request a refund when they discover an overpayment in 
response to a communication from the Licensing Division, and they asked 
the Office to adopt a new regulation which would allow the Office to 
issue a refund in this situation. Program Suppliers Reply at 2-4; NCTA 
Reply at 4.

B. Discussion

    The Program Suppliers are correct that a cable operator may request 
a refund under Sec.  201.17(m)(3)(i) of the regulations, provided that 
the request is made within 60 days after the operator filed its 
Statement of Account and/or royalty payments with the Office. However, 
most of the refunds at issue in this proceeding are not governed by 
this section.\5\ Instead, they are governed by Sec.  201.17(m)(3)(vi) 
of the regulations, which states that ``[a] request for a refund is not 
necessary where the Licensing Division, during its examination of a 
Statement of Account or related document, discovers an error that has 
resulted in a royalty overpayment.''
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    \5\ As discussed above, the Office is aware of at least one 
situation where a cable operator requested a refund on its 2009/2 
Statement of Account before the Statement was examined by the 
Licensing Division. This request was timely under Sec.  
201.17(m)(3)(i), because it was received within 60 days after the 
last day of the accounting period.
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    When the Office discovers a legitimate overpayment in its 
examination of a Statement or amended Statement it is required to issue 
a refund, regardless of whether the Office discovers the error on its 
own or in the course of its communication with the cable operator. When 
the Office issues an inquiry concerning a particular Statement of 
Account, the NCTA noted that the operator typically reviews that 
Statement for errors and, if the operator determines that the royalties 
paid on that Statement exceeded the amount due, the operator may 
request a refund by filing a corrected Statement of Account. The NCTA 
correctly noted that ``the Office's longstanding practice has been to 
issue the appropriate refund'' in this situation, ``even though the 
request for such refund falls outside the 60-day window that governs 
operator-initiated refund requests.'' NCTA Reply at 4.
    The NCTA contended that this practice ``is not expressly codified 
in the Office's rules,'' NCTA Reply at 4, but in fact, the regulations 
specifically state that ``the Licensing Division will forward the 
royalty refund to the cable system owner named in the Statement of 
Account without regard to the time limitations provided for [in Sec.  
201.17(m)(3)(i) of the regulations].'' 37 CFR 201.17(m)(3)(vi). Simply 
put, the Program Suppliers and the NCTA have asked the Office to adopt 
a rule that is already reflected in the regulations.
    To be clear, there must be a direct relationship between the issues 
identified in the Office's inquiry and the basis for the operator's 
refund request. An inquiry from the Office is not an open invitation to 
revisit every entry in every Statement of Account that has been filed 
with the Office, and refunds will not be made if the operator discovers 
errors that are unrelated to the issues that prompted the Office's 
inquiry. For example, if the Office notified a cable operator that it 
apparently reported three local signals as distant signals on its 2010/
1 Statement of Account, the operator may be entitled to a refund for 
those three signals under Sec.  201.17(m)(3)(vi) of the regulations. 
However, if the operator determined that it failed to identify another 
distant station as a significantly viewed station on its 2010/1 
Statement of Account (hence, considered to be a local station), or 
mistakenly paid royalties for another signal that was not carried 
anywhere on the system, the operator would not be entitled to a refund 
for those overpayments unless it filed an amended Statement of Account 
within the time allowed under Sec.  201.17(m)(3)(i) of the regulations.

III. Final Rule

A. Comments

    The Program Suppliers and the Copyright Owners did not take a 
position on the proposed regulation in their initial comments. They 
simply noted that the refund requests appear to be untimely and should 
be denied on that basis. However, the Program Suppliers took an 
entirely different position in their reply comments, stating that the 
``proposed Amendment to Section 201.17(m) is unnecessary,'' and that 
there is ``no reason for [a] new regulation regarding phantom 
signals.'' Program Suppliers Reply at 2.
    While the Program Suppliers did not explain the reason for the 
change in their views, the NCTA consistently maintained the same 
position in its initial comments and reply comments. The NCTA contended 
that the proposed rule ignores the ``letter and spirit'' of the 
statutory language set forth in Section 111(d)(1)(D), as well as the 
legislative

[[Page 1758]]

history for that provision. The NCTA also contended that the regulation 
would undermine the negotiated settlement between copyright owners and 
cable operators that resolved the longstanding dispute over phantom 
signals. NCTA Comment at 2; NCTA Reply at 1, 2.
    Specifically, the NCTA asserted that the proposed regulation ``runs 
counter to Congress' clear intent to hold cable operators harmless for 
their past use of the subscriber group methodology,'' and that adopting 
this rule ``would effectively penalize a cable operator for something 
Congress has expressly approved.'' NCTA Comment at 2; NCTA Reply at 3. 
The NCTA commented that the regulation would prevent cable operators 
from obtaining a refund for an overpayment on a Statement of Account or 
an amended Statement of Account filed prior to the effective date of 
STELA, even if the overpayment ``does not arise from the operator's use 
of subscriber group or system-wide reporting.'' NCTA Reply at 3. For 
example, the NCTA contended that the regulation would prevent a cable 
operator who used the subscriber group methodology from claiming a 
refund where the operator incorrectly reported a local signal as 
distant or mistakenly paid royalties for a signal that was not carried 
anywhere on the system. NCTA Reply at 3.
    Finally, the NCTA predicted that the proposed rule will cause 
``confusion'' regarding the treatment of phantom signals and it will 
``reignite the uncertainty and controversy'' that the legislation was 
intended to resolve. NCTA Comment at 2; NCTA Reply at 2. The NCTA 
explained that the amendments to Section 111 were intended ``to provide 
a permanent resolution of the phantom signal controversy'' and that the 
proposed rule ``is antithetical to the goals of closure and certainty 
that are at the heart of the phantom signal settlement.'' NCTA Comment 
at 4 (emphasis in original).

B. Discussion

    As a general rule, the Office will issue a refund to a cable 
operator when the royalty fees paid on a particular Statement of 
Account exceed the amount due. The NCTA contended that ``Section 
111(d)(1)(D), as amended by STELA, speaks for itself and provides all 
of the guidance needed for copyright owners, copyright users, and the 
Office to determine a cable operator's royalty fees and to make refunds 
where appropriate.'' NCTA Reply at 2. The Office agrees with that 
assessment.
    STELA amended Section 111(d)(1)(D) to state that:

    A cable system that, on a statement submitted before the date of 
the enactment of the Satellite Television Extension and Localism Act 
of 2010, computed its royalty fee consistent with the methodology 
under subparagraph (C)(iii), or that amends a statement filed before 
such date of enactment to compute the royalty fee due using such 
methodology, shall not be subject to an action for infringement, or 
eligible for any royalty refund or offset, arising out of its use of 
such methodology on such statement.

As the NCTA observed, cable operators cannot be held liable in an 
infringement action for using the subscriber group methodology to 
calculate their royalty obligations on a Statement of Account or 
amended Statement of Account filed prior to the enactment of STELA. Nor 
are they required to recalculate their royalty obligations using the 
system-wide methodology in order to avoid liability for infringement. 
See NCTA Reply at 2. However, Section 111(d)(1)(D) makes it clear that 
cable operators are not entitled to any refunds or offsets arising out 
of their use of the subscriber group methodology before the enactment 
of STELA. The NCTA correctly noted that cable operators who paid for 
phantom signals on a pre-STELA Statement of Account are ``expressly 
precluded from obtaining any benefit (through refunds or offsets to 
other payment obligations) by going back and revising their 
calculations to use the subscriber group methodology after-the-fact.'' 
NCTA Comment at 3-4. Likewise, cable operators cannot deduct the amount 
that they paid for a phantom signal prior to the 2010/1 accounting 
period in order to reduce the amount that they owe on a future 
Statement of Account. See id.
    The question presented in this proceeding is whether the Office 
should allow use of the subscriber group methodology in place of the 
system-wide methodology to determine whether there is an overpayment or 
a balance due on Statements filed prior to the effective date of STELA. 
The NCTA contended that Section 111(d)(1)(D) prevents copyright owners 
from bringing an infringement action against a cable operator that 
computed its royalty obligations using the subscriber group 
methodology, and that this same provision extinguishes ``all direct or 
indirect claims that operators have outstanding `balances' of underpaid 
royalties as a result of their using that methodology.'' NCTA Comment 
at 5.
    While this is one interpretation of Section 111(d)(1)(D), it is not 
the only one. As the Office explained in the notice of proposed 
rulemaking, a literal reading indicates that this provision shields 
cable operators from liability for an infringement action, but it does 
not eliminate the obligation to pay for the carriage of phantom signals 
prior to the enactment of STELA. Under the licensing framework that 
predated STELA, cable operators were expected to calculate their 
royalty obligations on a system-wide basis. If an operator failed to 
pay for a distant signal on a system-wide basis, the Office would 
notify the operator and record the balance due as an outstanding 
obligation. Until the operator satisfied this royalty obligation, the 
Office would not issue a refund for overpayments caused by misreporting 
a local signal as a distant signal or other reporting errors. The 
Office has followed this practice for more than 30 years.
    The NCTA contended that the proposed regulation ``would effectively 
penalize cable operators who used the subscriber group methodology on 
statements of account for accounting periods occurring prior to 2010'' 
and that this is contrary to ``Congress' clear intent to hold cable 
operator's [sic] harmless for their past use of the subscriber group 
methodology.'' NCTA Comment at 2; NCTA Reply at 3. However, the NCTA 
has not cited any language in the statute or the legislative history 
that expressly overruled the Office's longstanding practice concerning 
refunds or offsets involving payments for phantom signals in the pre-
STELA period. Section 111(d)(1)(D) simply states that a cable operator 
cannot be sued for infringement for failing to calculate its royalty 
obligation using the system-wide methodology on a Statement filed prior 
to the enactment of STELA. The fact that Congress eliminated a cause of 
action that could have been asserted before STELA does not mean that 
the obligation to use the system-wide methodology did not exist or that 
Congress retroactively eliminated that obligation prior to the 2010/1 
accounting period. Nor does it mean that a cable operator should be 
able to pocket the difference if using the subscriber group method, 
rather than the system-wide method, resulted in an overpayment for 
accounting periods prior to 2010/1. Indeed, the statute specifically 
states that refunds or offsets arising out of the cable operators' use 
of the subscriber group methodology prior to the effective date of 
STELA are not permitted.
    The NCTA contended that the proposed rule would prevent a cable 
operator from obtaining a refund or offset, even if the overpayment 
``does not arise from the operator's use of subscriber group or system-
wide reporting.'' NCTA Reply at 3. In other words, if the cable 
operator would

[[Page 1759]]

otherwise be entitled to a refund or offset \6\--but for the fact that 
it calculated its royalty obligation using the subscriber group method 
rather than the system-wide method, and as a result, underpaid the 
royalties due under the system-wide method--then the operator is not 
entitled to a refund or offset under Section 111(d)(1)(D). That is 
indeed the effect of the regulation.
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    \6\ As the NCTA observed, an operator might be entitled to a 
refund if it incorrectly reported a local signal as distant or 
mistakenly paid royalties for a signal that was not carried anywhere 
on the system. See NCTA Reply at 3.
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    Cable operators presumably use the subscriber group method, because 
it lowers the amount of royalties owed under the statutory license. 
Indeed, in most of the refund requests at issue in this proceeding, the 
amount owed on the Statement of Account would be higher if the cable 
operator used the system-wide method instead of the subscriber group 
method to calculate its royalty obligation. In such cases, the 
operators are not entitled to a refund or offset, because the 
overpayments purportedly shown on their Statements of Account would not 
have occurred but for the fact that they calculated their royalty 
obligation using the subscriber group method rather than the system-
wide method, which was the methodology in effect when the Statements 
were filed.
    The NCTA contended that the proposed rule is inconsistent with the 
legislative history for the amendment to Section 111(d)(1)(D), but the 
quotes that the NCTA cited from the congressional debate do not support 
this view. At best, these quotes merely indicate that stakeholders 
disagreed over whether a cable operator should be required to pay for 
phantom signals and that the legislation was intended to resolve that 
longstanding dispute. The NCTA offered no language from the 
congressional debate indicating that Congress intended to change the 
method that should be used to calculate royalty obligations on 
Statements filed before the date of enactment. Nor is there any 
indication that Congress intended to overrule the Office's longstanding 
practice of declining to issue refunds or offsets to cable operators 
who failed to pay for phantom signals.
    Finally, the NCTA contended that the proposed rule will cause 
``confusion and uncertainty'' regarding the treatment of phantom 
signals. NCTA Reply at 2. However, the NCTA acknowledged that the 
instances where a cable operator used the subscriber group methodology 
and subsequently requested a refund ``are relatively rare,'' NCTA 
Comment at 1 n.3, and in fact, it provided only one example of alleged 
``confusion and delay'' in its comments. Specifically, the NCTA 
predicted that the proposed rule would create uncertainty for 
Statements of Account filed for the second accounting period of 2010, 
because ``those statements were not due until after the effective date 
of STELA, but in some cases were filed before that date.'' NCTA Reply 
at 2, n.1. In fact, the Office did not receive any Statements of 
Account for the 2010/2 accounting period before the effective date of 
STELA, so the regulation will not cause any delay in connection with 
those Statements.\7\ Moreover, the proposed rule draws a bright line 
that eliminates any confusion. Refunds on Statements of Account filed 
prior to the 2010/1 accounting period are based upon calculations of 
royalty obligations under the methodology that attributed carriage of a 
signal throughout the cable system rather than on the revised 
methodology adopted under STELA that requires calculations to be made 
based on carriage of signals within discrete communities.
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    \7\ As discussed above, STELA is effective as of February 27, 
2010. The 2010/2 accounting period ended on December 31, 2010, and 
Statements of Account for that period were due on March 1, 2011.
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List of Subjects in 37 CFR Part 201

    Copyright, General provisions.

Final Regulations

    In consideration of the foregoing, the Copyright Office amends part 
201 of 37 CFR as follows:

PART 201--GENERAL PROVISIONS

0
1. The authority citation for part 201 continues to read as follows:

    Authority:  17 U.S.C. 702.


0
2. Amend Sec.  201.17 by redesignating paragraphs (m)(1) through (4) as 
paragraphs (m)(2) through (5) and adding a new paragraph (m)(1) to read 
as follows:


Sec.  201.17  Statements of Account covering compulsory licenses for 
secondary transmissions by cable systems.

* * * * *
    (m) * * *
    (1) Royalty fee obligations under 17 U.S.C. 111 prior to the 
effective date of the Satellite Television Extension and Localism Act 
of 2010, Public Law 111-175, are determined based on carriage of each 
distant signal on a system-wide basis. Refunds for an overpayment of 
royalty fees for an accounting period prior to January 1, 2010, shall 
be made only when all outstanding royalty fee obligations have been 
met, including those for carriage of each distant signal on a system-
wide basis.
* * * * *

    Dated: September 21, 2012.
Maria A. Pallante,
Register of Copyrights.
    Approved by:
James H. Billington,
The Librarian of Congress.
[FR Doc. 2013-00171 Filed 1-8-13; 8:45 am]
BILLING CODE 1410-30-P