Verification of Statements of Account Submitted by Cable Operators and Satellite Carriers, 27137-27153 [2013-11020]

Agencies

• Library of Congress
• U.S. Copyright Office

[Federal Register Volume 78, Number 90 (Thursday, May 9, 2013)]
[Proposed Rules]
[Pages 27137-27153]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11020]


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LIBRARY OF CONGRESS

U.S. Copyright Office

37 CFR Part 201

[Docket No. 2012-5]


Verification of Statements of Account Submitted by Cable 
Operators and Satellite Carriers

AGENCY: U.S. Copyright Office, Library of Congress.

ACTION: Notice of proposed rulemaking; request for comments.

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SUMMARY: On June 14, 2012, the United States Copyright Office published 
a notice of proposed rulemaking and request for comments concerning a 
new regulation that will allow copyright owners to audit the Statements 
of Account and royalty fees that cable operators and satellite carriers 
deposit with the Copyright Office for secondary transmissions of 
broadcast programming made pursuant to statutory licenses. The 
Copyright Office has revised the proposed regulation based on comments 
that it received from copyright owners, cable operators, and satellite 
carriers. The Copyright Office seeks comments on the revised proposal 
before it is adopted as a final rule.

DATES: Comments on the revised proposal must be received in the Office 
of the General Counsel of the Copyright Office no later than 5 p.m. 
Eastern Daylight Time (EDT) on June 10, 2013. Reply comments must be 
received in the Office of the General Counsel no later than 5 p.m. EDT 
on June 24, 2013.

ADDRESSES: The Copyright Office strongly prefers that comments be 
submitted electronically. A comment submission page is posted on the 
Copyright Office Web site at www.copyright.gov/docs/soaaudit/comments/submission/. The Web site interface requires submitters to complete a 
form specifying name and other required information, and to upload 
comments as an attachment. To meet accessibility standards, all 
comments must be uploaded in a single file in either the Portable 
Document Format (PDF) that contains searchable, accessible text (not an 
image); Microsoft Word; WordPerfect; Rich Text Format (RTF); or ASCII 
text file format (not a scanned document). The maximum file size is 6 
megabytes (MB). The name of the submitter and organization should 
appear on both the form and the face of the comments. All comments will 
be posted publicly on the Copyright Office Web site exactly as they are 
received, along with names and organizations if provided. If electronic 
submission of comments is not feasible, please contact the Copyright 
Office at (202) 707-8380 for special instructions.

FOR FURTHER INFORMATION CONTACT: Erik Bertin, Attorney Advisor, 
Copyright GC/I&R, P.O. Box 70400, Washington, DC 20024. Telephone: 
(202) 707-8380. Telefax: (202) 707-8366.

SUPPLEMENTARY INFORMATION:

I. Background

    Sections 111 and 119 of the Copyright Act (``Act''), title 17 of 
the United States Code, allow cable operators and satellite carriers to 
retransmit the performance or display of works embodied in a primary 
transmission made by a broadcast station licensed by the Federal 
Communications Commission. In order to use the statutory licenses, 
cable operators and satellite carriers are required to file Statements 
of Account and deposit royalty fees with the Copyright Office 
(``Office'') on a semi-annual basis. The Office invests these royalties 
in United States Treasury securities pending distribution of the funds 
to copyright owners who are entitled to receive a share of the 
royalties.
    In 2010, Congress enacted the Satellite Television Extension and 
Localism Act of 2010 (``STELA''), Public Law 111-175 which, inter alia, 
directed the Register of Copyrights to develop a new procedure for 
verifying the Statements of Account and royalty fees that cable 
operators and satellite carriers deposit with the Office. Specifically, 
section 119(b)(2) directed the Register to ``issue regulations to 
permit interested parties to verify and audit the statements of account 
and royalty fees submitted by satellite carriers under [that] 
subsection.'' Similarly, section 111(d)(6) directed the Register to 
``issue regulations to provide for the confidential verification by 
copyright owners whose works were embodied in the secondary 
transmissions of primary transmissions pursuant to [section 111] of the 
information reported on the semiannual statements of account filed 
under this subsection for accounting periods beginning on or after 
January 1, 2010, in order that the auditor designated under 
subparagraph [111(d)(6)(A)] is able to confirm the correctness of the 
calculations and royalty payments reported therein.''
    On June 14, 2012, the Office published a Notice of Proposed 
Rulemaking and Request for Comments on a regulation that would 
implement sections 111(d)(6) and 119(b)(2) of the Copyright Act. See 77 
FR 35643, June 14, 2012. The proposed regulation was based on similar 
regulations that the Office developed for parties that make ephemeral 
recordings or transmit digital sound recordings under 17 U.S.C. 112(e) 
and 114(f), respectively, or manufacture, import, and distribute 
digital audio recording devices under 17 U.S.C. chapter 10. See id. at 
35644. The Office also considered a Petition for Rulemaking, which 
offered proposals from a group of copyright owners who are the 
beneficiaries of the royalties paid under the statutory licenses 
(``Copyright Owners'').\1\
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    \1\ The petition was filed on behalf of Program Suppliers 
(commercial entertainment programming), Joint Sports Claimants 
(professional and college sports programming), Commercial Television 
Claimants (local commercial television programming), Music Claimants 
(musical works included in television programming), Public 
Television Claimants (noncommercial television programming), 
Canadian Claimants (Canadian television programming), National 
Public Radio (noncommercial radio programming), Broadcaster 
Claimants Group (U.S. commercial television stations), and 
Devotional Claimants (religious television programming). A copy of 
the petition has been posted on the Copyright Office Web site at 
https://www.copyright.gov/docs/soaaudit/soa-audit-petition.pdf.
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    The Office received comments on the proposed regulation from groups 
representing copyright owners, cable operators,\2\ and individual 
companies that retransmit broadcast programming under section 111 or 
119 of the Act, namely, AT&T, Inc., DIRECTV, LLC (``DTV''), and DISH 
Network L.L.C. (``DISH''). While the parties agreed on the overall 
framework that the Office proposed for the verification procedure, they 
strongly disagreed on a number of key issues, such as the procedures 
for selecting an auditor, for expanding the scope of the audit, and for 
allocating the cost of the verification procedure.
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    \2\ The National Cable & Telecommunications Association 
(``NCTA'') and the American Cable Association (``ACA'') filed 
comments on behalf of cable operators.
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    On August 24, 2012 and again on September 26, 2012, the National 
Cable & Telecommunications Association (``NCTA''), the Joint Sports 
Claimants, and the Program Suppliers submitted a joint motion to extend 
the deadline for submitting reply comments.\3\ They

[[Page 27138]]

explained that there might be common ground among the moving parties 
concerning certain aspects of the proposed regulation. If so, the 
moving parties stated that they might be able to narrow the issues that 
they discuss in their reply comments, which in turn, might narrow the 
issues that need to be resolved in this rulemaking. The Office granted 
these motions, making reply comments due by October 24, 2012. See 77 FR 
55783, Sept. 11, 2012; 77 FR 60334, Oct. 3, 2012. In lieu of reply 
comments, NCTA, DIRECTV, and a group representing certain copyright 
owners \4\ submitted a joint proposal for revising the proposed 
regulation (hereinafter the ``Joint Stakeholders' Proposal'').\5\ The 
Joint Stakeholders stated that their Proposal adopts ``the general 
framework'' set forth in the Notice of Proposed Rulemaking and in other 
verification procedures that the Office has adopted in the past. They 
also stated that their Proposal has been ``carefully tailored'' to 
reflect ``the unique characteristics of the cable and satellite 
compulsory licenses,'' and reflects ``significant compromises by all 
parties with the objective of securing a workable set of audit 
procedures consistent with STELA.'' (Joint Stakeholders Reply at 2.)
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    \3\ The NCTA is a trade association that represents cable 
operators. The Joint Sports Claimants represent copyright owners 
that produce professional and college sports programming. The 
Program Suppliers represent copyright owners that produce and/or 
syndicate movies, programs, and specials that are broadcast by 
television stations.
    \4\ This group includes the Program Suppliers, Joint Sports 
Claimants, Public Television Claimants, Canadian Claimants Group, 
Devotional Claimants, National Public Radio, and Music Claimants. 
The Commercial Television Claimants and the Broadcaster Claimants 
Group did not join their fellow copyright owners in submitting this 
proposal.
    \5\ A copy of the Joint Stakeholders' Proposal has been posted 
on the Copyright Office Web site at https://www.copyright.gov/docs/soaaudit/comments/reply/joint_stakeholders.pdf. It includes a 
redline showing the differences between the Joint Stakeholders' 
Proposal and the proposed regulation set forth in the Notice of 
Proposed Rulemaking published on June 14, 2012.
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    The Office also received reply comments from AT&T. Although it was 
aware of the Joint Stakeholders' negotiations and the areas of 
agreement among the parties, AT&T explained that it was not in a 
position to endorse the Joint Stakeholders' Proposal, because it was 
not given a sufficient amount of time for ``meaningful engagement'' 
with the group. (AT&T Reply at 1.) Therefore, AT&T urged the Office to 
publish the Joint Stakeholders' Proposal ``for further comment by other 
interested parties who were not parties to the agreement.'' Id.
    The Office carefully reviewed all of the comments and reply 
comments that were submitted in this proceeding, including the Joint 
Stakeholders' Proposal.\6\ The Joint Stakeholders' Proposal addresses 
most of the concerns that the parties raised in their initial comments, 
and for the most part, it balances those concerns in an appropriate 
manner. Therefore, the Office has incorporated most of the Joint 
Stakeholders' suggestions into the proposed regulation, which is 
referred to herein as the ``Revised Proposal.''
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    \6\ All of the comments and reply comments have been posted on 
the Copyright Office Web site at https://www.copyright.gov/docs/soaaudit/comments/.
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    The Office recognizes that ACA, AT&T, DISH, the Broadcaster 
Claimants Group, the Commercial Television Claimants, and other 
interested parties did not participate in the Joint Stakeholders' 
negotiations. Because the Revised Proposal includes proposed changes 
offered by the Joint Stakeholders, the Office concludes that other 
interested parties should be given an opportunity to comment on the 
proposed regulation before the Office adopts a final rule. The Office 
also welcomes reply comments on the Revised Proposal from the Joint 
Stakeholders or other interested parties. Commenters should limit their 
remarks to issues raised by the Revised Proposal which were not 
discussed in the initial comments, the reply comments, or this Federal 
Register notice, while reply commenters should limit their remarks to 
the issues or concerns presented in the follow-up comments.

II. Areas of Common Agreement Among the Parties

    Generally speaking, the parties agreed with the overall framework 
that the Office proposed for the audit regulation. They agreed that the 
Office should create a single verification procedure applicable to 
cable operators and satellite carriers alike. (See Copyright Owners at 
3, 4, 8; DTV at 1-2.) They agreed that copyright owners should initiate 
a verification procedure by filing a notice of intent to audit with the 
Office, and that the notice must be received within three years after 
the last day of the year in which the licensee filed its Statements of 
Account. They agreed that the verification should be conducted by a 
certified public accountant, and that a single auditor should conduct 
the audit on behalf of all copyright owners (regardless of whether they 
decide to join the audit or not). (See AT&T at 2, 3; DISH at 8-9.) They 
agreed that satellite carriers and cable operators that own a single 
system should be subject to no more than one audit per year. They 
agreed that an audit involving a multiple system operator should be 
limited to a sampling of the systems owned by that entity. (See NCTA at 
6.) They agreed that 30 days would be a sufficient amount of time for 
the auditor to consult with the statutory licensee's designee 
concerning the conclusions set forth in the initial draft of the 
auditor's report. They agreed that the auditor should be allowed to 
deliver his or her final report to the copyright owners without 
consulting with the statutory licensee if the auditor suspects that the 
licensee has engaged in fraud. They also agreed that statutory 
licensees should be required to retain records needed to confirm the 
correctness of the calculations and royalty payments reported in a 
Statement of Account for at least three and a half years after the last 
day of the year in which the Statement was filed with the Office. (See 
DISH at 7.)

III. Retroactivity

A. Comments

    As discussed above, the Office received a Petition for Rulemaking 
on January 31, 2012, which was filed on behalf of groups that represent 
copyright owners (collectively ``the Petitioners''). Among other 
things, the Petitioners urged the Office to establish separate 
procedures for verifying Statements of Account filed under section 111 
and 119, and they provided the Office with draft regulations for audits 
involving cable operators and satellite carriers.
    The Office did not adopt this approach in its Notice of Proposed 
Rulemaking. If the Office followed the Petitioners' recommendation, the 
regulation for cable operators would apply to Statements of Account for 
accounting periods beginning on or after January 1, 2010 (i.e., the 
semiannual accounting period that was in effect when the President 
signed STELA into law on May 27, 2010), while the regulation for 
satellite carriers would apply to any Statement of Account, even if the 
Statement was filed before STELA was enacted. In other words, the 
regulation for satellite carriers would apply retroactively, while the 
regulation for cable operators would apply on a prospective basis only. 
See 77 FR 35645, June 14, 2012.
    DTV agreed that the Office should ``harmonize'' the procedures for 
cable operators and satellite carriers, and noted that ``there are 
strong policy reasons not to apply laws retroactively.'' (DTV at 2.) 
DISH agreed that the regulation should not apply to Statements of 
Account for accounting periods that pre-date STELA, and further 
asserted that the proposed regulation should apply only to

[[Page 27139]]

Statements of Account filed on or after the date that the final rule 
goes into effect. (DISH at 3.) While the Copyright Owners agreed that 
the Office should adopt a uniform procedure for both cable operators 
and satellite carriers, they contended that a regulation allowing for 
the verification of pre-2010 Statements of Account would not constitute 
a retroactive obligation. (Copyright Owners at 4.)

B. Discussion

    The Revised Proposal would allow copyright owners to audit 
Statements of Account filed by cable operators and satellite carriers 
for accounting periods beginning on or after January 1, 2010. The 
Office has concluded that this would not be a retroactive regulation, 
even though it would apply to Statements for the 2010, 2011, and 2012 
accounting periods.
    A regulation is retroactive if it ``takes away or impairs vested 
rights acquired under existing law, or creates a new obligation, 
imposes a new duty, or attaches a new disability in respect to 
transactions or considerations already past.'' National Mining Ass'n v. 
Dep't of Labor, 292 F.3d 849, 859 (D.C. Cir. 2002). The fact that the 
regulation establishes a procedure for verifying Statements of Account 
filed before the date that the final rule goes into effect does not 
mean it is retroactive. See Landgraf v. USI Film Prods., 511 U.S. 244, 
269-70 (1994) (a law is not considered retroactive ``merely because it 
is applied in `a case arising from conduct antedating the statute's 
enactment''). Instead, ``the operative inquiry is `whether the new 
provision attaches new legal consequences to events completed before 
its enactment.'' Id.
    Neither DISH nor any other party has identified any aspect of the 
proposed regulation that changes the legal landscape for satellite 
carriers or cable operators. The regulation creates a framework for 
audits that will be conducted in the future, but it does not change the 
``past legal consequences of past actions'' for a statutory licensee 
who may be subject to the verification procedure. See National 
Petrochemical & Refiners Ass'n v. EPA, 630 F.3d. 145, 161 (D.C. Cir. 
2010). The regulation states that the auditor will review a Statement 
of Account to determine whether the licensee correctly calculated, 
reported, and paid the amount which was due. If the auditor discovers 
an error or underpayment, the licensee would be subject to the same 
legal obligations which would apply if the error had been discovered 
when the Statement was filed.\7\ Moreover, cable operators and 
satellite carriers that use the statutory license knew that copyright 
owners would be entitled to audit Statements of Account following the 
enactment of STELA, and as such, were on notice that Statements filed 
on or after the effective date might be subject to this procedure. 
Indeed, some of the parties who submitted comments in this proceeding 
stated that they were ``intimately'' and ``directly'' involved in the 
negotiations that preceded the drafting of STELA. See DTV at 1-2; 
Refunds Under the Cable Statutory License, Docket No. RM-2010-3, 
Comments of National Cable & Telecommunications Association at 3 
(available at https://www.copyright.gov/docs/stela/comments/ncta-11-03-10.pdf).
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    \7\ The cases cited by DISH are distinguishable because they 
involve situations where ``an agency completely reversed the status 
quo ante.'' See Nat'l Petrochemical & Refiners Ass'n, 630 F.3d at 
160 (distinguishing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 
(1988) and Nat'l Mining Ass'n v. Dep't of Labor, 292 F.3d 849 (D.C. 
Cir. 2002)). For example, in Bowen the agency required a party to 
return or forfeit money that it had received from the government. In 
Marrie v. SEC, 374 F.2d 1196 (D.C. Cir. 2004), the agency changed 
the legal standard needed to establish professional misconduct, and 
then applied that standard to conduct that occurred before the rule 
was adopted.
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IV. Initiation of an Audit

A. Comments

    In the Notice of Proposed Rulemaking the Office explained that a 
copyright owner could initiate an audit procedure by filing a notice 
with the Office, which would be published in the Federal Register. The 
copyright owner would be required to identify the Statement(s) of 
Account and accounting period(s) that would be included in the audit, 
and the statutory licensee that filed those Statement(s) with the 
Office. In addition, the notice would have to provide contact 
information for the copyright owner filing the notice, and a brief 
statement establishing that it owns at least one work that was embodied 
in a secondary transmission made by that licensee. A notice of intent 
to audit a particular Statement of Account would be considered timely 
if it is received within three years after the last day of the year in 
which that Statement was filed.
    Any other copyright owner that wishes to participate in the audit 
would have to notify both the copyright owner that filed the notice of 
intent to audit and the statutory licensee who would be subject to the 
audit within 30 days after the notice was published in the Federal 
Register. Copyright owners that join in the audit would be entitled to 
participate in the selection of the auditor, they would be entitled to 
receive a copy of the auditor's report, and they would usually be 
required to pay for the auditor for his or her work in connection with 
the audit.\8\ However, a copyright owner that failed to join the audit 
within the time allowed would not be permitted to participate in the 
selection of the auditor and would not be entitled to receive a copy of 
the auditor's report. Moreover, a copyright owner that failed to join 
the audit would not be permitted to conduct its own audit of the 
semiannual Statement(s) of Account identified in the Federal Register 
notice at a later time.
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    \8\ These parties are defined in the Revised Proposal as the 
``participating copyright owner(s).''
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    All of the parties agreed with this approach, although the 
Copyright Owners suggested that a group representing multiple copyright 
owners should be permitted to file a notice of intent to audit on 
behalf of the members of that group. (Copyright Owners at 4-5.)

B. Discussion

    Generally speaking, the Revised Proposal follows the same approach 
for initiating an audit that the Office proposed in its Notice of 
Proposed Rulemaking. As the Copyright Owners suggested, the term 
``copyright owners'' is defined to mean ``a person or entity that owns 
the copyright in a work embodied in a secondary transmission made by a 
statutory licensee'' or ``a designated agent or representative of such 
person or entity.'' This will allow groups representing multiple 
copyright owners to file a notice of intent to audit, provided that the 
groups represent at least one party who owns a work which was embodied 
in a secondary transmission made by the statutory licensee during one 
or more of the accounting periods specified in the notice. It will also 
allow groups representing multiple copyright owners to prepare a list 
of qualified and independent auditors who may be selected to conduct 
the audit, to expand the scope of the audit if the auditor discovers an 
underpayment that exceeds a certain threshold, to prepare an itemized 
report documenting the cost of the audit, among other activities 
contemplated by the Revised Proposal.

V. Designation of the Auditor

A. Comments

    In the Notice of Proposed Rulemaking, the Office suggested that the 
copyright owners should be solely responsible for selecting a qualified 
and independent auditor to conduct the

[[Page 27140]]

verification, and that any disputes concerning the auditor's 
qualifications or independence should be resolved by the Professional 
Ethics Division of the American Institute of Certified Public 
Accountants (``AICPA'') or the State Board of Accountancy that licensed 
the auditor while the audit is underway. Many of the parties disagreed 
with this approach.
    The Copyright Owners predicted that this would lead to needless 
delay and expense. They stated that a statutory licensee should be 
required to raise any concerns about the auditor in a prompt manner, 
and that if the parties are unable to resolve their differences within 
30 days, the auditor should be allowed to proceed with the 
verification. (Copyright Owners at 5.) AT&T agreed that any disputes 
concerning the qualifications or independence of the auditor should be 
resolved before the audit begins, and further stated that if the 
auditor is not qualified or independent, the statutory licensee should 
not be subject to any audits until the following year. (AT&T at 4; AT&T 
Reply at 2.) The NCTA stated that an auditor selected by the copyright 
owners could be biased in favor of his or her clients. To address these 
concerns, the NCTA suggested that both the copyright owners and the 
statutory licensee should designate a certified independent accountant, 
who, in turn, would select a neutral auditor to conduct the 
verification procedure. (NCTA at 4-5.)
    Regarding the auditor's qualifications, AT&T agreed that the audit 
should be conducted by a certified public accountant who is in good 
standing with the AICPA. AT&T stated that the auditor should not be 
subject to any disciplinary inquiry or proceeding, that the auditor 
should not be allowed to collect a contingency fee based on the results 
of the audit, and that the auditor should be required to file a 
certification with the Office confirming his or her qualifications and 
independence before the audit begins. (AT&T at 3-4; AT&T Reply at 2.)

B. Discussion

    The Revised Proposal addresses the parties' concerns regarding the 
selection of the auditor. Copyright owners who wish to participate in 
the audit would provide the statutory licensee with a list of three 
independent and qualified auditors, along with information that would 
be reasonably sufficient for the licensee to evaluate the independence 
and qualifications of each individual. Specifically, the copyright 
owners would provide the licensee with a copy of the auditor's 
curriculum vitae, a copy of the engagement letter that would govern his 
or her performance of the audit, and a list of any other audits that 
the auditor has conducted under this regulation. They would also 
provide a brief description of any other work that the auditor has 
performed for any of the participating copyright owners within the 
previous two calendar years, along with a list of the participating 
copyright owners who have engaged the auditor's firm within the 
previous two calendar years.
    Within five (5) business days after receiving this information, the 
statutory licensee would be required to select one of these auditors. 
That individual would audit the licensee's Statements of Account on 
behalf of all copyright owners who own a work that was embodied in a 
secondary transmission made by that licensee during the accounting 
period(s) subject to the audit.\9\ To ensure that the auditor maintains 
his or her independence during the audit, the Revised Proposal explains 
that there may be no ex parte communications between the auditor and 
the participating copyright owners or their representatives until the 
auditor has issued his or her final report. However, there are two 
exceptions to this rule. The auditor may communicate directly with the 
copyright owners if he or she has a reasonable basis to suspect that 
the statutory licensee has committed fraud, or if the auditor gives the 
licensee an opportunity to participate in the communication and the 
licensee declines to do so.
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    \9\ The Revised Proposal differs from the Joint Stakeholders' 
Proposal by clarifying that the auditor would initially only be 
authorized to verify the Statement(s) of Account which were listed 
in the notice of intent to audit. As discussed in section VIII(B), 
if the auditor discovers an underpayment that meets or exceeds a 
certain threshold, the auditor would be permitted to expand the 
scope of the audit to include other Statements which were not 
mentioned in the initial notice.
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    In response to AT&T's concerns, the Revised Proposal states that 
the auditor must be a member in good standing with the AICPA and the 
relevant licensing authority for the jurisdiction(s) where the auditor 
practices,\10\ and it states that the auditor must be compensated with 
a flat fee or based on an hourly rate, rather than a contingency 
fee.\11\
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    \10\ The licensing requirements for a CPA are set and enforced 
by the Board of Accountancy for the jurisdiction(s) where the CPA 
practices (rather than the AICPA). However, CPAs who join the AICPA 
agree to abide by the Code of Professional Conduct and Bylaws (the 
``Code'') that have been adopted by the organization. ``The bylaws 
provide a structure for enforcement of the Code by the Institute's 
Professional Ethics Division. When allegations come to the attention 
of the Ethics Division regarding a violation of the Code, the 
division investigates the matter, under due process procedures, and 
depending upon the facts found in the investigation, may take a 
confidential disciplinary action, settle the matter with suspension 
or revocation of membership rights, or refer the matter to a panel 
of the Trial Board Division for a hearing.'' See AICPA, FAQs--Become 
a CPA, available at https://www.aicpa.org/BecomeACPA/FAQs/Pages/FAQs.aspx.
    \11\ According to the AICPA, 47 states and jurisdictions allow 
CPAs to accept contingency fees, except in situations where the CPA 
audits or reviews a financial statement or prepares an original tax 
return. See AICPA Code of Professional Conduct, Rule 302--Contingent 
Fees, available at https://www.aicpa.org/research/standards/codeofconduct/pages/et_302.aspx; see also AICPA, Commissions and 
Contingent Fees, available at https://www.aicpa.org/Advocacy/State/Pages/CommissionsandContingentFees.aspx
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    The Office declined to adopt AT&T's suggestion that the auditor 
should not be subject to ``any disciplinary inquiry or proceeding.'' 
(AT&T at 3, emphasis added.) It is implicit that the auditor is not 
currently subject to a disciplinary inquiry or proceeding, because the 
regulation requires that the auditor must be a member in good standing 
with the relevant licensing authority and professional association for 
certified public accountants. In any event, it seems unlikely that the 
copyright owners would invite a ``peremptory challenge'' by nominating 
an accountant who is currently suspended or subject to a pending 
disciplinary inquiry or proceeding.\12\ Likewise, the Office does not 
believe that the auditor should be required to file a certification 
with the Office concerning his or her qualifications and independence, 
because the Revised Proposal already directs the copyright owners to 
provide the statutory licensee with information that it reasonably 
needs to evaluate each auditor.
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    \12\ To be clear, an auditor who has been subject to a 
disciplinary inquiry or proceeding at some point in the past would 
not necessarily be disqualified from conducting an audit under this 
procedure.
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VI. Scope of the Audit and Time Period for Conducting an Audit

A. Comments

    The Notice of Proposed Rulemaking did not specify a precise 
deadline for when the audit should begin or when the audit should be 
completed, because the Office expects that the issues presented in each 
audit will vary depending on the number and complexity of the 
Statements of Account that will be subject to review. For the same 
reason, the Office did not specify the precise issues that the auditor 
should consider in each audit. Instead, the Notice of Proposed 
Rulemaking simply stated that the audit should be performed in 
accordance with generally accepted auditing standards.

[[Page 27141]]

See 77 FR 35647, June 14, 2012. Many of the parties criticized this 
approach.
    In order to avoid ``needless delay and added expense,'' the 
Copyright Owners contended that the statutory licensee should be given 
a 30 to 90 day deadline to provide the auditor with the information he 
or she needs to conduct the verification procedure. (Copyright Owners 
at 6.) DISH predicted that the statutory licensee would have to 
``devote certain resources to ensuring compliance with the auditor's 
needs,'' and that the ``longer the auditing process is stretched out, 
the greater the resource strain.'' Therefore, DISH said that the 
auditor should be given a precise deadline for completing the 
verification process. (DISH at 6.)
    DISH also contended that the auditor should not conduct a deep and 
burdensome ``inquiry into the cable or satellite carrier's business 
operations or processes.'' Instead, he or she should simply confirm 
that the licensee correctly identified the network and non-network 
transmissions carried by that licensee during the relevant time period 
and confirm that the licensee correctly multiplied the number of 
subscribers who receive each transmission by the applicable royalty 
rate. (DISH at 5-6.) AT&T expressed a similar concern. Citing the 
Office's audit regulations for digital audio recording devices, it 
asserted that the auditor should review the information that the 
statutory licensee provides in its Statement of Account, but should not 
consider any discrepancies that appear on the face of each Statement or 
any aspect of the Statement that is reviewed by the Licensing Division, 
such as the classification of stations as distant, local, permitted, or 
non-permitted. AT&T also contended that statutory licensees should not 
be required to provide the auditor with information concerning 
individual subscribers. (AT&T at 3, 4; AT&T Reply at 4.)
    Both AT&T and the NCTA stated that the audit should be conducted 
during normal business hours in order to expedite the audit process and 
to minimize the disruption to the statutory licensee's business. (AT&T 
at 9; NCTA at 8.) In addition, AT&T contended that the statutory 
licensee should be given 60 days to respond to the auditor's request 
for information, and that the licensee should not be required to 
respond to such requests within 75 days before the due date for a 
semiannual Statement of Account ``when individuals with the most 
knowledge are fully occupied with meeting filing requirements.'' (AT&T 
at 9.)

B. Discussion

    The Revised Proposal addresses the parties' concerns regarding the 
scope and duration of the audit. The statutory licensee would be given 
more than two months notice to identify and collect information that 
may be relevant to the audit. Specifically, the copyright owner would 
be required to serve a notice of intent to audit on the licensee that 
identifies the Statements of Account that will be reviewed by the 
auditor. At least 30 days would pass before other participating 
copyright owners would be required to notify the licensee of their 
intent to join the audit. The licensee would be given at least 5 
business days to select the auditor who would conduct the verification 
procedure and another 30 days thereafter to provide the auditor with a 
list of the broadcast signals that the licensee retransmitted during 
the accounting period(s) at issue in the audit. So as a practical 
matter, the licensee would have at least 65 days to prepare before the 
audit gets underway.
    After the auditor has been selected, the licensee would be required 
to provide the auditor and a representative of the participating 
copyright owners with a certified list of the broadcast signals 
retransmitted under each Statement of Account that is at issue in the 
audit, including the call sign for each broadcast signal and each 
multicast signal. In addition, cable systems and multiple system 
operators (``MSOs'') would be required to identify the classification 
of each signal on a community by community basis pursuant to Sec. Sec.  
201.17(e)(9)(iv)-(v) and 201.17(h) of the regulations.
    The Joint Stakeholders included similar language in their 
proposal,\13\ and the Office assumes that this provision is intended to 
respond to the Copyright Owners' request that statutory licensees be 
given a precise deadline for providing information that the auditor 
needs to conduct the verification procedure. However, the Office notes 
that statutory licensees already provide this information in the 
Statements of Account that they file with the Licensing Division, and 
that the person signing the Statement must certify, under penalty of 
law pursuant to title 18 of the U.S. Code, that this information is 
true, correct, and complete. Although the Office included this 
requirement in the Revised Proposal, the Office seeks comment on 
whether there is any benefit in requiring licensees to provide 
information that should be apparent from the face of their Statements 
of Account.
---------------------------------------------------------------------------

    \13\ The primary difference is that the Revised Proposal would 
impose this requirement on satellite carriers, cable systems, and 
MSOs alike, while the provision in the Joint Stakeholders' Proposal 
only applied to cable operators and MSOs.
---------------------------------------------------------------------------

    The Revised Proposal would allow the statutory licensee to suspend 
an audit for up to 30 days before the due date for filing a semiannual 
Statement of Account,\14\ although the licensee would not be allowed to 
exercise this option once the auditor has delivered the initial draft 
of his or her report to the licensee.\15\ At the same time, the Revised 
Proposal protects the interests of the copyright owners by requiring 
the licensee to execute an agreement tolling the statute of limitations 
for no more than 30 days if the copyright owners believe in good faith 
that the suspension could prevent the auditor from delivering his or 
her final report before the statute of limitations expires.
---------------------------------------------------------------------------

    \14\ In other words, satellite carriers could suspend an audit 
from January 1st through January 30th and from July 1st through July 
30th, while cable operators could suspend an audit from January 28th 
through February 28th (in a non-leap year) and from July 31st 
through August 29th.
    \15\ This limitation is discussed in more detail in section 
IX(B).
---------------------------------------------------------------------------

    The Revised Proposal differs from the Joint Stakeholders' proposal 
insofar as the Joint Stakeholders would have allowed the statutory 
licensee to suspend the audit for up to 60 days before the deadline for 
filing a semiannual Statement of Account. Given that the copyright 
owners may conduct only one audit per year, the Office believes that it 
would be unduly restrictive to impose a ``blackout period'' on the 
auditor for up to four months of the year.
    DISH contended that the auditor should be given a precise deadline 
for completing the audit, but this does not appear to be necessary. As 
discussed in section VIII(B), a statutory licensee would be subject to 
no more than one audit per calendar year. In other words, if the 
copyright owners launched an audit on January 1, 2014 and if that audit 
was still ongoing as of January 1, 2015, the copyright owners would not 
be allowed to conduct another audit of that licensee until January 1, 
2016. As a result, the copyright owners would have a strong incentive 
to complete each audit before the end of the calendar year.
    The Revised Proposal specifically states that the statutory 
licensee must provide the auditor with reasonable access to the 
licensee's books, records, or other information that the auditor needs 
in order to conduct the audit. The Revised Proposal protects the 
licensees' interests by providing that the audit must be conducted 
during normal

[[Page 27142]]

business hours at a location designated by the licensee, that 
consideration must be ``given to minimizing the costs and burdens 
associated with the audit,'' and that the licensee is only required to 
provide the auditor with information that he or she ``reasonably 
requests'' (emphasis added). This should address DISH's concern that 
the verification procedure might lead to a ``deep and burdensome 
inquiry'' into a licensee's business operations or processes. (DISH at 
5-6.) The Revised Proposal also requires the auditor to safeguard any 
confidential information that he or she may receive from the licensee. 
This should address AT&T's concern that cable operators might be asked 
to provide the auditor with information concerning individual 
subscribers.
    Finally, AT&T contended that the auditor should review the 
information that the licensee provided in its Statement of Account, but 
should not consider any discrepancies that appear on the face of the 
Statement or any aspect of the Statement that is reviewed by the 
Licensing Division, such as the classification of stations as distant, 
local, permitted, or non-permitted, or other discrepancies. The Revised 
Proposal addresses this concern by requiring that the auditor verify 
``all information reported on the Statements of Account subject to the 
audit in order to confirm the correctness of calculations and royalty 
payments reported therein.'' However, the auditor shall not determine 
whether a cable system properly classified any broadcast signal under 
Sec. Sec.  201.17(e)(9)(iv)-(v) and 201.17(h) of the regulations or 
whether a satellite carrier properly determined that any subscriber or 
group of subscribers is eligible to receive broadcast signals under 
section 119(a) of the Act.

VII. Retention of Records

A. Comments

    The Notice of Proposed Rulemaking explained that a statutory 
licensee would be required to retain any records needed to confirm the 
correctness of the calculations and royalty payments reported in its 
Statements of Account for at least three and a half years after the 
last day of the year in which the Statement was filed with the Office. 
The Office also explained that a licensee who has been subject to an 
audit would be required to retain those records for at least three 
years after the date that the auditor delivers his or her final report 
to the copyright owners who decided to participate in the audit.
    Generally speaking, the parties did not object to this proposal. 
The Copyright Owners opined that when a statutory licensee files an 
amended Statement of Account, the deadline for maintaining records 
should be calculated from the date that the amendment is filed rather 
than the date of the initial Statement. (Copyright Owners at 6.) DISH 
stated that if the auditor determines that the statutory licensee 
correctly reported the royalties due on a particular Statement of 
Account the licensee should not be required to retain its records 
concerning that Statement once the auditor has delivered his or her 
final report to the copyright owners. (DISH at 7-8.)

B. Discussion

    In response to the Copyright Owners' concerns, the Revised Proposal 
specifies that the deadline for maintaining records for an amended 
Statement of Account should be calculated from the date that the 
amendment was filed rather than the filing date for the initial 
Statement.
    The Office is concerned that the one-year retention period proposed 
by the Joint Stakeholders would deprive copyright owners of the 
benefits of the three-year statute of limitations and it would create 
confusion for statutory licensees (with a one year retention period for 
Statements of Account that have been audited, and a three year 
retention period for Statements that could potentially be subject to an 
audit). Therefore, the proposed regulation states that a licensee who 
has been subject to an audit would be required to retain any records 
needed to confirm the correctness of the calculations and royalty 
payments reported in a Statement of Account for at least three years 
after the date that the auditor delivers his or her final report to the 
copyright owners. The Office weighed DISH's concerns, but concluded 
that a licensee should be required to retain its records even if the 
auditor finds no discrepancies in the Statements of Account, to ensure 
that the licensee does not discard its records before the copyright 
owners have had an opportunity to review the auditor's report.

VIII. Frequency of the Audit Procedure

A. Comments

    In its Notice of Proposed Rulemaking, the Office suggested that a 
satellite carrier or a cable operator that owns one cable system should 
be subject to no more than one audit per year. By contrast, an operator 
that owns more than one system would be subject to no more than three 
audits per year. In order to protect the interests of multiple system 
operators, the Office explained that the auditor would review a 
sampling of the systems owned by each MSO. To protect the interests of 
copyright owners, the Office explained that if the auditor discovers an 
underpayment of 5 percent or more in a Statement of Account filed by an 
MSO, the size of the sample could be expanded to include any and all of 
the systems owned by that operator.
    The Office explained that the Notice of Proposed Rulemaking was 
merely a starting point for further discussion on these issues, and 
invited comment from interested parties concerning the limit on the 
total number of audits that an MSO should be required to undergo in a 
single year. See 77 FR 35647, June 14, 2012. The Office invited 
comments on whether an audit involving 50 percent of the systems owned 
by a particular operator would be likely to produce a statistically 
significant result. It also invited comments on whether a 50 percent 
threshold would be unduly burdensome for MSOs and, if so, what 
percentage would be appropriate. See id at 35648.
    The Copyright Owners did not object to the proposed limit on the 
number of audits that an MSO would be required to undergo, but 
recommended that the Office define the term ``multiple system 
operator'' to avoid any confusion about which systems would be covered 
by this aspect of the regulation. (Copyright Owners at 7.) AT&T stated 
that an MSO should be subject to no more than one audit per year and 
that each audit should be limited to no more than two Statements of 
Account, noting that this would be consistent with verification 
procedures that the Office has adopted in the past. (AT&T at 2.) The 
NCTA expressed the same view, but stated that each audit should be 
limited to no more than one Statement of Account. (NCTA at 6, 7.)
    The NCTA and AT&T agreed that an audit involving an MSO should be 
based on a reasonable sampling of the systems owned by that entity. 
(AT&T at 3; NCTA at 6.) AT&T explained that an audit involving 50 
percent of its systems ``would cause substantial burden and 
disruption'' and stated that the accuracy of its Statements of Account 
could be determined based on a ``substantially smaller sample.'' (AT&T 
at 3.) While AT&T did not propose a specific number or percentage of 
systems that should be included in each audit, the NCTA stated that a 
representative sample of 10 percent or less would be consistent with 
audit practices and ``should be more than sufficient to determine 
whether an MSO's SOAs

[[Page 27143]]

suffer from any systemic problems.'' (NCTA at 6.)
    The Copyright Owners agreed that if the auditor discovers an 
underpayment of 5 percent or more in an audit of an MSO, the auditor 
should be allowed to expand the scope of the audit to include all of 
the systems owned by that operator. (Copyright Owners at 7.) AT&T did 
not object to the idea of expanding the number of systems subject to 
the audit, but stated that an expanded audit should require a showing 
of good cause. Specifically, AT&T stated that the amount of the 
underpayment should exceed a minimum threshold and a minimum percentage 
in order to trigger an expanded audit, and that discrepancies that 
appear on the face of a Statement of Account or discrepancies based on 
``reasonable disagreements about issues of law, construction of 
regulations, or accounting procedures'' should not be included in this 
calculation. In addition, AT&T stated that the Office should create a 
separate procedure for resolving good faith disputes over legal, 
regulatory, and accounting issues before the copyright owners are 
allowed to expand the scope of an audit. (AT&T at 8, 9.)
    The NCTA categorically opposed the idea of expanding the scope of 
an audit involving an MSO. It asserted that there is no need to audit 
more than 10 percent of the systems owned by an MSO, because a sample 
of 10 percent of those systems should disclose any systemic problems in 
the operator's royalty calculations. The NCTA also asserted that it 
would be unreasonable to allow an ``isolated underpayment'' in a single 
Statement of Account to trigger an audit of all of the systems owned by 
that operator. (NCTA at 6-7.)

B. Discussion

    The Revised Proposal states that statutory licensees would be 
subject to no more than one audit per calendar year (regardless of the 
number of cable systems that they own) and the audit of a particular 
satellite carrier or cable system would be limited to no more than two 
of the Statements of Account submitted by that licensee.
    In response to the concerns expressed by AT&T and the NCTA, the 
Revised Proposal explains that an audit involving an MSO would be 
limited to a sampling of the systems owned by that entity. 
Specifically, the auditor would be permitted to verify the Statements 
of Account filed by no more than 10 percent of the Form 2 and 10 
percent of the Form 3 systems owned by an MSO. In order to avoid any 
confusion about which systems would be subject to this procedure, the 
Revised Proposal explains that the term MSO means ``an entity that 
owns, controls, or operates more than one cable system.''
    If the Office has published a notice of intent to audit a 
particular Statement of Account in the Federal Register, the Office 
would not accept another notice of intent to audit that Statement. Once 
the auditor has begun to audit a particular satellite carrier, a 
particular cable system, or a particular MSO, copyright owners would 
not be permitted to conduct another audit of that licensee until the 
following calendar year.
    For example, if the auditor started to review a licensee's 
Statement of Account for the 2010/1 accounting period on August 1, 2013 
and if the auditor delivered his or her final report the copyright 
owners by December 31, 2013, the copyright owners would be allowed to 
audit other Statements filed by that licensee beginning on January 1, 
2014. However, if the auditor delivered his or her final report on 
March 1, 2014, the licensee would not be subject to any other audits in 
calendar year 2013 or 2014.
    The copyright owners could lay the initial groundwork for other 
audits involving this licensee at any time. For example, the copyright 
owners could file a notice of intent to audit the licensee's Statement 
of Account for the 2011/2 accounting period on October 1, 2013, even if 
the auditor was still reviewing the licensee's Statement for the 2010/1 
accounting period as of that date. Other participating copyright owners 
would then be required to notify the copyright owner and the licensee 
of their intent to audit the 2011/2 Statement within 30 days 
thereafter.\16\ However, the participating copyright owners could not 
propose a list of qualified and independent auditors to review the 
2011/2 Statement until 30 days after the final report concerning the 
2010/1 Statement has been delivered to the participating copyright 
owners and the licensee.
---------------------------------------------------------------------------

    \16\ As the Office explained in its Notice of Proposed 
Rulemaking, ``if a copyright owner filed a notice of intent to audit 
a particular Statement of Account or a particular statutory licensee 
in calendar year 2013 and if that audit was still ongoing as of 
January 1, 2014, the Office would accept a notice of intent to audit 
filed in calendar year [2013 or] 2014 concerning other Statements 
filed by that same licensee.'' See 77 FR 35645 n.3, June 14, 2012,.
---------------------------------------------------------------------------

    In order to protect the interests of copyright owners, the Revised 
Proposal provides an exception to these rules. In the event that the 
auditor discovers an underpayment in his or her review of a satellite 
carrier or a particular cable system, the copyright owners would be 
permitted to audit all of the Statements of Account filed by that 
particular cable system or satellite carrier during the previous six 
accounting periods (including a cable system that is owned by an MSO). 
Consistent with the Federal Rule of Civil Procedure, the copyright 
owners should exclude the Statements of Account listed in the notice of 
intent to audit when identifying the ``previous six'' accounting 
periods that will be included in the expanded audit.\17\ See Fed. R. 
Civ. P. 6(a)(1)(A). In addition, if the auditor discovers an 
underpayment in his or her review of an MSO, the copyright owners would 
be permitted to audit a larger sample of the cable systems owned by 
that operator. Specifically, the copyright owners would be permitted to 
audit 30 percent of the Form 2 and 30 percent of the Form 3 systems 
owned by that operator.
---------------------------------------------------------------------------

    \17\ Copyright owners may have an incentive to audit the 
licensee's two most recent Statements of Account before auditing the 
licensee's earlier Statements, given that an underpayment in the 
most recent Statements would give the copyright owners an 
opportunity to audit all of the Statements that the licensee 
submitted for the previous six accounting periods.
---------------------------------------------------------------------------

    Generally speaking, the expanded audit would be considered an 
extension of the initial audit. However, the copyright owners would be 
required to file another notice of intent to audit with the Copyright 
Office, given that the expanded audit would include Statements of 
Account and/or cable systems not listed in the initial notice. Doing so 
would give other copyright owners an opportunity to join in the 
expanded audit and it would put them on notice that a subsequent audit 
of the Statements identified in the notice will not be permitted. In 
addition, it would provide the statutory licensee with advance notice 
of the Statements of Account and/or cable systems that would be 
included within the expanded audit.\18\
---------------------------------------------------------------------------

    \18\ The Office did not adopt the Joint Stakeholders' Proposal, 
which stated that the expanded audit could be conducted 
``immediately'' without specifying a precise procedure for when and 
how the expanded audit would begin.
---------------------------------------------------------------------------

    The Revised Proposal explains that the expanded audit may be 
conducted by the same auditor who conducted the initial audit, provided 
that the copyright owners supply the licensee with information 
sufficient to show that there has been no material change in the 
auditor's independence and qualifications.\19\ If the copyright owners

[[Page 27144]]

prefer to use a different auditor or if the previous auditor is no 
longer qualified or independent within the meaning of the regulation, a 
new auditor may be selected using the procedure discussed in section 
V(B) above.
---------------------------------------------------------------------------

    \19\ Under the Joint Stakeholders' Proposal, the copyright 
owners would be allowed to use the same auditor in another audit 
involving an MSO, but they would not be allowed to use the same 
auditor two years in a row. The Office fails to see the 
justification for this limitation.
---------------------------------------------------------------------------

    Because an expanded audit would be an extension of the initial 
audit, the copyright owners could proceed with an audit of a satellite 
carrier or a particular cable system at any time (including a cable 
operator that is owned by an MSO). For example, if the copyright owners 
audited a cable operator's Statement for the 2013/1 accounting period 
in June 2014 and if the auditor discovered an underpayment on that 
Statement, the copyright owners would be permitted to audit any or all 
of the operator's Statements for the 2010/1 through 2012/2 accounting 
periods in calendar year 2014.\20\ If the auditor delivered his or her 
final report to the copyright owners by December 31, 2014, the 
copyright owners would be allowed to audit other Statements filed by 
that operator beginning on January 1, 2015. However, if the auditor 
delivered his or her report on the 2013/1 Statement on or after January 
1, 2015, then the operator would not be subject to any other audits in 
calendar year 2015.
---------------------------------------------------------------------------

    \20\ As discussed in section VII(B), the licensee would be 
required to retain any records needed to confirm the correctness of 
the calculations and royalty payments reported in these Statements 
for at least three years after the last day of the year in which the 
Statement were filed with the Office. Once the licensee has received 
a notice of intent to audit those Statements, the licensee would be 
required to retain its records for three years after the auditor 
delivers his or her final report.
---------------------------------------------------------------------------

    In order to protect the interests of MSOs, the Revised Proposal 
provides a limited exception to this rule. As discussed above, the 
copyright owners would be allowed to audit a larger sample of the cable 
systems owned by an MSO if the auditor discovered an underpayment 
during the initial audit. However, the expanded audit could not be 
conducted until the following calendar year. For example, if the 
auditor discovered an underpayment in the 2013/1 and 2013/2 Statements 
of Account for one of the Form 2 and four of the Form 3 systems owned 
by an MSO, the copyright owners would be permitted to audit any or all 
of the Statements filed by those systems for the 2010/1 through 2012/2 
accounting periods. If the auditor delivered his or her report to the 
copyright owners on July 1, 2014, the copyright owners could proceed 
with this expanded audit in calendar year 2014. In addition, the 
copyright owners would be allowed to audit the Statements filed by 30 
percent of the Form 2 and 30 percent of the Form 3 systems owned by 
that operator. However, those systems could not be audited until 
January 1, 2015, and the copyright owners would not be allowed to audit 
any other cable systems owned by that MSO in calendar year 2015.
    In all cases, the copyright owners would only be allowed to conduct 
an expanded audit if the auditor discovers a ``net aggregate 
underpayment'' of 5 percent or more on all of the Statements listed in 
the notice of intent to audit.\21\ This addresses AT&T's concern that 
the underpayment should exceed a minimum percentage in order to trigger 
an expanded audit, and the NCTA's concern that an isolated underpayment 
in a single Statement of Account should not trigger an audit of all of 
the systems owned by an MSO.
---------------------------------------------------------------------------

    \21\ The Revised Proposal differs from the Joint Stakeholders' 
Proposal by clarifying that the copyright owners would be allowed to 
conduct an expanded audit if the auditor discovers an underpayment 
that is 5 percent or more of the amount reported on the Statements 
of Account at issue in the audit, as opposed to requiring a net 
aggregate underpayment of exactly 5 percent. In making this 
calculation the auditor would be required to subtract the total 
amount of any overpayments reflected on the Statements at issue in 
the audit from any underpayments reflected on those Statements.
---------------------------------------------------------------------------

    The Office assumes that the amount of underpayments and 
overpayments that may be discovered in an audit may vary depending on 
the size of the statutory licensee and the amount of its royalty 
obligations. Therefore, the Office is not inclined to set a minimum 
monetary threshold needed to trigger an expanded audit (as AT&T 
recommended). Nor is the Office inclined to create a separate procedure 
for resolving disagreements over legal, regulatory, or accounting 
issues before an audit is expanded (as AT&T suggested). The Office 
believes that the consultation between the auditor and the statutory 
licensee, and the opportunity to prepare a written response to the 
auditor's conclusions should provide the parties with an adequate 
opportunity to air their differences concerning the auditor's 
conclusions.

IX. Disputing the Facts and Conclusions Set Forth in the Auditor's 
Report

A. Comments

    The Notice of Proposed Rulemaking proposed that the auditor prepare 
a written report setting forth his or her conclusions and deliver a 
copy of that report to the statutory licensee before it is delivered to 
any of the copyright owner(s) that elected to participate in the audit. 
If the statutory licensee disagrees with any of the facts or 
conclusions set forth in the auditor's report, the licensee's designee 
should raise those issues during the initial consultation with the 
auditor. If the auditor agrees that a mistake has been made, the 
auditor should correct those errors before the final report is 
delivered to the copyright owners. If the facts or conclusions set 
forth in the auditor's report remain in dispute after the consultation 
period has ended, the licensee would have the opportunity to provide 
the auditor with a written response setting forth its views within two 
weeks (e.g., 14 calendar days) after the date of the initial 
consultation between the auditor and the licensee's representative. The 
auditor would be required to include that response as an attachment to 
his or her final report, which would have to be delivered to the 
copyright owners and the statutory licensee within 60 days after the 
date that the auditor delivered the initial draft of his or her report 
to the licensee.\22\
---------------------------------------------------------------------------

    \22\ The Copyright Owners said that the Office should provide 
``a hard deadline for issuing the final report'' (Copyright Owners 
at 9), but in fact, the deadline that they recommended in their 
comments is precisely the same as the deadline specified in the 
Notice of Proposed Rulemaking.
---------------------------------------------------------------------------

    The Office invited comment on whether the regulation should provide 
a precise amount of time for the auditor to discuss his or her report 
with the statutory licensee's designee, and if so, whether 30 days 
would be a sufficient amount of time. AT&T stated that the licensee 
should be given 45 days to review the initial report before the 
consultation period begins; none of the other parties commented on this 
aspect of the proposal.
    The Office also invited comment on whether 14 days would be a 
sufficient amount of time for the statutory licensee to prepare a 
written response to the auditor's report, and whether 60 days would be 
a sufficient amount of time for the auditor to prepare his or her final 
report for the copyright owners. ACA stated that a 14 day deadline 
would ``increase administrative burdens'' for smaller cable operators, 
and that they should be given ``flexibility to respond within a 
reasonable amount of time.'' (ACA at 8.) AT&T agreed that 14 days would 
be ``wholly inadequate'' and that a statutory licensee should be given 
60 days to prepare a written response to the auditor's report. AT&T 
also contended that a licensee should be allowed to extend the response 
period for another 30 days if the 60-day period falls within 75 days 
before the due date for submitting a semiannual Statement of Account. 
(AT&T at 9-10.) The NCTA expressed the same view, stating that the 14 
day deadline for preparing a written response to the auditor and the 60 
day deadline for completing the final

[[Page 27145]]

report would be ``unreasonably short.'' (NCTA at 9.)

B. Discussion

    The Notice of Proposed Rulemaking and the Revised Proposal follow 
the same approach for disputing the facts and conclusions set forth in 
the auditor's report. The only difference is that the Revised Proposal 
would require the auditor to deliver his or her final report to the 
copyright owners within 5 business days after the statutory licensee's 
deadline for delivering its written response to that report.
    AT&T stated that the statutory licensee should be given 45 days to 
review the initial draft of the auditor's report before the 
consultation period begins, and AT&T, the ACA, and the NCTA predicted 
that cable operators would need more than 14 days to prepare a written 
response to that report. However, none of the parties offered any 
evidence to support these claims, and the Office continues to believe 
that 44 days (i.e., 30 days for the consultation period plus another 14 
days to prepare a written response) is a reasonable amount of time for 
the licensee to review and respond to the auditor's report.
    Under the Joint Stakeholders' proposal, the auditor would be 
required to send his or her report to both the participating copyright 
owners and the licensee even if the auditor has reason to suspect that 
the licensee has committed fraud and that disclosing his or her 
conclusions to the licensee would prejudice further investigation of 
that fraud. The Office is concerned that sending the report to both 
parties may defeat the purpose of withholding the auditor's suspicions 
from the licensee. Therefore, the Revised Proposal states that the 
auditor may send a copy of his or her report to the copyright owners in 
this situation without providing a complete copy to the licensee. 
However, the Office is also concerned that the licensee would be denied 
the opportunity to consult with the auditor and to remedy any errors or 
disputed facts or conclusions set forth in the auditor's report, as 
required by section 111(6)(C) of the Act. Therefore, the Revised 
Proposal would allow the auditor to deliver an abridged version of the 
report to the licensee that contains all of the facts and conclusions 
set forth in his or her report to the copyright owners except for the 
auditor's ultimate conclusion that the licensee has committed fraud.
    The Revised Proposal also differs from the Joint Stakeholder' 
proposal for suspending the audit in the period prior to the deadline 
for filing semiannual Statements of Account. As discussed above, the 
Revised Proposal would allow the licensee to suspend the audit for up 
to 30 days before the deadline for filing its semiannual Statement of 
Account, but the licensee would not be allowed to exercise this option 
once the auditor has delivered the initial draft of his or her report 
to the licensee. DISH predicted that a licensee may need to devote 
``certain resources'' in order to respond to the auditor's 
``inquiries'' (DISH at 6), but neither DISH nor any other party offered 
any evidence to suggest that the time needed to consult with the 
auditor or to prepare a written response to the auditor's report would 
prevent a licensee from filing its semiannual Statement of Account in a 
timely manner. Nor is the Office aware of such problems in the audit 
procedures for statements of account filed under the section 112 and 
114 licenses or under chapter 10.

X. Correcting Errors and Curing Underpayments Identified in the 
Auditor's Report

A. Comments

    The Notice of Proposed Rulemaking explained that if the auditor 
concludes that the information in a Statement of Account is incorrect 
or incomplete, that the calculation of the royalty fee was incorrect, 
or that the statutory licensee failed to deposit the royalties owed 
with the Office, the licensee may correct those errors by filing an 
amended Statement of Account and/or by submitting supplemental royalty 
payments to the Office. To do so, the licensee should follow the 
procedures set forth in 37 CFR 201.11(h)(1) and 201.17(m)(3), including 
the obligation to pay interest on any underpayment that may be due and 
the requisite amendment fee. The Office invited comment on whether 
statutory licensees should be given a deadline for correcting errors in 
their Statements of Account and for making supplemental royalty 
payments, and if so, whether 30 days would be a sufficient amount of 
time.
    The Copyright Owners contended that if an independent auditor 
determines that a statutory licensee failed to pay the correct amount 
of royalties, the licensee should be required to file an amended 
Statement of Account and to correct the underpayment within 30 days 
after the auditor delivers his or her final report. Otherwise, the 
licensee would have a ``perverse incentive'' to ignore the auditor's 
conclusions ``until either the statute of limitation runs or a 
copyright owner drafts an infringement complaint.'' (Copyright Owners 
at 8-9.) In the NCTA's view, the statutory license should be allowed to 
amend its Statement of Account and to make any supplemental royalty 
payments after the consultation period has ended but before the auditor 
has delivered his or her final report to the copyright owners. (NCTA at 
10.) AT&T contended that the licensee should be given an opportunity to 
cure any alleged underpayments within 60 days after the consultation 
period has ended. In addition, AT&T said that ``[t]he regulation should 
make clear that such remediation and cure does not constitute [the] 
licensee's admission that the prior reports and payments were wrong.'' 
(AT&T at 9-10.)
    While the Notice of Proposed Rulemaking gave statutory licensees an 
opportunity to correct any underpayments in their Statements of Account 
at any time, it did not allow licensees to request a refund from the 
Office in the event that the auditor discovered an overpayment. In 
DTV's view, a licensee should be allowed to request a refund in this 
situation, or in the alternative, to deduct the overpayment from a 
future Statement of Account. (DTV at 2-3.) The NCTA agreed that cable 
operators should be allowed to request refunds for any overpayments 
discovered during the course of an audit. (NCTA at 14-15.)

B. Discussion

    Generally speaking, the Notice of Proposed Rulemaking and the 
Revised Proposal give the statutory licensee the opportunity to correct 
any errors or underpayments reported in a Statement of Account. The 
primary difference is that the Revised Proposal would give the licensee 
a precise deadline for exercising this option. It states that the 
licensee may file an amended Statement of Account and may submit 
supplemental royalty fees within 60 days after the auditor delivers his 
or her final report to the copyright owners and the statutory licensee 
or within 90 days after that date in the case of an audit involving an 
MSO. In addition, the Revised Proposal would allow the licensee to 
request a refund from the Office if the auditor discovered an 
overpayment on any of the Statements of Account at issue in the audit.
    The Office will issue a refund under its current regulations if a 
request to amend a Statement of Account is received within 30 to 60 
days after the last day of the accounting period for that Statement or 
within 30 to 60 days after the overpayment was received in the

[[Page 27146]]

Office,\23\ whichever is longer, or if the Office discovers a 
legitimate overpayment in its examination of an initial Statement or 
amended Statement. See 37 CFR 201.11(h)(1); 201.11(h)(3)(i)-(vi); 
201.17(m)(3)(i)-(vi). STELA directed the Office to establish a 
mechanism for correcting ``any underpayment identified'' in the 
auditor's report, but it did not mention overpayments or refunds. See 
section 111(d)(6)(C)(ii). Nevertheless, the Office does have the 
authority to prescribe regulations concerning the Statements of Account 
that cable operators and satellite carriers file with the Office, 17 
U.S.C. 111(d)(1); 119(b)(1), and the Office agrees that a regulation 
authorizing refunds for overpayments discovered in the course of a 
verification procedure would be consistent with ``the administration of 
the functions and duties made the responsibility of the Register'' 
under title 17 of the U.S. Code. 17 U.S.C. 702.
---------------------------------------------------------------------------

    \23\ The deadline for satellite carriers is 30 days, while the 
deadline for cable operators is 60 days.
---------------------------------------------------------------------------

    Under the Revised Proposal the statutory licensee may request a 
refund for an overpayment that is discovered during an audit by 
following the procedures set forth in Sec. Sec.  201.17(m)(3) or 
201.11(h)(3) of the regulations. The refund request must be received in 
the Office within 30 days after the auditor has delivered his or her 
final report to the licensee. The Joint Stakeholders' proposal would 
have given the licensee 60 days to request a refund, but the Office 
concluded that 30 days would be more appropriate, given that the amount 
of the overpayment and the basis for the refund request would be 
apparent from the auditor's report.
    When the Office receives a notice of intent to audit a particular 
Statement of Account and until the conclusion of that audit, the Office 
will retain sufficient royalties to ensure that funds are available in 
the event that the licensee subsequently requests a refund. The Office 
does not need a copy of the auditor's final report, but it would be 
helpful to know when the audit has been completed. Therefore, the 
Revised Proposal directs a representative of the participating 
copyright owners to notify the Office when the auditor has delivered 
his or her final report and to state whether the auditor discovered an 
overpayment on any of the Statements at issue in the audit. If the 
auditor did not discover any overpayments, the royalties will be made 
available for distribution to the copyright owners at the appropriate 
time.

XI. Cost of the Audit Procedure

A. Comments

    The Notice of Proposed Rulemaking explained that the copyright 
owner(s) who selected the auditor would be expected to pay the auditor 
for his or her work in connection with the audit, unless the auditor 
were to determine that there was an underpayment of 5 percent or more 
reported in any Statement of Account that is subject to the audit. If 
so, the statutory licensee would be expected to pay the auditor's fee. 
If the auditor's determination is subsequently rejected by a court, 
then the copyright owners would have to reimburse the statutory 
licensee for the cost of the auditor's services. The Office invited 
comment on whether the regulation should include a cost-shifting 
provision, and if so, whether the percentage of underpayment needed to 
trigger this provision should be more or less than 5 percent. See 77 FR 
35649, June 14, 2012.
    This proved to be the most controversial aspect of the proposed 
regulation. The Copyright Owners supported the proposal, noting that it 
would be consistent with the verification procedures that the Office 
has issued for other statutory licensees. (Copyright Owners at 9-10.) 
AT&T, DISH, ACA, and the NCTA strongly opposed the idea.\24\
---------------------------------------------------------------------------

    \24\ DTV took no position on this issue.
---------------------------------------------------------------------------

    AT&T contended that the Office does not have the legal authority to 
shift the costs of the audit from the copyright owners to the statutory 
licensee. AT&T stated that ``the absence of any provision relating to 
cost-shifting . . . confirms that Congress did not intend for the 
Register to authorize cost-shifting,'' and the fact that the statute 
indicates ``that the auditor is working on behalf of copyright owners'' 
suggests that the cost of the audit should be paid by the copyright 
owners. (AT&T at 5-6.) AT&T also suggested that the cost-shifting 
provision ``would implicate due process and delegation concerns,'' 
because it ``effectively grants an interested private party the 
authority to regulate `private persons whose interests may be and often 
are adverse.' '' AT&T contended that this represents `` `an intolerable 
and unconstitutional interference with personal liberty and private 
property,' '' that it is `` `clearly arbitrary,' '' and that it 
constitutes `` `a denial of rights safeguarded by the due process 
clause of the Fifth Amendment.' '' (AT&T at 7, quoting Carter v. Coal 
Co., 298 U.S. 238 (1936)).
    AT&T, the ACA, the NCTA, and DISH contended that cost-shifting 
would be unfair to the statutory licensee. They predicted that 
statutory licensees would expend substantial resources in responding to 
the audit, they noted that licensees would not be able to recover any 
of their costs from the copyright owners, nor would licensees receive 
any financial benefit from the verification procedure that might offset 
these costs. By contrast, the copyright owners could decline to 
participate in the audit if they do not wish to pay for the auditor's 
services, and if they decide to join the audit they could split the 
cost of the audit amongst themselves. (ACA at 3; DISH at 9; NCTA at 
13.)
    ACA worried that a 5 percent underpayment threshold could result in 
a relatively small underpayment giving rise ``to an audit bill several 
orders of magnitude larger.'' (ACA at 1, 3.) AT&T and DISH predicted 
that this would encourage the auditor to look for ``discrepancies even 
where they do not exist'' and ``to raise as many issues as possible, 
whatever their merit.'' (AT&T at 6; DISH at 9.) AT&T also predicted 
that a cost-shifting provision would discourage licensees from 
correcting the underpayments reported on their Statements of Account, 
because a supplementary payment could be viewed as an admission that 
the auditor's calculations are correct. (AT&T at 6.) In order to avoid 
this result, AT&T urged the Office to create a separate ``process for 
resolving disputes or for determining how much a system operator has 
underpaid.'' (AT&T at 7.)
    Although they strongly opposed the Office's cost-shifting proposal, 
the ACA, the NCTA, and AT&T offered several suggestions for improving 
the cost-shifting provision. ACA stated that the underpayment threshold 
should be set significantly higher than 5 percent, that the 
underpayment should surpass a minimum dollar amount in order to trigger 
a cost-shifting, and that the Office should provide additional relief 
for small cable operators. (ACA at 1, 3, 4.) AT&T and the NCTA 
expressed a similar view. AT&T stated that the cost of the audit should 
only be shifted if the auditor discovers an underpayment of $10,000 or 
more. (AT&T at 7-8.) In addition, AT&T and the NCTA agreed that the 
cost of the audit should only be shifted if the auditor finds an 
underpayment of 10 percent or more, noting that a 10 percent threshold 
would be consistent with the trigger that the Office has adopted in its 
other audit regulations. (AT&T at 7-8; AT&T Reply at 3; NCTA at 13.)
    In determining whether the minimum threshold has been met, both 
AT&T and the NCTA said that the auditor should consider the total 
amount of royalties

[[Page 27147]]

reported by all of the cable systems and reflected on all of the 
Statements of Account that are at issue in the audit. The NCTA stated 
that the auditor should consider both overpayments and underpayments in 
making this calculation. However, AT&T stated that the auditor should 
not consider ``underpayments attributable to reasonable disagreements 
on issues of law, constructions of regulations, or accounting 
procedures'' or other issues ``about which reasonable minds may 
differ.'' (AT&T at 7-8; NCTA at 13.)
    Both AT&T and the NCTA stated that the costs of the audit must be 
reasonable, and that in no event, should the licensee be required to 
pay for costs that exceed the amount of the underpayment. (AT&T Reply 
at 3; NCTA at 13, 14.) They stated that the statutory licensee should 
not be required to pay for an audit unless a court determines that the 
licensee failed to report the correct amount of royalties, noting that 
requiring a final judicial determination would be consistent with the 
cost-shifting procedures set forth in the Office's other audit 
regulations. (AT&T at 7-8; AT&T Reply at 3; NCTA at 14.) In addition, 
AT&T stated that if the auditor discovers an overpayment of 10 percent 
or more, the copyright owners should be required to reimburse the 
licensee for the costs that it incurred in responding to the audit. 
AT&T contended that this would discourage copyright owners from abusing 
the verification procedure. (AT&T at 7-8.)
    As discussed above, the Notice of Proposed Rulemaking would allow 
copyright owners to expand the scope of the audit to include other 
systems owned by an MSO if the auditor discovers an underpayment in an 
audit of its systems. (AT&T at 7.) AT&T stated that the statutory 
licensee should not be required to pay for the cost of an expanded 
audit based solely on the fact that the auditor discovered an 
underpayment in the initial audit. (AT&T at 8.)

B. Discussion

1. The Office Has the Authority To Include a Cost-Shifting Provision in 
Its Audit Regulations
    Section 702 of the Act states that ``The Register of Copyrights is 
authorized to establish regulations not inconsistent with law for the 
administration of the functions and duties made the responsibility of 
the Register under this title.'' 17 U.S.C. 702. This includes the 
authority to prescribe regulations concerning the Statements of Account 
that cable operators and satellite carriers file with the Office, and 
the authority to prescribe regulations concerning the verification of 
those Statements. See 17 U.S.C. 111(d)(1); 111(d)(6); 119(b)(1), 
119(b)(2). The Office has concluded that a regulation authorizing cost-
shifting for underpayments discovered in the course of a verification 
procedure would be consistent with ``the administration of the 
functions and duties made the responsibility of the Register'' under 
title 17 of the U.S. Code. 17 U.S.C. 702. Moreover, the Office is not 
aware of any provision in sections 111(d)(6), 119(b)(2), or elsewhere 
in the Act that precludes the Office from adopting regulations that 
allocate the cost of a verification procedure among the participants.
    While there is no legislative history for STELA, the legislative 
history for a prior iteration of the legislation lends some additional 
support for the Office's conclusion.\25\ Sections 102(f)(4) and 
104(c)(6) of the earlier bill directed the Register to issue 
regulations to allow copyright owners to verify the Statements of 
Account and royalty fees that cable operators and satellite carriers 
deposit with the Office. Like sections 111(d)(6) and 119(b)(2) of the 
current statute, the earlier bill did not indicate whether the 
regulations should include a cost-shifting provision or whether those 
costs should be paid by the copyright owners or by the statutory 
licensee, or both. See Satellite Home Viewer Reauthorization Act of 
2009, H.R. 3570, 111th Cong. Sec. Sec.  102(f)(4), 104(c)(6) 
(2009).\26\ However, the House Report for the earlier bill stated that 
``[t]he rules adopted by the Office shall include procedures allocating 
responsibility for the cost of audits consistent with such procedures 
in other audit provisions in its rules.'' See H.R. Rep. No. 111-319, at 
10 (2009).
---------------------------------------------------------------------------

    \25\ See Defense Logistics Agency v. Federal Labor Relations 
Authority, 754 F.2d 1003, 1008 (DC Cir. 1985) (noting that a House 
Committee report on an earlier version of a statutory provision 
provided ``some support'' for the agency's interpretation of the 
provision which was subsequently enacted by Congress); Crooker v. 
Bureau of Alcohol, Tobacco & Firearms, 670 F.2d 1051, 1074 n.59 (DC 
Cir. 1981) (noting that ``[t]o the extent that the legislative 
history of earlier bills is useful,'' it tended to support the 
court's interpretation of the legislation that Congress subsequently 
enacted).
    \26\ The bill was passed by the House on December 3, 2009. The 
bill was read twice in the Senate and referred to the Committee on 
the Judiciary.
---------------------------------------------------------------------------

    The House was aware that the Office has established verification 
procedures in the past and that the Office has included a cost-shifting 
provision in those regulations.\27\ The fact that the House directed 
the Office to ``include procedures allocating responsibility for the 
costs of audits''--despite the fact that the earlier bill did not 
explicitly mention this issue--indicates that the House expected the 
Office to include a cost-shifting provision in this regulation 
consistent with its long-standing practice of allocating costs among 
stakeholders on a reasonable basis. While the House Report tends to 
support the conclusion that the Office has the authority to create a 
cost-shifting procedure, the Office recognizes that the value of the 
House Committee's remarks is limited, given that Congress made 
significant changes to the provision concerning the verification 
procedure for cable operators before it was enacted in STELA (although 
the provision concerning the verification procedure for satellite 
carriers remained unchanged).\28\
---------------------------------------------------------------------------

    \27\ As the Office stated in the Notice of Proposed Rulemaking, 
the Office included a cost-shifting provision in its regulations 
concerning the audit of Statements of Account and royalty payments 
made under section 112, section 114, and chapter 10. See 77 FR 
35649, June 14, 2012.
    \28\ See Defense Logistics Agency, 754 F.2d at 1008 (explaining 
that it would be ``unwise to place great weight'' on the legislative 
history for a prior version of a bill where the legislation ``was 
altered significantly before adoption'').
---------------------------------------------------------------------------

    AT&T contended that the cost-shifting provision would be 
unconstitutional, because it would impose ``costs on the system 
operator based on the judgment of a private party'' and it would allow 
the auditor to be ``prosecutor, judge, and jury'' if there is a dispute 
concerning the auditor's calculations.\29\ (AT&T at 7.) AT&T did not 
contend that it would be a violation of due process or the delegation 
doctrine to allow an auditor to verify the information provided in a 
Statement of Account or to use the auditor's determination as the 
appropriate baseline for curing underpayments, requesting refunds, or 
expanding the scope of the audit to include other Statements filed by 
the statutory licensee. Nor does AT&T explain why the cost-shifting 
provision

[[Page 27148]]

would be unconstitutional, while these other aspects of the regulation 
would not.
---------------------------------------------------------------------------

    \29\ In support of this argument AT&T cited two cases from the 
Great Depression, which are clearly distinguishable. In Schechter 
Poultry Corp. v. United States, 295 U.S. 495 (1935) the Supreme 
Court held the National Industrial Recovery Act of 1933 to be 
unconstitutional, because it allowed poultry producers--rather than 
the government--to establish ``codes of fair competition'' for the 
poultry industry. Likewise, in Carter v. Coal Co., 298 U.S. 238 
(1936), the Court held the Bituminous Coal Conservation Act of 1935 
to be unconstitutional, because it stated that if the companies that 
produce more than two-thirds of the nation's annual production of 
coal negotiated a labor agreement with more than half of their 
workers, then the minimum wages and maximum work hours specified in 
those contracts would be binding upon other coal mining companies. 
Unlike the laws at issue in these cases, STELA authorizes an auditor 
to confirm the correctness of the calculations and royalty payments 
reported on a particular Statement of Account, but the auditor's 
determination would not be binding upon any other statutory licensee 
or any other Statements that are not included within that audit.
---------------------------------------------------------------------------

    In any event, the cost-shifting provision is not a violation of due 
process, because inter alia, the statutory licensee would be given an 
opportunity to meet and confer with the auditor report, to identify 
errors or mistakes in the initial draft of the auditor's report, and to 
prepare a written response to the auditor's conclusions before he or 
she delivers the final report to the copyright owners. If the licensee 
disagrees with the auditor's conclusion, the licensee could ask a court 
of competent jurisdiction to review that decision, and if the court 
agrees that the underpayment did not meet the threshold set forth in 
the proposed regulation, the copyright owners would be required to 
reimburse the licensee for the amount that it contributed to the cost 
of the audit. Likewise, the proposed regulation is not a violation of 
the delegation doctrine, because STELA expressly directs the Office--
not the private industry--to develop a procedure for the verification 
of Statements of Account and royalty payments (although the Office has 
received valuable input on the proposed regulation from the Joint 
Stakeholders and other interested parties). See Sunshine Anthracite 
Coal Co. v. Adkins, 310 U.S. 381, 398 (1940) (``Since law-making is not 
entrusted to the industry, this statutory scheme is unquestionably 
valid.'').
    AT&T, the ACA, and DISH predicted that the proposed regulation 
would be unduly burdensome for the statutory licensee. The Office 
weighed these concerns, but believes that they have been adequately 
addressed in the Revised Proposal. The Office also notes that cost-
shifting provisions are commonly used in private agreements that 
provide a contractual right to audit another party's books or records, 
and the Office assumes that agreements negotiated by members of the 
copyright, cable, and satellite industries are no exception.
    AT&T, the ACA, and DISH contended that statutory licensees should 
not be required to pay for the costs of an audit, because they would 
incur significant costs in responding to an audit. They also contended 
that licensees would not be able to recover any of their costs from the 
copyright owners (even if the auditor discovered an overpayment), nor 
would they receive any financial benefit from the verification 
procedure that could be used to offset their costs.
    The cable and satellite industries receive a substantial benefit 
from the statutory licensing system, insofar as it provides a mechanism 
for licensing the public performance and display of broadcast content 
without having to negotiate with the owners of that content. Moreover, 
the Congressional Budget Office estimated that the cost of responding 
to an audit ``would be minimal,'' because the auditor would be 
verifying information that ``is already collected and maintained by 
satellite and cable carriers'' as a condition for using the statutory 
license. See H.R. Rep. No. 111-319, at 20 (2009). While the cost of 
complying with the verification procedure may be a new obligation, this 
is simply a cost of doing business under the statutory licensing 
system, much like the obligation to pay royalties and the recordkeeping 
and reporting requirements.
2. The Revised Proposal
    AT&T, the ACA, and the NCTA offered several suggestions for 
improving the cost-shifting procedure, and most of those suggestions 
have been included in the Revised Proposal. If the auditor discovers a 
net aggregate underpayment \30\ of more than 10 percent on the 
Statements of Account at issue in the audit, then the statutory 
licensee would be required to reimburse the copyright owners for the 
cost of the audit. If the licensee prepared a written response to the 
auditor's report and if the methodology set forth in that response 
indicates that there was a net aggregate underpayment between 5 percent 
and 10 percent of the amount reported on the Statements of Account, 
then the cost of the audit would be split evenly between the copyright 
owners and the licensee. However, if the net aggregate underpayment is 
less than 5 percent or if the auditor discovers an overpayment rather 
than an underpayment, then the participating copyright owner(s) would 
be required to pay for the auditor's services.
---------------------------------------------------------------------------

    \30\ This term is defined and discussed in section VIII(B) 
above.
---------------------------------------------------------------------------

    The Office did not adopt the methodology proposed by the Joint 
Stakeholders, because it may impose an unfair burden on small cable 
operators. Specifically, the Joint Stakeholders would require the 
licensee to pay for half the cost of the audit if the auditor 
discovered a net aggregate underpayment of 10 percent or less--even if 
the underpayment was as low as .001 percent of the amount reported on 
the Statements of Account. In other words, the licensee could 
potentially be required to pay a portion of the auditor's costs 
whenever there is an underpayment, regardless of the amount of that 
underpayment.
    In determining whether the minimum threshold has been met, the 
auditor would consider the total amount of royalties reported on all of 
the Statements at issue in the audit, including any overpayments or 
underpayments. This addresses the ACA's and the NCTA's concern that 
audit costs might be shifted to the statutory licensee based on a minor 
discrepancy on a single Statement of Account. If the auditor discovers 
a net aggregate underpayment in an audit of an MSO, then as discussed 
above, the copyright owners would be allowed to expand the scope of the 
audit to include other Statements filed by the systems at issue in that 
audit and/or other systems owned by that MSO. Although the expanded 
audit would be considered an extension of the initial audit, the 
licensee would not be required to pay for the cost of the expanded 
audit unless the auditor discovered a net aggregate underpayment on the 
Statements at issue in the expanded audit (even if the same auditor 
conducted both the initial audit and the expanded audit).
    Consistent with AT&T's and the NCTA's recommendation, the statutory 
licensee would not be required to pay for any portion of the auditor's 
costs that exceed the amount of the net aggregate underpayment reported 
on its Statements of Account. This would appear to address the ACA's 
request for special relief for small cable operators (although the cap 
on audit costs would apply to large and small statutory licensees 
alike). For example, if the auditor discovered net aggregate 
underpayment of $3,000 and if that amount was more than 10 percent of 
the amount reported on all of the Statements of Account at issue in the 
audit, then the licensee would be given an opportunity to amend its 
Statements of Account and to deposit $3,000 (plus any applicable 
interest on that amount) with the Office to cover the deficiency in its 
initial filings. If the auditor charged $2,500 for his or her work on 
the audit, the licensee would be required to pay another $2,500 to a 
representative of the participating copyright owners to cover the cost 
of the audit. However, if the auditor charged $3,300 for his or her 
services, then licensee would be required to pay the copyright owners 
no more than $3,000 for the cost of the audit, and the participating 
copyright owners would be expected to pay the auditor $300 to cover the 
remaining amount.
    The Office is not inclined to create a separate procedure for 
resolving disagreements over legal, regulatory, or accounting issues 
before the cost-shifting provision would be triggered (as

[[Page 27149]]

AT&T suggested). The Revised Proposal already protects statutory 
licensees by giving them an opportunity to meet and confer with the 
auditor, to identify errors or discrepancies in the initial draft of 
the auditor's report, and to prepare a written response to the 
auditor's conclusions before the auditor delivers his or her final 
report to the copyright owners. At the same time, it protects the 
interests of the copyright owners by giving the statutory licensee a 
precise deadline for reimbursing the participating copyright owners for 
the licensee's share of the audit costs.
    The Joint Stakeholders' proposal would require the auditor to 
provide the participating copyright owners and the licensee with an 
itemized statement by the 15th of each month specifying the costs 
incurred by the auditor in the preceding month. The Office agrees that 
the participating copyright owners should provide the licensee with an 
itemized statement at the conclusion of the audit specifying the total 
costs incurred by the auditor. However, requiring the auditor to 
provide monthly statements could be used as an excuse for harassing the 
auditor and interfering with his or her conduct of the audit. The 
participating copyright owners could agree to provide the licensee with 
copies of the auditor's billing statements in the auditor's engagement 
letter or in a side agreement with the licensee, but the Office is not 
inclined to require this type of micro-management in the regulation.
    As discussed above, the amount of underpayments and overpayments 
that may be discovered in an audit may vary depending on the size of 
the statutory licensee, the amount of its royalty obligations, and the 
accuracy of its accounting procedures. Therefore, the Office is not 
inclined to specify a minimum dollar amount that would be needed to 
shift costs from the copyright owners to the statutory licensee (as 
AT&T and the ACA suggested).
    AT&T and DISH worried that the cost-shifting provision would 
encourage the auditor to look for discrepancies even where they do not 
exist. This does not appear to be a valid concern, because the auditor 
would not be entitled to collect a contingency fee based on the results 
of the audit. Instead, the auditor would be paid a flat fee or an 
hourly rate regardless of whether he or she discovers an underpayment 
or an overpayment on the Statements of Account. Moreover, the 
requirement that the auditor be a qualified and an independent 
certified public accountant subject to the Code of Professional Conduct 
of the American Institute of Certified Public Accountants should 
diminish significantly any concerns that the auditor would perform 
unnecessary procedures beyond those needed to conduct an accurate and 
thorough audit.
    AT&T contended that the copyright owners should be required to 
reimburse the licensee for the costs that it incurred in responding to 
the audit if the auditor discovers an overpayment on a Statement of 
Account. The Office is not inclined to accept this proposal, because as 
discussed above, the Congressional Budget Office has estimated that the 
cost of responding to an audit request would be minimal. Moreover, the 
Revised Proposal contains a number of provisions that should deter 
copyright owners from abusing the verification procedure, such as the 
limit on the number of audits that may be conducted per year, the limit 
on the topics that the auditor may review, and the fact that the 
copyright owners would be required to pay for the entire cost of the 
audit if the auditor discovers that the licensee overpaid rather than 
underpaid.
    AT&T also predicted that the cost-shifting provision would 
discourage the licensee from curing its underpayment, because making a 
supplemental payment could be viewed as a concession that the licensee 
failed to report the correct amount on its Statement of Account. That 
is a non sequitur. The Revised Proposal states that if the auditor 
discovers an underpayment on a Statement of Account, the licensee 
``may'' cure that underpayment by submitting additional royalty 
payments, although the licensee is not required to do so.\31\ Thus, the 
fact that the licensee may be required to reimburse the copyright 
owners for the cost of the audit would not appear to be an admission of 
liability, particularly if the licensee prepares a written response 
expressing its disagreement with the auditor's conclusions and declines 
to amend its Statement of Account or submit any supplemental payments 
within the time allowed.
---------------------------------------------------------------------------

    \31\ Both the Notice of Proposed Rulemaking and the Joint 
Stakeholders' proposal took this same approach.
---------------------------------------------------------------------------

    Finally, AT&T stated that the licensee should not be required to 
pay for the cost of the audit unless a court determines that the 
licensee failed to report the correct amount on its Statement of 
Account.\32\ The Office believes that the Revised Proposal strikes a 
more appropriate balance between the interests of the participating 
copyright owners and the statutory licensees. If the auditor determines 
that the licensee failed to pay and report the correct amount on its 
Statements of Account and if the underpayment was more than 10 percent 
of the total amount reported on those Statements, then the licensee 
would be required to pay for the cost of the audit. If the licensee 
disagrees with that assessment, the licensee could seek a declaratory 
judgment of non-infringement and an order directing the copyright 
owners to reimburse the licensee for the cost of the audit. Conversely, 
if the auditor determines that the licensee failed to pay the correct 
amount and if the licensee fails to deposit any additional royalties 
with the Office within the time allowed, the copyright owners could 
file an infringement action seeking damages and an injunction. In other 
words, both parties would need to take legal action at the conclusion 
of the audit if the other party disagrees with the auditor's 
conclusions, and the prevailing party in that dispute would be 
reimbursed under the Revised Proposal, regardless of whether the case 
is filed by the copyright owners or the licensee.
---------------------------------------------------------------------------

    \32\ The Office's regulation on digital audio recording devices 
is the only procedure that specifically requires a ``judicial 
determination'' in order to shift costs from the copyright owners to 
the statutory licensee. See 37 CFR 201.30(i). The regulation on 
ephemeral recordings and the digital transmission of sound 
recordings states that the cost of the audit should be paid by the 
licensee if an independent auditor concludes that there was an 
underpayment of 5 percent or more. See 37 CFR. 260.5(f); 260.6(f). 
The rest of the regulations state that the costs should be shifted 
if it is ``finally determined that there was an underpayment,'' 
without specifying whether the determination should be made by the 
auditor or in a judicial proceeding. See 37 CFR 261.6(g); 261.7(g); 
262.6(g); 262.7(g).
---------------------------------------------------------------------------

XII. Confidentiality

A. Comments

    The Notice of Proposed Rulemaking explained that the auditor should 
be permitted to review confidential information in the course of the 
verification procedure, and that the auditor should be permitted to 
share that information with his or her employees, agents, consultants, 
and independent contractors, provided that they are not employees, 
officers, or agents of a copyright owner, and provided that those 
individuals enter into an appropriate confidentiality agreement 
governing their use of that material. See 77 FR 35650, June 14, 2012.
    AT&T and the NCTA contended that these restrictions are 
insufficient. Specifically, the NCTA stated that if the auditor 
includes any supporting documentation in his or her final report to the 
copyright owners, that information should be presented in a separate 
appendix and it should be redacted to protect any confidential

[[Page 27150]]

information contained therein. (NCTA at 11-12.) AT&T contended that the 
auditor should be required to enter into a confidentiality agreement 
with the statutory licensee, and that an auditor who breaches his or 
her obligations under that agreement should be subject to monetary 
damages and injunctive relief and should be barred from conducting any 
additional audits for at least three years. AT&T agreed that the 
copyright owners should not be given access to any confidential 
information, but it contended that this prohibition should also apply 
to the copyright owners' affiliates as well as the employees, officers, 
and agents of any other statutory licensee that retransmits broadcast 
programming under sections 111 or 119. (AT&T at 10.) The Copyright 
Owners generally agreed that any party that is owned or controlled by 
another statutory licensee should not be permitted to review 
confidential information that may be produced during the course of an 
audit. (Copyright Owners at 10.)

B. Discussion

    The Revised Proposal explains that access to confidential 
information should be limited to the auditor who conducts the 
verification procedure and a discrete class of persons who are listed 
in paragraph (m)(2)(ii) of the regulation. Specifically, the auditor 
would be allowed to share confidential information with his or her 
employees, agents, consultants, and independent contractors who need 
access to the information in order to perform their duties in 
connection with the audit. In addition, the auditor would be allowed to 
share confidential information with outside counsel for the 
participating copyright owners (including any third party consultants 
retained by outside counsel). Neither the auditor nor the auditor's 
employees, agents, consultants, and independent contractors could be 
employees, officers, or agents of a copyright owner for any purpose 
other than the audit, and any other person who receives confidential 
information during the course of an audit would have to implement 
procedures to safeguard that information.
    If the auditor includes any supporting documentation in his or her 
final report to the copyright owners, the auditor would have to redact 
any confidential information contained therein, because the auditor is 
never allowed to share confidential information with the copyright 
owners. However, the auditor could provide an unredacted copy of the 
report to outside counsel for the participating copyright owners. 
Likewise, the auditor would not be allowed to share confidential 
information with the copyright owners' affiliates or with the 
employees, officers, and agents of any other statutory licensee, 
because those parties are not expressly mentioned in the class of 
persons who may be given access to confidential information under 
paragraph (m)(2) of the Revised Proposal.
    While outside counsel and the auditor's employees, agents, 
consultants, and independent contractors would be required to enter 
into an appropriate confidentiality agreement governing the use of the 
confidential information, the auditor would not be subject to the same 
requirement (as AT&T suggested). The Office does not believe that this 
is necessary given that the rules of professional conduct for certified 
public accountants already prohibit the disclosure of confidential 
information.

XIII. Conclusion

    The Office seeks comment from the public on the subjects discussed 
above related to the implementation of the audit provisions adopted by 
Congress with the passage of the Satellite Television Extension and 
Localism Act of 2010.

List of Subjects in 37 CFR Part 201

    Copyright, General Provisions.

Proposed Regulation

    In consideration of the foregoing, the Copyright Office proposes to 
amend part 201 of 37 CFR, Chapter II, as follows:

PART 201--GENERAL PROVISIONS [AMENDED]

0
1. The authority citation for this part reads as follows:

    Authority:  17 U.S.C. 702, 17 U.S.C. 111(d)(6), and 17 U.S.C. 
119(b)(2).

0
2. Add Sec.  201.16 to read as follows:


Sec.  201.16  Verification of a Statement of Account and royalty fee 
payments for secondary transmissions made by cable systems and 
satellite carriers.

    (a) General. This section prescribes general rules pertaining to 
the verification of a Statement of Account and royalty fees filed with 
the Copyright Office pursuant to sections 111(d)(1) and 119(b)(1) of 
title 17 of the United States Code, as amended by Public Law 111-175.
    (b) Definitions.
    (1) The term cable system has the meaning set forth in Sec.  
201.17(b)(2) of this part.
    (2) MSO means an entity that owns, controls, or operates more than 
one cable system.
    (3) Copyright owner means any person or entity that owns the 
copyright in a work embodied in a secondary transmission made by a 
statutory licensee that filed a Statement of Account with the Copyright 
Office for an accounting period beginning on or after January 1, 2010, 
or a designated agent or representative of such person or entity.
    (4) Generally accepted auditing standards (GAAS) means the auditing 
standards promulgated by the American Institute of Certified Public 
Accountants (AICPA).
    (5) Net aggregate underpayment means the aggregate amount of 
underpayments found by the auditor less the aggregate amount of any 
overpayments found by the auditor, as measured against the total amount 
of royalties reflected on the Statements of Account examined by the 
auditor.
    (6) Participating copyright owner means a copyright owner that has 
filed a notice of intent to audit a particular Statement of Account 
pursuant to paragraph (c) of this section and any other copyright owner 
that has given notice of its intent to participate in such audit 
pursuant to paragraph (d) of this section.
    (7) The term satellite carrier has the meaning set forth in section 
119(d)(6) of title 17 of the United States Code.
    (8) The term secondary transmission has the meaning set forth in 
section 111(f)(2) of title 17 of the United States Code, as amended by 
Public Law 111-175.
    (9) Statement of Account or Statement means a semiannual Statement 
of Account filed with the Copyright Office under section 111(d)(1) or 
119(b)(1) of title 17 of the United States Code, as amended by Public 
Law 111-175, or an amended Statement of Account filed with the Office 
pursuant to Sec. Sec.  201.11(h) or 201.17(m) of this part.
    (10) Statutory licensee or licensee means a cable system or 
satellite carrier that filed a Statement of Account with the Office 
under section 111(d)(1) or 119(b)(1) of title 17 of the United States 
Code, as amended by Public Law 111-175.
    (c) Notice of intent to audit. Any copyright owner that intends to 
audit a Statement of Account for an accounting period beginning on or 
after January 1, 2010 must notify the Register of Copyrights no later 
than three years after the last day of the year in which the Statement 
was filed with the Office. The notice of intent to audit may be filed 
by a copyright owner or a

[[Page 27151]]

designated agent that represents a group or multiple groups of 
copyright owners. The notice shall identify the statutory licensee that 
filed the Statement(s) with the Copyright Office, the Statement(s) and 
accounting period(s) that will be subject to the audit, and the party 
that filed the notice, including its name, address, telephone number, 
facsimile number, and email address, if any. In addition, the notice 
shall include a statement that the party owns, or represents one or 
more copyright owners who own, a work that was embodied in a secondary 
transmission made by the statutory licensee during one or more of the 
accounting period(s) specified in the Statement(s) of Account that will 
be subject to the audit. The notice of intent to audit shall be served 
on the statutory licensee on the same day that the notice is filed with 
the Copyright Office. Within 30 days after the notice has been received 
in the Office, the Office will publish a notice in the Federal Register 
announcing the receipt of the notice of intent to audit.
    (d) Participation by other copyright owners. Within 30 days after a 
notice of intent to audit a Statement of Account is published in the 
Federal Register pursuant to paragraph (c) of this section, any other 
copyright owner who owns a work that was embodied in a secondary 
transmission made by that statutory licensee during an accounting 
period covered by the Statement(s) of Account referenced in the Federal 
Register notice and who wishes to participate in the audit of such 
Statement(s) must give written notice of such participation to the 
statutory licensee and to the party that filed the notice of intent to 
audit. The notice given pursuant to this paragraph may be filed by a 
copyright owner or a designated agent that represents a group or 
multiple groups of copyright owners, and it shall include all of the 
information specified in paragraph (c) of this section.
    (e) Selection of the auditor and communications with auditor during 
the course of the audit. (1) The participating copyright owner(s) shall 
provide to the statutory licensee a list of three independent and 
qualified auditors, along with information reasonably sufficient for 
the statutory licensee to evaluate the proposed auditors' independence 
and qualifications including:
    (i) The auditor's curriculum vitae and a list of audits that the 
auditor has conducted pursuant to section 111(d)(6) or 119(b)(2) of 
title 17 of the United States Code;
    (ii) A list and, subject to any confidentiality or other legal 
restrictions, a brief description of any other work the auditor has 
performed for any of the participating copyright owners during the 
prior two calendar years;
    (iii) A list identifying the participating copyright owners for 
whom the auditor's firm has been engaged during the prior two calendar 
years; and,
    (iv) A copy of the engagement letter that would govern the 
auditor's performance of the audit and that provides for the auditor to 
be compensated on a non-contingent flat fee or hourly basis that does 
not take into account the results of the audit.
    (2) The statutory licensee shall select one of the proposed 
auditors within five business days of receiving the list of auditors 
from the participating copyright owners. That auditor shall conduct the 
audit on behalf of all copyright owners who own a work that was 
embodied in a secondary transmission made by the statutory licensee 
during the accounting period(s) specified in the Statement(s) of 
Account identified in the notice of intent to audit.
    (3) The auditor shall be qualified and independent as defined in 
this section. An auditor shall be considered qualified and independent 
if:
    (i) He or she is a certified public accountant and a member in good 
standing with the AICPA and the licensing authority for the 
jurisdiction(s) where the auditor is licensed to practice;
    (ii) He or she is not, for any purpose other than the audit, an 
officer, employee, or agent of any participating copyright owner;
    (iii) He or she is independent as that term is used in the Code of 
Professional Conduct of the AICPA, including the Principles, Rules, and 
Interpretations of such Code applicable generally to attest 
engagements; and
    (iv) He or she is independent as that term is used in the 
Statements on Auditing Standards promulgated by the Auditing Standards 
Board of the AICPA and Interpretations thereof issued by the Auditing 
Standards Division of the AICPA.
    (4) Following the selection of the auditor and until the 
distribution of the auditor's report to the participating copyright 
owner(s) pursuant to paragraph (h) of this section, there may be no ex 
parte communications regarding the audit between the selected auditor 
and the participating copyright owner(s) or their representatives 
provided, however, that the auditor may engage in such ex parte 
communications where either:
    (i) The auditor has a reasonable basis to suspect fraud and that 
participation by the statutory licensee in communications regarding the 
suspected fraud would, in the reasonable opinion of the auditor, 
prejudice the investigation of such suspected fraud; or
    (ii) The auditor provides the licensee with a reasonable 
opportunity to participate in communications with the participating 
copyright owner(s) or their representatives and the licensee declines 
to do so.
    (5) Following the selection of the auditor and until 30 days after 
the distribution of the auditor's report to the participating copyright 
owner(s) and the statutory licensee pursuant to paragraph (h) of this 
section, the participating copyright owners may not propose a list of 
auditors to conduct an audit involving any other Statement of Account 
filed by the licensee.
    (f) Scope of the audit. The auditor shall have exclusive authority 
to verify all of the information reported on the Statements of Account 
subject to the audit in order to confirm the correctness of the 
calculations and royalty payments reported therein; provided, however, 
that the auditor shall not determine whether any cable system properly 
classified any broadcast signal as required by Sec.  201.17(e)(9)(iv) 
and (v) and (h) of this part or whether a satellite carrier properly 
determined that any subscriber or group of subscribers is eligible to 
receive any broadcast signals under section 119(a) of title 17 of the 
United States Code, as amended by Public Law 111-175. The auditor may 
verify the carriage of the broadcast signals on each Statement of 
Account after reviewing the certified list of broadcast signals 
provided by the statutory licensee pursuant to paragraph (g)(1) of this 
section. The audit shall be performed in accordance with GAAS and with 
consideration given to minimizing the costs and burdens associated with 
the audit.
    (g) Obligations of the Statutory Licensee. (1) Within 30 days of 
the auditor's selection by the statutory licensee pursuant to paragraph 
(e)(2) of this section, the licensee shall provide the auditor and a 
representative of the participating copyright owner(s) with a certified 
list of all broadcast signals retransmitted pursuant to the statutory 
license in each community covered by each of the Statements of Account 
subject to the audit, including the call sign for each broadcast signal 
and each multicast signal. In the case of an audit involving a cable 
system or MSO, the list must include the classification of each signal 
on a community by community basis pursuant to

[[Page 27152]]

Sec.  201.17(e)(9)(iv) and (v) and (h) of this chapter.
    (2) The statutory licensee shall provide the auditor with 
reasonable access to the licensee's books and records and any other 
information that, consistent with GAAS, the auditor needs in order to 
conduct his or her audit, and the statutory licensee shall provide the 
auditor with any information the auditor reasonably requests promptly 
after receiving such a request.
    (3) The audit will be conducted during regular business hours at a 
location designated by the statutory licensee. If the auditor and 
statutory licensee agree, the audit may be conducted in whole or in 
part by means of electronic communication.
    (4) The statutory licensee may suspend the audit within 30 days 
before the semi-annual due dates for filing Statements of Account by 
providing prompt written notice to the participating copyright owner(s) 
and the auditor; provided, however, that audit may be suspended for no 
more than 30 days, the licensee may not exercise this option if the 
auditor has delivered his or her report to the statutory licensee 
pursuant to paragraph (h)(1) of this section, and if the participating 
copyright owner(s) notify the licensee within 10 days of receiving the 
notice of suspension of their good faith belief that suspension of the 
audit could prevent the auditor from delivering his or her final report 
to the participating copyright owner(s) before the statute of 
limitations expires on any claims under the Copyright Act related to a 
Statement of Account covered by that audit, the statutory licensee may 
not suspend the audit unless it first executes a tolling agreement to 
extend the statute of limitations by a period of time equal to the 
period of time during which the audit would be suspended.
    (h) Audit report. (1) Upon completion of the audit, the auditor 
shall prepare a written report setting forth his or her findings and 
conclusions. Prior to delivering the report to any participating 
copyright owner, the auditor shall deliver a copy of that report to the 
statutory licensee and consult with a designee of the licensee 
regarding the findings and conclusions set forth in the report for a 
period not to exceed 30 days. However, if the auditor has a reasonable 
basis to suspect fraud and that disclosure would, in the reasonable 
opinion of the auditor, prejudice investigation of such suspected 
fraud, the auditor may deliver a copy of the report to the 
participating copyright owner(s) and an abridged copy to the licensee 
that omits the auditor's allegation that the licensee has committed 
fraud.
    (2) If, upon consulting with the licensee, the auditor agrees that 
there are errors in the report, the auditor shall correct those errors 
before delivering the report to the participating copyright owner(s). 
If the statutory licensee disagrees with any of the findings or 
conclusions set forth in the report, the licensee may provide the 
auditor with a written explanation of its good faith objections within 
14 days after the last day of the consultation period.
    (3) Within five business days following the last date on which the 
statutory licensee may provide the auditor with a written response to 
the report pursuant to paragraph (h)(2) of this section, and subject to 
the confidentiality provisions set forth in paragraph (m) of this 
section, the auditor shall deliver a final report to the participating 
copyright owner(s) and to the statutory licensee, along with a copy of 
the statutory licensee's written response (if any). A representative of 
the participating copyright owners shall promptly notify the Office 
that the audit has been completed and shall state whether the auditor 
discovered an overpayment on any of the Statements of Account at issue 
in the audit.
    (i) Corrections, supplemental payments, and refund. (1) Where the 
final auditor's report concludes that any of the information reported 
on a Statement of Account is incorrect or incomplete, that the 
calculation of the royalty fee payable for a particular accounting 
period was incorrect, or that the amount deposited in the Copyright 
Office for that period was too low, a statutory licensee may, within 60 
days of the delivery of the final report to the participating copyright 
owners and the statutory licensee, or within 90 days of the delivery of 
such report in the case of an audit of an MSO, cure such incorrect or 
incomplete information or underpayment by filing an amendment to the 
Statement of Account and by depositing supplemental royalty fee 
payments utilizing the procedures set forth in Sec.  201.11(h) or Sec.  
201.17(m) of this chapter.
    (2) Notwithstanding Sec. Sec.  201.17(m)(3)(i) and 201.11(h)(3)(i) 
of this chapter, where the final report reveals an overpayment by the 
statutory licensee for a particular Statement of Account, the licensee 
may request a refund of such overpayments within 30 days of the 
delivery of the final report to the participating copyright owners and 
the licensee by utilizing the procedures set forth in Sec.  
201.11(h)(3) or Sec.  201.17(m)(3) of this chapter.
    (j) Costs of the audit. (1) Except as provided in this paragraph, 
the participating copyright owner(s) shall pay for the full costs of 
the auditor. If the auditor concludes that there was a net aggregate 
underpayment of more than 10 percent on the Statements of Account at 
issue in an audit or an expanded audit, the statutory licensee shall 
pay the auditor's costs associated with that audit. If the statutory 
licensee provides the auditor with a written explanation of its good 
faith objections to the auditor's report pursuant to paragraph (h)(2) 
of this section and the net aggregate underpayment made by the 
statutory licensee on the basis of that explanation is not more than 10 
percent and not less than 5 percent, the costs of the auditor shall be 
split evenly between the statutory licensee and the participating 
copyright owner(s); provided, however, that if a court, in a final 
judgment (i.e., after all appeals have been exhausted) concludes there 
was a net aggregate underpayment exceeding 10 percent, the statutory 
licensee shall, subject to paragraph (j)(3) of this section, reimburse 
the participating copyright owner(s), within 60 days of that final 
judgment, for any costs of the auditor that the participating copyright 
owners have paid.
    (2) If a statutory licensee is responsible for any portion of the 
costs of the auditor, a representative of the participating copyright 
owner(s) will provide the statutory licensee with an itemized 
accounting of the auditor's total costs and the statutory licensee 
shall reimburse such representative for the appropriate share of those 
costs within 30 days of the statutory licensee's payment of 
supplemental royalties (if applicable) or within 90 days of the 
delivery to the participating copyright owners and the statutory 
licensee of the final report, whichever is later. Notwithstanding the 
foregoing, if a court, in a final judgment (i.e., after all appeals 
have been exhausted) concludes that the statutory licensee's net 
aggregate underpayment, if any, was 10 percent or less, the 
participating copyright owner(s) shall reimburse the licensee, within 
60 days of the final judgment, for any costs of the auditor that the 
licensee has paid.
    (3) No portion of the auditor's costs that exceed the amount of the 
net aggregate underpayment may be recovered from the statutory 
licensee.
    (k) Frequency of verification. (1) Except as provided in paragraph 
(k)(3) of this section, no cable system, MSO, or satellite carrier 
shall be subject to more than one audit per calendar year and the audit 
of a particular cable

[[Page 27153]]

system or satellite carrier shall include no more than two of the 
Statements of Account from the previous six accounting periods 
submitted by that cable system or satellite carrier.
    (2) Once a notice of intent to audit a Statement of Account has 
been received by the Office, a notice of intent to audit that same 
Statement will not be accepted for publication in the Federal Register.
    (3) If the final auditor's report concludes that there has been a 
net aggregate underpayment of five percent or more on the audited 
Statements of Account of a particular cable system or satellite 
carrier, the participating copyright owners may audit all of the 
Statements of Account filed by that particular cable system or 
satellite carrier during the previous six accounting periods by 
complying with the procedures set forth in paragraphs (c) and (d) of 
this section. The expanded audit may be conducted by the same auditor 
that performed the initial audit, provided that the participating 
copyright owner(s) provide the statutory licensee with updated 
information reasonably sufficient to allow the licensee to determine 
that there has been no material change in the auditor's independence 
and qualifications. In the alternative, the expanded audit may be 
conducted by an auditor selected by the licensee pursuant to the 
procedures set forth in paragraph (e) of this section.
    (4) An audit of an MSO shall be limited to a sample of no more than 
10 percent of the MSO's Form 3 cable systems and no more than 10 
percent of the MSO's Form 2 systems, except that if the auditor 
concludes that there was a net aggregate underpayment of five percent 
or more on the Statements of Account at issue in an audit:
    (i) The number of Statements of Account of a particular cable 
system subject to audit in a calendar year may be expanded in 
accordance with paragraph (k)(3) of this section; and
    (ii) The sample of cable systems that may be audited in a calendar 
year may be expanded in the following calendar year to include a sample 
of 30 percent of the MSO's Form 3 cable systems and 30 percent of the 
MSO's Form 2 cable systems.
    (l) Retention of records. For each Statement of Account that a 
statutory licensee files with the Copyright Office for accounting 
periods beginning on or after January 1, 2010, the statutory licensee 
shall maintain all records necessary to confirm the correctness of the 
calculations and royalty payments reported in each Statement for at 
least three and one-half years after the last day of the year in which 
that Statement or an amendment of that Statement was filed with the 
Office and, in the event that such Statement or amendment is the 
subject of an audit conducted pursuant to this section, for three years 
after the auditor delivers the final report to the participating 
copyright owner(s) and the statutory licensee.
    (m) Confidentiality. (1) For purposes of this section, confidential 
information shall include any non-public financial or business 
information pertaining to a Statement of Account that has been 
subjected to an audit under section 111(d)(6) or 119(b)(2) of title 17 
of the United States Code, as amended by Public Law 111-175.
    (2) Access to confidential information under this section shall be 
limited to:
    (i) The auditor; and
    (ii) Subject to executing a reasonable confidentiality agreement, 
outside counsel for the participating copyright owners and any third 
party consultants retained by outside counsel, and any employees, 
agents, consultants, or independent contractors of the auditor who are 
not employees, officers, or agents of a participating copyright owner 
for any purpose other than the audit, who are engaged in the audit of a 
Statement of Account or activities directly related hereto, and who 
require access to the confidential information for the purpose of 
performing such duties during the ordinary course of their employment;
    (3) The auditor and any person identified in paragraph (m)(2)(ii) 
of this section shall implement procedures to safeguard all 
confidential information received from any third party in connection 
with an audit, using a reasonable standard of care, but no less than 
the same degree of security used to protect confidential financial and 
business information or similarly sensitive information belonging to 
the auditor or such person.

    Dated: May 2, 2013.
Maria A. Pallante,
Register of Copyrights.
[FR Doc. 2013-11020 Filed 5-8-13; 8:45 am]
BILLING CODE 1410-30-P