Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Deliveries, 40802-40813 [E8-16165]

Agencies

• Library of Congress
• Copyright Office

[Federal Register Volume 73, Number 137 (Wednesday, July 16, 2008)]
[Proposed Rules]
[Pages 40802-40813]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16165]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201 and 255

[Docket No. RM 2000-7]


Compulsory License for Making and Distributing Phonorecords, 
Including Digital Phonorecord Deliveries

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Copyright Office of the Library of Congress is proposing 
to amend its regulations to clarify the scope and application of the 
Section 115 compulsory license to make and distribute phonorecords of a 
musical

[[Page 40803]]

work by means of digital phonorecord deliveries.

DATES: Written comments must be received in the Office of the General 
Counsel of the Copyright Office no later than August 15, 2008. Reply 
comments must be received in the Office of the General Counsel of the 
Copyright Office no later than September 2, 2008.

ADDRESSES: If hand delivered by a private party, an original and five 
copies of a comment or reply comment should be brought to the Library 
of Congress, U.S. Copyright Office, Room 401, 101 Independence Avenue, 
SE, Washington, DC 20559, between 8:30 a.m. and 5 p.m. The envelope 
should be addressed as follows: Office of the General Counsel, U.S. 
Copyright Office. If delivered by a commercial courier, an original and 
five copies of a comment or reply comment must be delivered to the 
Congressional Courier Acceptance Site (``CCAS'') located at 2nd and D 
Streets, NE, Washington, DC between 8:30 a.m. and 4 p.m. The envelope 
should be addressed as follows: Office of the General Counsel, U.S. 
Copyright Office, LM 403, James Madison Building, 101 Independence 
Avenue, SE, Washington, DC 20559. Please note that CCAS will not accept 
delivery by means of overnight delivery services such as Federal 
Express, United Parcel Service or DHL. If sent by mail (including 
overnight delivery using U.S. Postal Service Express Mail), an original 
and five copies of a comment or reply comment should be addressed to 
U.S. Copyright Office, Copyright GC/I&R, P.O. Box 70400, Washington, DC 
20024.

FOR FURTHER INFORMATION CONTACT: Tanya M. Sandros, General Counsel, or 
Stephen Ruwe, Attorney Advisor, Copyright GC/I&R, P.O. Box 70400, 
Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202)-707-
8366.

SUPPLEMENTARY INFORMATION:

Background.

    The copyright laws of the United States grant certain rights to 
copyright owners for the protection of their works of authorship. Among 
these rights are the right to make, and to authorize others to make, a 
reproduction of the copyrighted work, and the right to distribute, and 
to authorize others to distribute, the copyrighted work. 17 U.S.C. 
106(1) and (3). Both the reproduction right and the distribution right 
granted to a copyright owner inhere in all works of authorship and are, 
for the most part, exclusive rights. However, for nondramatic musical 
works, the exclusivity of the reproduction right and distribution right 
are limited by the nonexclusive compulsory license set forth in Section 
115 of Title 17, which allows third parties to make and distribute 
phonorecords of nondramatic musical works.
    The Section 115 compulsory license can be invoked once a 
nondramatic musical work embodied in a phonorecord has been distributed 
``to the public in the United States under the authority of the 
copyright owner.'' 17 U.S.C. 115(a)(1). Unless and until such an act 
occurs, the copyright owner's reproduction and distribution rights 
remain exclusive, and the compulsory license does not apply. Once 
distribution has occurred, the license permits anyone to make and 
distribute phonorecords of the musical work provided that they comply 
with all of the terms and conditions of Section 115. It is important to 
note that the compulsory license only permits the making and 
distribution of phonorecords of a musical work, and does not permit the 
use of a sound recording created by someone else. The compulsory 
licensee must either assemble his own musicians, singers, recording 
engineers and equipment to make a cover recording or obtain permission 
to use a preexisting sound recording before making a phonorecord that 
includes that sound recording. One who obtains permission to use 
another's sound recording is eligible to use the compulsory license to 
clear the rights for use of the musical work embodied in the sound 
recording.
    The compulsory license was the first statutory license in U.S. 
copyright law, having its origin in the 1909 Copyright Act. It operated 
successfully for many years, and it continued under the 1976 Copyright 
Act with some modifications. However, in 1995, Congress passed the 
Digital Performance Right in Sound Recordings Act (``DPSRA''), Pub. L. 
No. 104-39, 109 Stat. 336, which amended Sections 114 and 115 of Title 
17 to take into account technological changes which enable digital 
transmissions of sound recordings on a large scale. With respect to 
Section 115, the DPSRA expanded the scope of the compulsory license to 
include the right to distribute or authorize the distribution of a 
phonorecord by means of a ``digital phonorecord delivery.'' 17 U.S.C. 
115(c)(3)(A).
    For purposes of Section 115, a ``digital phonorecord delivery,'' is 
defined as ``each individual delivery of a phonorecord by digital 
transmission of a sound recording which results in a specifically 
identifiable reproduction by or for any transmission recipient of a 
phonorecord of that sound recording, regardless of whether the digital 
transmission is also a public performance of the sound recording or any 
nondramatic musical work embodied therein. A digital phonorecord 
delivery does not result from a real-time, non-interactive subscription 
transmission of a sound recording where no reproduction of the sound 
recording or the musical work embodied therein is made from the 
inception of the transmission through to its receipt by the 
transmission recipient in order to make the sound recording audible.'' 
17 U.S.C. 115(d).
    As a result of the DPSRA, the Section 115 license applies to two 
kinds of disseminations of nondramatic musical works: 1) the 
traditional making and distribution of physical phonorecords; and 2) 
digital phonorecord deliveries, commonly referred to as DPDs. However, 
in including DPDs within Section 115, Congress directed that rates and 
terms for DPDs should distinguish between ``(i) digital phonorecord 
deliveries where the reproduction or distribution of a phonorecord is 
incidental to the transmission which constitutes the digital 
phonorecord delivery, and (ii) digital phonorecord deliveries in 
general.'' 17 U.S.C. 115(c)(3)(D). This language has led to endless 
debates as to what constitutes an ``incidental DPD.''
    As required by the DPSRA, in 1996 the Library of Congress initiated 
a Copyright Arbitration Royalty Panel (``CARP'') proceeding to adjust 
the royalty rates for DPDs and incidental DPDs. 61 FR 37213 (July 17, 
1996). The parties to the proceeding avoided arbitration by reaching a 
settlement as to new rates for DPDs and the time periods for conducting 
future rate adjustment proceedings for DPDs. The parties could not 
reach agreement, however, on new rates for incidental DPDs because the 
representatives of both copyright owners and users of the Section 115 
license could not agree as to what was, and what was not, an incidental 
DPD. The resolution of this impasse was to defer establishing rates for 
incidental DPDs until the next scheduled rate adjustment proceeding.
    The Librarian of Congress accepted the settlement agreement of the 
parties and adopted new regulations setting rates for DPDs and a 
timeframe for future rate adjustments. 64 FR 6221 (February 9, 1999). 
Section 255.5 of 37 CFR specified royalty rates for DPDs ``in 
general,'' while Sec.  255.6 of the rules expressly deferred 
consideration of incidental DPDs. The time table for future rate 
adjustment proceedings for general DPDs and incidental DPDs was set 
forth in Section 255.7 and provided

[[Page 40804]]

for proceedings at two-year intervals upon the filing of a petition by 
an interested party. The year 2000 was a window year for the filing of 
such petitions.
    In accordance with this timetable, the Copyright Office received on 
November 22, 2000, a pleading from the Recording Industry Association 
of America (``RIAA'') styled as a ``Petition for Rulemaking and to 
Convene a Copyright Arbitration Royalty Panel If Necessary.'' The RIAA 
petition asked the Office to conduct a rulemaking proceeding to address 
the issue of what types of digital transmissions of prerecorded music 
are general DPDs, and what types are incidental DPDs. Specifically, 
RIAA asked the Office to determine the status of two methods used to 
deliver music digitally, On-Demand Streams and Limited Downloads, and 
whether and to what extent they come within the scope of the Section 
115 license.
    For purposes of the proposed rulemaking, RIAA characterized an 
``On-Demand Stream'' as a ``on-demand, real-time transmission using 
streaming technology such as Real Audio, which permits users to listen 
to the music they want when they want and as it is transmitted to 
them,'' and a ``Limited Download'' as an ``on-demand transmission of a 
time-limited or other use-limited (i.e. non-permanent) download to a 
local storage device (e.g. the hard drive of the user's computer), 
using technology that causes the downloaded file to be available for 
listening only either during a limited time (e.g. a time certain or a 
time tied to ongoing subscription payments) or for a limited number of 
times.'' RIAA petition at 1.
    RIAA steadfastly maintained that a rulemaking is necessary to 
determine the status of these two types of digital music delivery 
systems because the record companies and music publishers could not 
agree how to categorize them for purposes of the Section 115 license. 
RIAA stated its opinion that On-Demand Streams are more in the nature 
of an incidental DPD, for which there are currently no established 
royalty rates, whereas music publishers have taken the position that 
On-Demand Streams include the making of a general DPD for which they 
are entitled to full compensation. Consequently, RIAA asked the Office 
to determine whether On-Demand Streams are incidental DPDs and, if they 
were, to convene a CARP to set rates for these incidental DPDs.
    With respect to Limited Downloads, RIAA suggested that they may be 
either (1) incidental DPDs or (2) more in the nature of record rentals, 
leases or lendings. The latter approach is based upon the provision in 
the Section 115 license which authorizes the maker of a phonorecord to 
rent, lease or lend it, provided that a royalty fee is paid.
    Specifically, the statute states:
     A compulsory license under this section includes the right of 
the maker of a phonorecord of a nondramatic musical work ... to 
distribute or authorize distribution of such phonorecord by rental, 
lease, or lending (or by acts or practices in the nature of rental, 
lease, or lending). In addition to any royalty payable under clause 
(2) and chapter 8 of this title, a royalty shall be payable by the 
compulsory licensee for every act of distribution of a phonorecord 
by or in the nature of rental, lease, or lending, by or under the 
authority of the compulsory licensee. With respect to each 
nondramatic musical work embodied in the phonorecord, the royalty 
shall be a proportion of the revenue received by the compulsory 
licensee from every such act of distribution of the phonorecord 
under this clause equal to the proportion of the revenue received by 
the compulsory licensee from distribution of the phonorecord under 
clause (2) that is payable by a compulsory licensee under that 
clause and under chapter 8. The Register of Copyrights shall issue 
regulations to carry out the purpose of this clause.
17 U.S.C. 115(c)(4). RIAA noted that the Copyright Office has yet to 
adopt such regulations.
    This provision was added to Section 115 in the Record Rental 
Amendment of 1984, Pub. L. No. 98-450, which also amended the first 
sale doctrine codified in section 109 to restrict the owner of a 
phonorecord from disposing of the phonorecord for direct or indirect 
commercial advantage by rental, lease or lending without authorization 
of the sound recording copyright owner. The legislative history of the 
amendment to Section 115 states that the amendment was made to 
emphasize ``that the right of authorization accorded to copyright 
owners of recorded musical works under revised section 109(a) is 
subject to compulsory licensing under revised Section 115'' and that it 
gives the copyright owner of a nondramatic musical work recorded under 
a compulsory license the right to a share of the royalties for rental 
received by a compulsory licensee (a record company) in proportion 
equal to that received for distribution under Section 115(c)(2). H.R. 
Rep. No. 98-987, at 5 (1984).
    The Office was to issue appropriate regulations relating to the 
royalty for rental, lease or lending ``as and when necessary to carry 
out the purposes'' of Section 115(c)(4). S. Rep. No. 98-162, at 9 
(1983). Thus far, there has been no need to issue such regulations 
because the Office has been unaware of any activity by sound recording 
copyright owners engaging in or authorizing the rental, lease or 
lending of phonorecords.
    In summary, RIAA asserted that it is unclear whether the Section 
115 license permits all of the reproductions necessary to make On-
Demand Streams or Limited Downloads, and if it does, what royalty rates 
apply. Consequently, RIAA petitioned the Office to determine: 1) 
whether On-Demand Streams are incidental DPDs covered by the license; 
2) whether the license includes the right to make server copies or 
other copies necessary to transmit On-Demand Streams and Limited 
Downloads; and 3) the royalty rate applicable to On-Demand Streams (if 
they are covered by the license) and Limited Downloads.
    Prior to publication of a notice of inquiry, the Office received 
unsolicited comments from Napster, Inc. (``Napster''), Digital Music 
Associates, Inc. (``DiMA''); and MP3.com, Inc. (``MP3'') in response to 
the RIAA petition. In its comments, Napster opposed the RIAA petition 
and urged the Copyright Office to defer resolution of the issues to 
Congress, which it contended is the appropriate forum for resolving the 
types of questions raised by the petition. On the other hand, MP3 
supported the RIAA petition and urged the Office to conduct a 
rulemaking proceeding to determine whether copies made in the course of 
On-Demand Streams are incidental DPDs, and whether the copies made that 
are necessary to stream musical works are covered by the Section 115 
license. In the event the Office concluded that the disputed 
reproductions are covered, it also asked the Library to convene a CARP 
to ``determine the appropriate rate or rates (if any)'' for incidental 
DPDs.
    Like RIAA and MP3, DiMA was especially concerned with the status of 
copies of musical works made in the course of streaming. In particular, 
DiMA noted that the status of temporary RAM buffer copies created in a 
user's personal computer during audio streaming was raised at the 
November 29, 2000, Copyright Office/National Telecommunications and 
Information Administration hearing on the Section 104 study mandated by 
the Digital Millennium Copyright Act of 1998 (``DMCA'') and urged that 
consideration of the same issue in a rulemaking proceeding be done in 
such a way as not to prejudice the outcome of that study. Thus, DiMA 
indicated that either the issue should be resolved in the Section 104 
study, or that the Office should conduct a separate rulemaking 
proceeding devoted solely to the issue.

[[Page 40805]]

DiMA suggested, however, that the complexity of the issue counsels for 
legislative action rather than agency interpretation of the existing 
statute.
    Although a number of parties urged the Office not to take up the 
questions, the Copyright Office published a Notice of Inquiry on March 
9, 2001, 66 FR 14099, to gather information on the issues raised in the 
petition. The Notice asked for comments from interested parties on the 
interpretation and application of the Section 115 compulsory license to 
certain digital music services, namely, Limited Downloads and On-Demand 
Streams.
    In response to the March 9, 2001, Notice of Inquiry, the Copyright 
Office received eight comments and ten reply comments. On December 14, 
2001, the Office published a follow-up notice seeking comments on the 
March 9, 2001, Notice of Inquiry in light of an agreement negotiated by 
RIAA, National Music Publishers Association (``NMPA'') and Harry Fox 
Agency (``HFA'') concerning the interpretation and application of 
Section 115 to On-Demand Streams and Limited Downloads. Eight comments 
were submitted in response to that notice. Some of the comments are 
discussed below.
    Subsequently, Congress passed the Copyright Royalty and 
Distribution Reform Act of 2003. This Act altered the administrative 
structure for determining rates and terms for various compulsory 
licenses in Title 17. It established the Copyright Royalty Judges, who 
assumed authority for determining rates and terms for the statutory 
licenses, including the Section 115 license. See 17 U.S.C. chapter 8.
    Additional legislative activity took place with respect to reform 
of the Section 115 license, and for several years the Office's 
rulemaking activities were placed on the back burner as prospects for 
legislative reform, which could more comprehensively and effectively 
address the issues, were explored. On March 11, 2004, the Subcommittee 
on Courts, the Internet and Intellectual Property of the House 
Committee on the Judiciary held a hearing on ``Section 115 of the 
Copyright Act: In Need of an Update.'' Shortly after that hearing, the 
chairman of the subcommittee asked the Register of Copyrights to meet 
with the interested parties to explore ways in which Section 115 could 
be modernized by means of legislation that would address, among other 
things, the issues raised in this rulemaking. The Register's 
discussions with the parties made limited progress, and legislative 
options were again explored at a hearing of the subcommittee on June 
21, 2005. The Subcommittee on Intellectual Property of the Senate 
Judiciary Committee also conducted a hearing on July 12, 2005. 
Following those hearings, interested parties continued to discuss 
legislative reform, leading to the introduction of the proposed Section 
115 Reform Act (``SIRA''), H.R. 5553, in the 109th Congress, and a 
further hearing in the House subcommittee on May 16, 2006.
    SIRA would have amended Section 115 to make clear that the 
compulsory license for DPDs covers ``the making and distribution of 
general and incidental digital phonorecord deliveries in the form of 
full downloads, limited downloads, interactive streams, and any other 
form constituting a digital phonorecord delivery or hybrid offering'' 
and that it covers ``all reproduction and distribution rights necessary 
to engage in'' those activities. H.R. 5553, Section 2. It also would 
have granted a royalty-free license ``for the making of server and 
incidental reproductions to facilitate noninteractive streaming.'' Id. 
Although SIRA was approved by the House Subcommittee on Courts, the 
Internet and Intellectual Property, the 109th Congress adjourned 
without further action on the bill. Since that time, there has been no 
further legislative action with respect to Section 115.
    Early in the current Congress, the House subcommittee once again 
explored reform of Section 115 at a March 22, 2007, hearing. However, 
no legislation has been introduced and no visible progress has been 
made on reform of the section in the 16 months since that hearing.
    Because of the lack of progress on legislative reform, the Office 
once again directed its attention to the possibility of regulatory 
reform a year ago. On June 15, 2007, the Copyright Office conducted a 
public roundtable to refresh the record in order to ascertain the scope 
of the Section 115 license in relation to certain digital music 
services. The roundtable participants expressed their analyses of the 
legal implication of current business models and offered insight 
regarding the technology employed in today's marketplace. Over 20 
representatives of organizations and companies representing copyright 
owners, songwriters, record companies, online music services and others 
participated in the roundtable. Their views will be discussed below.

Purpose of this proceeding

    Having considered the views expressed at the June 15, 2007, 
roundtable as well as the previous record in this rulemaking 
proceeding, and mindful of the attempts to develop legislation that 
would reform Section 115, the Office now proposes to amend its 
regulations in a way that would enable digital music services to 
utilize the compulsory license to clear all reproduction and 
distribution rights in musical works that might be necessary in order 
to engage in activities such as the making of full downloads, Limited 
Downloads, On-Demand streams and non-interactive streams.\1\ As 
discussed below, certain parties (including, for example, some digital 
music services) disputed whether it is necessary to obtain a license 
for the reproduction or distribution rights in order to engage in some 
of these activities, while other parties (such as music publishers) 
contended that it is necessary to clear the reproduction and 
distribution rights in order to engage in any of these activities 
lawfully.\2\
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    \1\ The Office notes that the right to make and distribute a DPD 
does not include the exclusive rights to make and distribute the 
sound recording itself. These rights are held by the copyright owner 
of the sound recording and must be cleared through a separate 
transaction. See 17 U.S.C. 115(c)(3)(H). Certain transmission 
services, which operate under a Section 114(f) license to perform 
publically the sound recording, may operate under a separate 
statutory license to reproduce these sound recordings. See Section 
112(e). However, a the right to distribute a sound recording is not 
included in the Section 112(e) license.
    \2\ The position of the music publishers with respect to non-
interactive streaming is somewhat ambiguous. Music publishers 
supported the provision in SIRA which would have offered a royalty-
free compulsory license for the reproduction and distribution rights 
implicated in non-interactive streaming.
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    The proposed regulatory changes take no position with respect to 
whether and when it is necessary to obtain a license to cover the 
reproduction or distribution of a musical work in order to engage in 
activities such as streaming. However, the amendments would make the 
use of the statutory license available to a music service that wishes 
to engage in such activity without fear of incurring liability for 
infringement of the reproduction or distribution rights. Nor would the 
proposed regulations preclude licensees from arguing to the Copyright 
Royalty Judges that the royalty fees for certain of the licensed 
activities should be nominal or even free. Copyright owners presumably 
would argue for a substantial royalty. The Copyright Royalty Judges 
have the authority, based on a review of the record and consideration 
of the objectives set forth in 17 U.S.C. 801(b)(1), to conclude that 
the reasonable royalty fee for certain reproductions included within 
the license would be a rate of zero or, on the other hand, that all 
reproductions and

[[Page 40806]]

distributions of phonorecords included within the license should be 
subject to the same royalty fee.
    More specifically, the proposed regulations would allow the 
aforementioned services to employ the Section 115 license to cover all 
musical works embodied in phonorecords made and distributed to the 
public for private use including those phonorecords made on the end-
users' RAM or hard drive, on transmission service's servers, and all 
intermediate reproductions on the networks through which transmission 
occurs.
    In reaching this tentative interpretation, the Office has 
considered the parties' various interpretations of Section 115 which 
have evolved, as has ours, over the course of this proceeding. 
Moreover, the Office notes that both the continued legal uncertainty 
associated with operating music services in the current marketplace and 
the need to establish royalty rates for the statutory license highlight 
the need to resolve the outstanding questions concerning which 
reproductions of phonorecords made during the course of a stream falls 
within the scope of the statutory license and which, if any, do not. 
Such uncertainty has contributed to the current crisis in the music 
industry, due to the difficulty of obtaining licenses for all the 
rights required in order to offer various online music services in an 
environment in which it is not always apparent which rights must be 
cleared and how one can obtain them. While reasonable minds can differ 
on how to interpret Section 115 with respect to these reproductions, 
the Office proposes an approach which would support the making of all 
phonorecords made during the course of a transmission without regard to 
whether that transmission also involves the delivery of a public 
performance. With the publication of today's notice, the Office seeks 
public comment on its proposed interpretation.

Regulatory Authority

    As a preliminary matter, the Office requested comments on whether 
the questions raised in this proceeding could be addressed in an 
administrative rulemaking. While most of the commenters did not 
challenge the Office's rulemaking authority in this proceeding, NMPA 
and Songwriter's Guild of America (``SGA'') did suggest that the Office 
may be without authority to consider which phonorecords made during a 
digital transmission could be covered under a Section 115 license.
    NMPA and SGA argued that the Office has no authority to conduct a 
rulemaking to formulate a rule that would identify the general 
characteristics of an incidental DPD that distinguishes it from a 
general DPD. Moreover, NMPA contended that the Office has no authority 
to determine what types of activities, e.g., on-demand streams, 
constitute a DPD. It maintained that such determinations are so complex 
that they cannot be fixed by regulation and that such questions are 
best addressed by Congress through legislative changes or by the 
courts. NMPA also contended that rapid changes in technology would 
counsel against using a rulemaking proceeding to resolve these issues. 
The Consumer Electronics Association and Clear Channel Communications, 
Inc. (``CEA/Clear Channel'') supported NMPA's position with respect to 
the Office's authority to conduct this rulemaking and maintained that 
clarification of the law must come from Congress. See also Napster 
Reply Comment (arguing that Congress should balance the specific 
concerns of the interested parties and enact a legal regime that 
addresses their concerns).
    Other commenters, such as DiMA and RIAA, expressed support for the 
rulemaking process for the purpose of deciding which activities are 
covered under the Section 115 license in order to clarify those 
activities for which rates must be set. But RIAA wanted the rulemaking 
to accomplish considerably more than just clarifying whether certain 
activities fall within the scope of the license and asked the Office to 
adopt rules governing records of use, notice requirements, and rentals, 
lease and lendings. The Office is likely to address at least some of 
these issues in a separate proceeding, but not in the current one.
    The Office agrees that ideally, the resolution of the issues 
addressed herein should be made by Congress, and for that reason the 
Office has deferred moving forward in this rulemaking for several 
years. However, it seems unlikely that Congress will resolve these 
issues in the foreseeable future, yet the Office believes resolution is 
crucial in order for the music industry to survive in the 21st Century. 
The Copyright Office initiated this proceeding under its authority to 
establish regulations for the administration of its functions and 
duties under title 17. 17 U.S.C. 702. The Office exercises its 
authority under section 702 when it is necessary ``to interpret the 
statute in accordance with Congress' intentions and framework and, 
where Congress is silent, to provide reasonable and permissible 
interpretations of the statute.'' Cable Compulsory License; Definition 
of Cable System, 57 FR 3284, 3292 (January 29, 1992); see also 
Satellite Carrier Compulsory License; Definition of Unserved Household, 
63 FR 3685, 3686 (January 26, 1998) (invoking section 702 authority to 
determine whether a local over-the-air broadcast signal may be 
retransmitted into the local market area under the provisions of the 
section 119 statutory license). Our authority to act is supported 
bySatellite Broadcasting and Communications Ass'n of Am. v. Oman, 17 
F.3d 344 (11th Cir. 1994) (``SBCA''), and Cablevision Sys. Dev. Co. v. 
Motion Picture Ass'n of Am., Inc., 836 F.2d 599 (D.C. Cir.), cert. 
denied, 487 U.S. 1235 (1988) (``Cablevision''), where the Eleventh 
Circuit and the D.C. Circuit expressly acknowledged the Office's 
authority to provide reasonable interpretations of the cable statutory 
license. See SBCA, 17 F.3d at 347 (``The Copyright Office is a federal 
agency with authority to promulgate rules concerning the meaning and 
application of section 111''); Cablevision, 836 F.2d at 608-09 (same).
    Section 115 gives the Register authority to administer the 
compulsory license insofar as the Register is to prescribe by 
regulation requirements for the compulsory licensee's Notice of 
Intention to Obtain a Compulsory License, 17 U.S.C. 115(b)(1), and to 
issue regulations establishing requirements for the payment of 
royalties and governing statements of account submitted by compulsory 
licensees. 17 U.S.C. 115(c)(5).
    Moreover, the issues raised in this rulemaking are issues that will 
necessarily be resolved in the pending proceeding to determine rates 
and terms for the Section 115 compulsory license, Docket No. 2006-3 CRB 
DPRA. It will be the responsibility of the Register of Copyrights to 
review and, if necessary, correct the final determination of the 
Copyright Royalty Judges on material questions of substantive law, such 
as the questions addressed herein. 17 U.S.C. 802(f)(1)(D). See also 17 
U.S.C. 802(f)(1)(B) (mandatory referral of novel material questions of 
substantive law to the Register of Copyrights). Because these issues 
will ultimately be presented to the Register for final administrative 
determination, it makes sense for the Register to offer guidance on 
those issues at this point in this ongoing rulemaking proceeding.

The scope of the Section 115 license

    As a starting point, the parties offered a number of observations 
about the scope of the Section 115 license and Congress's intent in 
amending it to include DPDs. In comments early in the proceeding, some 
commenters maintained that Congress amended

[[Page 40807]]

Section 115 in 1995 merely to adapt the license to a digital 
distribution process and that the changes made to Section 115 did not 
expand or alter the reproduction and distribution rights, or blur 
existing lines between these rights and the copyright owner's exclusive 
right to perform the musical work. DiMA and others also argued that 
streaming does not involve a digital download of a phonorecord because 
the process uses a temporary memory buffer to store packets of data 
that are not fixed for purposes of copyright law. DiMA also maintained 
that these temporary copies cannot be fairly characterized as DPDs 
because these copies are not ``specifically identifiable 
reproductions,'' as required by the statutory definition of a DPD. DiMA 
and others maintained that unless the reproduction is specifically 
recognizable to the transmission service that initiated the 
transmission, it does not comport with the statutory definition.\3\ 
Finally, as a matter of policy, DiMA asserted that there is no economic 
justification for requiring payment for these intermediate copies 
because the copies are made to facilitate a licensed performance and 
are part of a single economic event. The National Association of 
Broadcasters (``NAB'') concurred, maintaining that ``it would seem to 
turn the Section 115 license on its head if non-interactive streams 
required a license under Section 115, even though the recipient listens 
only once and does not end up with a reusable copy of the recording.''
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    \3\ By the time of the Roundtable DiMA accepted an alternative 
interpretation of the ``specifically identifiable'' requirement. See 
Infra, discussion of Specifically identifiable.
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    Others took a different approach and asked the Office to focus on 
the purpose of the transmission. Some drew a distinction between 
subscription services and non-subcription services, arguing that in the 
case where the user cannot choose the song being played at a given 
time, and a permanent copy is not made, then the purpose of such a 
transmission is only to offer a performance. Alternatively, if the 
delivery of the song is interactive, in that the listener can choose to 
listen to a specific song at any time, the transmission of the song 
should be subject to the full mechanical rate because it replaces the 
need for the listener to buy a hard copy of the work.
    The Office recognizes that nearly all of the commenters have 
expressed some preference to distinguish different types of 
transmissions such as those made by Download Services, Limited Download 
Services, On-Demand/Interactive Streaming Services, and Non-interactive 
Streaming Services. The Office understands that distinctions relating 
to interactivity are appropriate in the context of the Section 114 
license and that such distinctions may be appropriate to raise as a 
matter of economic value or policy before the CRJs - e.g., in setting 
rates - or Congress. However, distinctions such as these do not appear 
to be relevant in determining whether particular reproductions of 
phonorecords may be covered under the current Section 115 license, 
except perhaps under the last sentence of Section 115(d) which 
provides, ``A digital phonorecord delivery does not result from a real-
time, non-interactive subscription transmission of a sound recording 
where no reproduction of the sound recording or the musical work 
embodied therein is made from the inception of the transmission through 
to its receipt by the transmission recipient in order to make the sound 
recording audible.'' 15 U.S.C. 115(d) (emphasis added).
    In the course of this proceeding, from the Notice of Inquiry 
through to the Office's June 15, 2007, Roundtable discussion, no 
participant offered any evidence or argument that streaming music 
services, whether they be real-time non-interactive subscription 
transmission services or on-demand interactive services, are able to 
operate in a way in which no reproduction of the sound recording or the 
musical work embodied therein is made from the inception of the 
transmission through to its receipt by the transmission recipient. It 
appears that in the course of all stream transmissions buffer 
reproductions are made on the recipient's device. In addition, in the 
course of at least some interactive stream transmissions, complete 
reproductions (as well as buffer reproductions) are made and 
distributed to the recipient. The Office considers whether these 
reproductions constitute phonorecords, or DPDs, in this Notice. 
Regardless of that analysis, the Office notes that they are in fact 
reproductions, making the last sentence of Section 115(d) (which 
excludes from the definition of DPDs certain non-interactive 
transmissions when no reproduction is made in the course of the 
transmission) inapplicable. Therefore, the Office, at this time, can 
discern no basis for distinguishing between interactive and non-
interactive streams in determining whether a particular transmission 
does or does not result in a DPD and, therefore, it proposes to define 
a DPD without reference to the transmission types.
    We now offer the following analysis regarding whether and how the 
basic technical activities of reproducing digital copies during a 
digital transmission fall within the scope of the Section 115 license 
for making and distributing phonorecords.

Discussion

    At the outset, the Office notes that there is general agreement 
that all transmission services involve the making of complete 
reproductions known as ``Server Copies,'' which the Office will refer 
to as ``Server-end Complete Copies.''\4\ The parties generally agree 
that certain transmission services, including Limited and Full Download 
Services, involve the making of complete reproductions on the 
recipient's computer. These services may or may not limit a recipient's 
use of a work. The Office will refer to these reproductions as 
``Recipient-end Complete Copies.'' The parties also generally agree 
that all digital transmission services involve the making of 
reproductions known as ``Buffer Copies.''\5\ The Office understands 
that buffer copies are made on both the transmitting service's server 
and on the recipient's computer. The Office will refer to these 
reproductions as ``Server-end Buffer Copies'' and ``Recipient-end 
Buffer Copies.'' The Office notes, however, that recognition of the 
various types of reproductions made during the course of a digital 
transmission is only the first step in the analysis.
---------------------------------------------------------------------------

    \4\ While we refer to these reproductions as types of 
``copies,'' we acknowledge that parties disagree on the copyright 
implications of the reproductions, which are analyzed herein.
    \5\ As discussed in greater detail herein, the Office 
understands that ``buffer copies'' are composed of packets of data 
that are deposited in temporary computer data storage, such as RAM, 
where these packets are assembled to an extent such that, while 
embodying less than the entire composition of a musical work, they 
constitute a material object from which sound recordings can be 
perceived, reproduced or otherwise communicated.
---------------------------------------------------------------------------

A. Digital Phonorecord Deliveries, in general.

    In considering whether the reproductions made by a transmission 
service are digital phonorecord deliveries and fit within the scope of 
the Section 115 license, the Office turns to the definition of a DPD. 
17 U.S.C. 115(d). The statute defines a DPD , in relevant part, as:
     ``each individual delivery of a phonorecord by digital 
transmission of a sound recording which results in a specifically 
identifiable reproduction by or for any transmission recipient of a 
phonorecord of that sound recording, regardless of whether the 
digital

[[Page 40808]]

transmission is also a public performance of the sound recording or 
any nondramatic musical work embodied therein. A digital phonorecord 
delivery does not result from a real-time, non-interactive 
subscription transmission of a sound recording where no reproduction 
of the sound recording or the musical work embodied therein is made 
from the inception of the transmission through to its receipt by the 
transmission recipient in order to make the sound recording 
audible.'' 17 U.S.C. 115(d).
In order for each type of reproduction identified above to qualify 
as a DPD under the statutory criteria, the reproduction must meet 
all the criteria specified in the definition: (1) it must be 
delivered, (2) it must be a phonorecord, and (3) it must be 
specifically identifiable.
    (1) Delivery. No party put forward any arguments that Server-end 
Copies are delivered as per the statutory requirement for a DPD. 
Indeed, the record indicates that Server-end Copies are retained by the 
transmission service. As such, the Office tentatively concludes that 
Server-end Complete Copies or Server-end Buffer Copies are not 
delivered and therefore do not satisfy the first requirement for being 
a DPD.\6\ On the other hand, there is general agreement amongst the 
commenters that the reproductions created by transmission services on 
recipients' computers are delivered. Despite the fact that several 
parties chose not to specifically consider whether buffer copies are 
delivered, this general agreement regarding delivery of recipient-end 
copies appears to include both Recipient-end Complete Copies as well as 
Recipient-end Buffer Copies. As such, the Office proposes that such 
copies are delivered and therefore satisfy the first requirement for 
being a DPD.
---------------------------------------------------------------------------

    \6\ However, the fact that a server copy is not delivered does 
not necessarily place it outside the scope of the Section 115 
license. See Infra discussion of Non-DPD copies under the Section 
115 License.
---------------------------------------------------------------------------

    (2) Phonorecord. In considering whether the reproductions made by a 
transmission service are phonorecords, the Office turns to the 
definition found in 17 U.S.C. 101. The statute defines phonorecords as: 
``material objects in which sounds, other than those accompanying a 
motion picture or other audiovisual work, are fixed by any method now 
known or later developed, and from which the sounds can be perceived, 
reproduced, or otherwise communicated, either directly or with the aid 
of a machine or device. The term `phonorecords' includes the material 
object in which the sounds are first fixed.'' 17 U.S.C. 101. The 
question though is whether each reproduction made during the course of 
a digital transmission meets this definition and thus satisfies the 
second prong of the statutory definition for a DPD.
    a. Server-end Complete Reproductions. There is general agreement 
among the commenters that a complete reproduction of a work created on 
a transmission service's server satisfies the statutory definition of a 
phonorecord. It is a material object from which fixed sounds can be 
perceived. While DiMA puts forward the notion that Server-end Copies 
used to facilitate licensed public performances should be exempted from 
liability, its argument was based on economic and policy rationales. 
Furthermore, DiMA did not offer any legal analysis by which such a copy 
might, under existing law, be excluded from being considered a 
phonorecord. As such, the Office tentatively finds that a Server-end 
Complete Copy is a phonorecord and therefore satisfies the second (but, 
as noted above, not the first) requirement for being a DPD.
    b. Recipient-end Complete Reproductions. Likewise, the parties 
generally agree that the creation of a complete reproduction of a work 
on a recipient's computer satisfies the statutory definition of a 
phonorecord. However, certain parties argued that a complete 
reproduction created on a recipient's computer which is accessible for 
a limited time or number of plays should be distinguished as a matter 
of policy or for purposes of valuation. While policy reasons might 
exist for distinguishing such a limited download from a permanent 
reproduction, we can find no basis in the statute for considering a 
limited download to be something other than a phonorecord. Moreover, 
the fact that a limited download is a phonorecord does not in any way 
prevent the Copyright Royalty Judges from valuing it differently and 
setting a lower rate. As such, the Office proposes that a Recipient-end 
Complete Copy is a phonorecord and therefore satisfies the second 
requirement for being a DPD.
    c. Buffer Reproductions. The Office recognizes that several 
commenters dispute any finding that buffer copies made by transmission 
services on either the Server-end or Recipient-end fall within the 
statutory definition of a phonorecord. The positions advanced by these 
parties rely on the notion that buffer copies are not sufficiently 
fixed, that they are fragmentary, that they are temporary, or that they 
are de minimis. As previously indicated, in the Office's consideration 
of these issues, it understands that buffer copies are composed of 
packets of data that are transmitted from one computer location to 
another temporary computer data storage, such as RAM, where they are 
assembled to an extent such that, while embodying less than the entire 
composition of a musical work, they constitute a material object from 
which sound recordings can be perceived, reproduced or otherwise 
communicated and, as such, are phonorecords for purposes of the 
copyright law.
    A finding that buffer copies created by transmission services on 
computer memory devices are phonorecords is also consistent with the 
legal analysis set forth in the Office's DMCA Section 104 Report as 
well as subsequent rulings. The Section 104 Report correctly stated 
that RAM reproductions of copyrighted works are material objects. While 
allowing that certain RAM reproductions that exist only for a 
transitory duration may not exist as ``fixed'' copies, the Section 104 
Report specifically pointed out that in general RAM copies are 
sufficiently fixed and noted that permanence is not required for 
fixation. Section 104 Report at 110-11. With regard to fixation, the 
Section 104 Report stated that the dividing line can be drawn between 
reproductions that exist for a sufficient period of time to be capable 
of being ``perceived, reproduced, or otherwise communicated'' and those 
that do not. DMCA Section 104 Report at 107-129 (August 29, 2001). The 
Report further noted that:
     To determine whether the reproduction right is implicated, the 
focus is on whether there has been a fixation in a material object, 
not on the quantity of material that has been so fixed. The 
reproduction right is not limited to copies of an entire work. 
Photocopying a page or paragraph out of an encyclopedia implicates 
the reproduction right and may, in appropriate circumstances, be an 
infringement. Whether or not a copy of a portion of a work is 
infringing is a question not of whether the reproduction right is 
implicated, but of whether the copying is substantial.
Id at 123.
    The Office understands that individual RAM reproductions made on a 
recipient's computer in the course of a transmission may, under various 
models, comprise small portions of copyrighted works. The Office also 
understands that NAB and DiMA challenged the extent to which such 
copies of small portions of works enjoy protection. Under their 
interpretation, the legislative history of DPSRA indicates that only 
the transmission and storage of an entire sound recording (and not 
fragments thereof) constitutes the making of a phonorecord. However,

[[Page 40809]]

the Office understands that title 17's language and purpose are broad 
and that portions of musical works should be treated the same as any 
other type of work. As stated in the Office's Ringtone Decision, 
Section 115 ``does not expressly exclude `portions of works' from its 
scope and we cannot assume that such treatment was intended in the 
absence of clear statutory language to that effect.'' In the Matter of 
Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, 
Docket No. RF 2006-1, at 13 (October 16, 2006).
    The Office's consistent findings regarding fixation and coverage of 
fragments of works support a finding that buffer copies meet the 
statutory definition of phonorecords. Additionally, even if one were to 
assume that the individual portions of works created by a transmission 
service on a recipient's RAM were not protectible, questions regarding 
the reproduction of a phonorecord would still not be settled. The 
Section 104 Report specifically addressed the matter, stating that 
``Even if each individual copy [the assemblage of several data packets] 
were to be considered a de minimis portion under the test for 
substantial similarity, the aggregate effect is the copying of the 
entire work.'' DMCA Section 104 Report at 133. See also, Twentieth 
Century Fox Film Corp. v. Cablevision Systems Corp., 478 F. Supp. 2d 
607, 621 (2007), (creation of a buffer copy is ``copying'').
    The Office has no reason to believe that developments in either 
technology or the law require us to revisit the above-stated 
conclusions. As such, Server-end Buffer Copies and Recipient-end Buffer 
Copies appear to be phonorecords and therefore satisfy the second 
requirement for being a DPD.
    (3) Specifically identifiable. The Office recognizes that several 
parties argued that transmissions made by certain types of services 
should not be deemed to result in ``specifically identifiable 
reproductions'' within the meaning of the statutory definition of a 
DPD. More often than not, commenters' views did not delve into legal 
analysis of this unique phrase and instead put forward arguments based 
on economic fairness. In addition, the Office notes that certain 
commenters' interpretations of the phrase appear to have shifted over 
time. The Office therefore must determine whether and when a digital 
transmission results in a ``specifically identifiable reproduction by 
or for any transmission recipient of a phonorecord of that sound 
recording.''\7\
---------------------------------------------------------------------------

    \7\ The Office does not consider whether a server copy is 
specifically identifiable because, under the Office's analysis the 
server copy is not delivered and therefore does not fall within the 
definition of DPD. As a result, we only consider if and when 
Recipient-end Buffer Copies and Recipient-end Complete Copies are 
``specifically identifiable.''
---------------------------------------------------------------------------

    Several commenters urged the Office to adopt an interpretation of 
``specifically identifiable reproduction by or for any transmission 
recipient of a phonorecord of that sound recording'' that would require 
that a reproduction be identifiable to the transmission service. To 
support this position, they cited to a passage from the legislative 
history of the DPSRA, which states ``the phrase `specifically 
identifiable reproduction,'as used in the definition, should be 
understood to mean a reproduction specifically identifiable to the 
transmission service.'' S. Rep. No. 104-128 at 44. Under this 
interpretation, DiMA argued that Recipient-end Buffer Copies and 
certain Recipient-end Complete Copies (referred to as ``cache copies'' 
which are complete copies that exist temporarily on a recipient's 
computer to enable the recipient to hear the sound recording at 
substantially the same time as the transmission) are not specifically 
identifiable to the transmission service and therefore such copies do 
not satisfy the third requirement for being a DPD.
    At this point, it is unclear to the Office under what circumstances 
a service's transmission may result in a reproduction that is 
specifically identifiable to the transmission service. The Office, 
therefore, seeks additional information regarding how the different 
transmission service models might result in Recipient-end Complete 
Copies or Recipient-end Buffer Copies that are specifically 
identifiable to the transmission service.
    Of course, identification of the reproduction by the transmission 
service is not the only option. By the time of the Roundtable 
discussion DiMA had altered its position and joined other parties in 
advancing an alternative interpretation of ``specifically 
identifiable.'' Id. at 62-63. The alternative interpretation does not 
look beyond the language of the statute itself. Instead, it focuses on 
the language of Section 115(d) and simply requires that a transmission 
of a sound recording result in a reproduction of a phonorecord that is 
either specifically identifiable by any transmission recipient or 
specifically identifiable for any transmission recipient.
    On the present record, the Office understands that reproductions of 
phonorecords appear to be ``specifically identifiable'' by both of 
these avenues. As to the first alternative, for the period of time 
during which each individual reproduction of a phonorecord exists on 
the recipient's computer, the Office understands that the specific file 
data for Recipient-end Complete Copies and Recipient-end Buffer Copies 
can be identified by the transmission recipient. The Office recognizes 
that it may be rare for a recipient to actually search out and identify 
the relevant data, and it may not always be easy to identify it. 
However, the Office understands that such identification is able to be 
performed by the transmission recipient. Furthermore, the Office notes 
that it is not actual identification but the possibility of 
specifically identifying that satisfies the statutory requirement. The 
Office also understands that the recipient's computer is necessarily 
able to specifically identify each individual reproduction of 
Recipient-end Complete Copies and Recipient-end Buffer Copies for the 
transmission recipient. The Office understands that such identification 
by the computer for the transmission recipient is a necessary step in 
the computer actually making the phonorecord perceptible to the 
transmission recipient. In other words, if a computer could not 
specifically identify each part of a stream, it would be unable to 
render the stream into a performance by assembling the parts in the 
proper order for performance. The statutory definition does not appear 
to require ``identifiability'' beyond that function.
    While the Office understands commenters' desire to look to the 
legislative history (which states at one point that ``the phrase 
`specifically identifiable reproduction,' as used in the definition, 
should be understood to mean a reproduction specifically identifiable 
to the transmission service'') for the meaning of a phrase that is so 
unique in copyright law, the parties advocating that interpretation 
have made no concrete argument why there is any reason to look beyond 
the plain text of the statute. Therefore, the Office proposes to follow 
canons of statutory construction which dictate that ``the meaning of a 
statute must, in the first instance, be sought in the language in which 
the act is framed, and if that is plain, and if the law is within the 
constitutional authority of the law-making body which passed it, the 
sole function of the courts is to enforce it according to its terms.'' 
Caminetti v. United States, 242 U.S. 470, 485 (1917). As such, the 
Office tentatively concludes that Recipient-end Complete Copies and 
Recipient-end Buffer Copies satisfy the requirement that a transmission 
of a sound recording must result in a reproduction of a

[[Page 40810]]

phonorecord that is either ``specifically identifiable by any 
transmission recipient'' or ``specifically identifiable for any 
transmission recipient'' and therefore such copies satisfy the third 
requirement for being a DPD.
    The Office seeks comment on the above-stated analysis and 
proposals, which lead the Office to conclude that Recipient-end 
Complete Copies and Recipient-end Buffer Copies satisfy the definition 
for a DPD. 17 U.S.C. 115(d).

B. Incidental DPDs.

    The Office recognizes commenters' views that certain reproductions 
created by transmission services may be categorized as so-called 
incidental DPDs. Section 115 requires that rates and terms shall 
distinguish between general DPDs and incidental DPDs. However, the 
statute does not offer a definition of incidental DPDs. Indeed, the 
statute does not specifically refer to incidental DPDs; it simply 
directs the Copyright Royalty Judges to set rates that ``distinguish 
between (i) digital phonorecord deliveries where the reproduction or 
distribution of a phonorecord is incidental to the transmission which 
constitutes the digital phonorecord delivery, and (ii) digital 
phonorecord deliveries in general.'' The lack of a specific definition 
of incidental DPDs has created a great deal of confusion among those 
parties with an interest in the Section 115 license. Because these 
parties have been unable to agree upon what constitutes an incidental 
DPD, they have been unable to negotiate rates for the making and 
distribution of these reproductions. Moreover, amidst the disagreement 
over the meaning of incidental DPDs, the Office notes that the parties 
seem less interested in defining what constitutes an incidental DPD and 
more concerned about receiving clarification as to whether specific 
types of digital transmissions services fall within the scope of the 
statutory license.
    RIAA's analysis began with the proposition that an incidental DPD 
is nothing more than a subset of DPDs. Along with other parties, RIAA 
encouraged the Office to interpret the meaning of incidental DPD in a 
rulemaking. NMPA, on the other hand, contended that it is not possible 
to define incidental DPDs through a definition of general application 
and suggested that the Office leave the matter to the industry to 
resolve these issues through negotiations or a rate setting proceeding. 
However, other parties, including DiMA, objected to the suggestion that 
the best approach is to leave the matter in the hands of the industry.
    In any event, the parties urging the Office to interpret the 
meaning of incidental DPD have not offered specific suggestions as to 
how the Office should define the term. Rather they offered conclusions 
as to which specific types of digital transmission services should be 
deemed to create reproductions that fall inside or outside the 
definition of incidental DPD. Support for these conclusions was made on 
policy or economic grounds. The few arguments that certain types of 
services do not create incidental DPDs were made largely in terms of 
whether reproductions satisfy the definition of DPDs in general, a 
matter which the Office has already addressed herein. Commenters also 
addressed the purpose of the transmission for purposes of 
characterizing a reproduction as incidental, drawing a distinction 
between services whose purpose is distribution and those whose purpose 
is public performance.
    As an initial matter, the Office is inclined to agree with the 
RIAA's analysis that an incidental DPD is nothing more than a subset of 
DPDs. However, we can find little reason to accept the invitation to 
delineate the contours of that subset. Whether a DPD is ``incidental'' 
or ``general,'' it is subject to the compulsory license. Consequently, 
the Office questions whether the concept of incidental DPDs as set 
forth in the statute lends itself to further clarification in a 
regulation of general application. The Office observes that the 
legislative history of the DPSRA indicates that Congress recognized the 
likelihood of several different types of digital transmission systems. 
The Office also recognizes Congress' indication that certain DPDs may 
be incidental to thepurpose of the transmission. S. Rep. No. 104-128 at 
39. However, the Office notes that, except for one discrete example of 
a type of service that would result in an incidental DPD, neither the 
statute nor the legislative history attempts to offer criteria for 
determining the purpose of a transmission.\8\
---------------------------------------------------------------------------

    \8\ ``For example, if a transmission system was designed to 
allow transmission recipients to hear sound recordings substantially 
at the time of transmission, but the sound recording was transmitted 
in a high-speed burst of data and stored in a computer memory for 
prompt playback (such storage being technically the making of a 
phonorecord), and the transmission recipient could not retain the 
phonorecord for playback on subsequent occasions (or for any other 
purpose), delivering the phonorecord to the transmission recipient 
would be incidental to the transmission.'' S. Rep. No. 104-128 at 
39.
---------------------------------------------------------------------------

    The Office understands that neither the statute, the legislative 
history, nor the proposals submitted by commenters clearly propose any 
conclusive methods or criteria for determining the purpose of a 
transmission. Moreover, the only consequence of a determination that a 
digital phonorecord delivery is ``incidental'' is that a separate rate 
must be set for an incidental phonorecord delivery (although, in any 
event, it is inherent in the ratemaking provisions of Section 115 that 
several different rates may be set for various kinds of digital 
phonorecord deliveries). In setting rates, the Copyright Royalty Judges 
are to distinguish between general and incidental DPDs, and they have 
the authority to set different rates for different types of DPDs, 
depending on their analysis of the economics of the service and the 
other circumstances set forth in section 801(b)(1). The Office 
therefore proposes that any determination regarding the purpose of a 
transmission, upon which the determination of when a DPD is an 
incidental DPD appears to turn, should be made in the context of a 
factual inquiry before the CRJs, if such a determination proves to be 
relevant.\9\
---------------------------------------------------------------------------

    \9\ The Office also observes that nothing in the law prevents 
the CRJs from setting different rates for various kinds of 
incidental DPDs, or, for that matter, for various kinds of 
``general'' DPDs.
---------------------------------------------------------------------------

C. Non-DPD Copies Under the Section 115 License.

    RIAA and others acknowledged that certain copies made by 
transmission services, such as undelivered Server-end Copies, are not 
DPDs.\10\ Such parties have urged the Office to consider whether these 
copies are covered by the Section 115 license.
---------------------------------------------------------------------------

    \10\ The proposals put forward in this NPRM also conclude that 
Server-end copies are not DPDs.
---------------------------------------------------------------------------

    RIAA argued that delivery is not always required in order to 
operate under the Section 115 license and that delivery merely 
establishes the point at which copyright liability accrues. Thus, it 
opined that Section 115 covers all copies of a phonorecord made during 
a transmission, but that copyright liability attaches only upon the 
distribution of a DPD. Under such an approach, a service would incur 
liability only for those copies that are delivered and otherwise meet 
the requirements for DPDs. No obligation for payment would accrue for 
undelivered Server Copies. DiMA offered a similar approach in arguing 
that Server Copies are covered within the license, proposing that 
Server Copies are similar to professional manufacturing equipment used 
by vinyl record pressing plants or CD stamping facilities, for which no 
separate license is required. Other parties also argued that certain 
non-DPD copies are not

[[Page 40811]]

infringing. Their argument was not that coverage for non-DPD copies 
comes from Section 115 but rather that such non-DPDs fall within the 
``fair use'' doctrine.\11\
---------------------------------------------------------------------------

    \11\ That argument can also be made with respect to some DPDs. 
The Office well understands how the fair use doctrine might operate 
in this context. See Section 104 Report at 133-141. However, we note 
that the determination of fair use requires a case-specific 
analysis. Services that wish to rely on the fair use defense are 
free to do so, knowing that they may have to litigate the issue and 
that the outcome of such litigation is not necessarily clear. But 
whether or not such use is fair does not prevent the inclusion of 
such activity within the scope of the compulsory lice