Review of Copyright Royalty Judges Determination, 4537-4543 [E9-1444]
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Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Notices
LIBRARY OF CONGRESS
Copyright Office
[Docket No. 2009–1]
Review of Copyright Royalty Judges
Determination
AGENCY: Copyright Office, Library of
Congress.
ACTION: Notice; correction.
SUMMARY: The Register of Copyrights
issues the following decision identifying
and correcting erroneous resolutions of
material questions of substantive law
under title 17 that underlie or are
contained in the Copyright Royalty
Judges’ final determination regarding
adjustment of reasonable rates and
terms of royalty payments for the
making and distribution of
phonorecords of musical works, Docket
No. 2006–3 CRB DPRA. The Register
concludes that the Copyright Royalty
Judges erroneously did not refer two
novel questions of law as required
under the statute; that they were in error
in their conclusions regarding both their
and the Register’s authority to review
regulations submitted to them under an
agreement by the participants; and that
their conclusion that they could not
review the agreement submitted by the
participants led to the inclusion of
regulations that constitute erroneous
resolution by the CRJs of material
questions of substantive law under title
17. This decision corrects such errors
and shall be made part of the record of
the proceeding (Docket No. 2006–3 CRB
DPRA).
FOR FURTHER INFORMATION CONTACT:
Tanya M. Sandros, Deputy General
Counsel, and 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 Royalty Judges
(‘‘CRJs’’) are required by 17 U.S.C.
115(c)(3)(C) and Chapter 8 to make and
issue determinations and adjustments of
reasonable rates and terms of royalty
payments for the making and
distribution of phonorecords of musical
works in accordance with the provisions
of 17 U.S.C. 115. Under 17 U.S.C.
802(f)(1)(D), the Register of Copyrights
may review for legal error the resolution
by the CRJs of a material question of
substantive law under title 17 that
underlies or is contained in a final
determination of the CRJs. If the Register
of Copyrights concludes, after taking
into consideration the views of the
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participants in the proceeding, that any
resolution reached by the CRJs was in
material error, the Register of Copyrights
shall publish such decision correcting
such legal errors in the Federal Register,
together with a specific identification of
the legal conclusion of the CRJs that is
determined to be erroneous, which shall
be made part of the record of the
proceeding.
On November 24, 2008, the CRJs
issued to the participants, posted to
their Web site, and transmitted to the
Register of Copyrights a copy of their
final determination setting such rates
and terms. Final Determination of Rates
and Terms in the Matter of Mechanical
and Digital Phonorecord Delivery Rate
Determination Proceeding, Docket No.
2006–3 CRB DPRA (November 24,
2008). The Register of Copyrights,
pursuant to section 802(f)(1)(D), has
reviewed the CRJs’ final determination.
The Register concludes that the
resolution of certain material questions
of substantive law under title 17 that
underlie or are contained in the final
determination were in error and issues
this decision correcting such errors.
In the course of their proceeding to set
rates and terms of royalty payments for
the making and distribution of
phonorecords of musical works in
accordance with the provisions of 17
U.S.C. 115, the CRJs addressed several
material questions of substantive law
that were properly referred to the
Register of Copyrights under 17 U.S.C.
802(f)(1)(A)(ii) and 802(f)(1)(B).
However, the Register determines that
they erroneously did not refer two
additional novel questions of law as
required under the statute. The Register
also finds that the CRJs were in error in
their conclusions regarding both their
and the Register’s authority to review
regulations submitted to them under an
agreement by the participants. The CRJs’
conclusion that they could not review
these regulations led to the inclusion of
regulations that constitute erroneous
resolutions of material questions of
substantive law under title 17, which as
stated, are corrected herein.
The regulations ultimately contained
in the CRJs’ final determination
establishing rates and terms of royalty
payments for the activities under
section 115, i.e. ‘‘making and
distributing phonorecords, including by
means of digital phonorecord
deliveries,’’ are divided into two
subparts. The first portion, Subpart A, is
the product of the findings and
deliberations of the CRJs, and delineates
the rates and terms for three distinct
categories of phonorecords under the
section 115 license. These particular
categories identify phonorecords made
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under specific conditions and are
categorized as ‘‘Physical phonorecord
deliveries,’’ ‘‘Permanent digital
downloads’’ and ‘‘Ringtones.’’ See 37
CFR 385.1–385.4.1 The second portion,
Subpart B, is the product of settlement
negotiations among the participants,
and delineates the rates and terms for
two additional distinct categories
identifying phonorecords made under
the section 115 license. These particular
categories identify phonorecords made
under specific conditions and are
identified as ‘‘Interactive streaming’’
and ‘‘Limited downloads.’’ Subpart B
also indicates specific conditions under
which ‘‘promotional royalty rates’’ are
applicable to ‘‘Interactive streaming’’
and ‘‘Limited downloads.’’ See 37 CFR
385.10–385.17. The Register observes
that although the participants informed
the CRJs that their agreement would
address Limited downloads and
Interactive streaming, including all
known incidental digital phonorecord
deliveries, their agreement ultimately
only addressed ‘‘Interactive streaming’’
and ‘‘Limited downloads,’’ thus
addressing less activity than might
reasonably have been expected.
The Register has also concluded that
in setting forth rates and terms for these
five distinct categories of phonorecords,
the CRJs’ final determination does not
include rates and terms for certain
ongoing activities which may be
licensable under the section 115 license,
e.g., phonorecords made during the
course of a non-interactive stream.
Nevertheless, if a licensee makes and
distributes phonorecords that do not fall
within any of the five distinct categories
of phonorecords for which specific rates
have been set, the making and
distribution of these phonorecords may
still be covered by the section 115
license, so long as the licensee operates
within the statutory terms of the license,
including the provisions addressing
Notice of Intention to Use and
Statements of Account, but the licensee
would incur no obligation to pay
royalties for such activity during the
relevant time period. However, under
certain circumstances, which are
dictated by section 803(d)(2)(B), royalty
rates may be set retroactively in future
proceedings.
Procedural Background of the CRJs’
Proceeding
On January 9, 2006, the CRJs issued
a Notice announcing commencement of
this proceeding with a request for
1 The Register cites to the regulations in the final
determination, 37 CFR 385.1–385.17, by the
references adopted by the CRJs. As of the date of
this review, they have not been codified in the Code
of Federal Regulations.
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Petitions to Participate, which was
published in the Federal Register. 71 FR
1453. In response to the Notice, the
following parties submitted petitions to
participate: Royalty Logic, Inc. (‘‘RLI’’);
the Songwriters Guild of America
(‘‘SGA’’); the National Music
Publishers’’ Association, Inc.
(‘‘NMPA’’), the Songwriters Guild of
America, and the Nashville Songwriters
Association International, jointly
(collectively, ‘‘Copyright Owners’’);
Apple Computer, Inc.; America Online,
Inc.; RealNetworks, Inc.; Napster, LLC;
Sony Connect, Inc.; Digital Media
Association (‘‘DiMA’’); Yahoo! Inc.;
MusicNet, Inc.; MTV Networks, Inc.;
and Recording Industry Association of
America (‘‘RIAA’’).
On August 1, 2006, prior to the filing
of written direct statements, RIAA
sought from the CRJs a referral of a
novel question of law to the Register of
Copyrights (‘‘Register’’). See Motion of
[RIAA] Requesting Referral of a Novel
Question of Substantive Law (filed
August 1, 2006). RIAA asserted that the
CRJs were compelled to refer the novel
question of law to the Register under
section 802(f)(1)(B). After considering
the views of all of the participants, the
CRJs granted RIAA’s motion in part and
referred to the Register two novel
questions of law regarding (1) whether
ringtones—regardless of whether the
ringtone is monophonic, polyphonic or
a mastertone—constitute delivery of a
digital phonorecord subject to statutory
licensing under section 115 and (2) if so,
what legal conditions and/or limitations
would apply. See Order Granting in Part
the Request for Referral of a Novel
Question of Law, Docket No. 2006–3
CRB DPRA (August 18, 2006). On
October 16, 2006, the Register
transmitted a Memorandum Opinion to
the CRJs that addressed the novel
questions of law. The Register’s
Memorandum Opinion was published
in the Federal Register on November 1,
2006. 71 FR 64303.
On January 7, 2008, DiMA requested
referral to the Register of what it
described as a novel question of law as
to whether ‘‘interactive streaming’’
constituted a digital phonorecord
delivery (‘‘DPD’’), asserting that the CRJs
were compelled to refer the novel
question of law to the Register under
section 802(f)(1)(B). See Motion of
[DiMA] Requesting Referral of a Novel
Material Question of Substantive Law
(‘‘DiMA Motion’’) (January 7, 2008).
Copyright Owners opposed DiMA’s
motion and RIAA took no position on it.
The CRJs heard oral arguments on the
motion on January 28, 2008. On
February 4, 2008, the CRJs denied
DiMA’s motion, finding that the matter
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of what is ‘‘interactive streaming’’
presented a question of fact and not a
question of law as required by section
802(f)(l)(B). See Order Denying Motion
of [DiMA], for a Referral of a Novel
Material Question of Substantive Law,
Docket No. 2006–3 CRB DPRA (February
4, 2008).
Subsequent to the presentation of the
rebuttal phase of their case, on May 15,
2008, the participants informed the CRJs
that they had reached a settlement
regarding the rates and terms for
‘‘limited downloads and interactive
streaming, including all known
incidental digital phonorecord
deliveries’’ and agreed to submit the
agreement to the CRJs at a later date. See
Joint Motion to Adopt Procedures for
Submission of Partial Settlement at 1
(filed May 15, 2008).
On July 2, 2008, after the evidentiary
phase addressing the remaining issues
in the proceeding, the participants filed
their respective Proposed Findings of
Fact and Conclusions of Law. The
participants filed replies on July 18,
2008. Closing arguments occurred on
July 24, 2008, after which time the
record was closed.
On July 25, 2008, after closing
arguments, the CRJs, on their own
motion and under authority established
in section 802(f)(1)(A)(ii), referred to the
Register a material question of
substantive law concerning the division
of authority between the CRJs and the
Register to establish terms under the
section 115 statutory license. See Order
Referring Material Question of
Substantive Law, Docket No. 2006–3
CRB DPRA (July 25, 2008). On August
8, 2008, the Register transmitted a
Memorandum Opinion to the CRJs that
addressed the material question of
substantive law. The Register’s
Memorandum Opinion was published
in the Federal Register on August 19,
2008. 73 FR 48396.
On September 22, 2008, the
participants filed their partial settlement
with the CRJs, and it was published in
the Federal Register on October 1, 2008.
73 FR 57033. Public comments were
due on October 31, 2008. CTIA-The
Wireless Association and the National
Association of Broadcasters (‘‘CTIA/
NAB’’), non-participants to the rate
setting proceeding, jointly filed the only
comment on the agreement. They
argued that adoption of the settlement
was beyond the CRJs’ authority,
contrary to law and bad policy. See
Comments of CTIA-The Wireless
Association and the National
Association of Broadcasters (filed
October 31, 2008).
On October 2, 2008, the CRJs issued
their Initial Determination of Rates and
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Terms subject to review by the
participants and the filing of motions for
a rehearing. See 17 U.S.C. 803(c)(1) and
(2)(A) and (b). On October 17, 2008,
RIAA filed a motion for rehearing to
reconsider the timing of the late
payment fee of 1.5% per month. After
reviewing the motion, the CRJs denied
the motion for rehearing, by Order dated
November 12, 2008. On November 24,
2008 the CRJs issued to the participants
a copy of their Final Determination of
Rates and Terms in the Matter of
Mechanical and Digital Phonorecord
Delivery Rate Determination Proceeding,
Docket No. 2006–3 CRB DPRA (‘‘Final
Determination’’), and transmitted a copy
to the Register of Copyrights. See Final
Determination of Rates and Terms in
the Matter of Mechanical and Digital
Phonorecord Delivery Rate
Determination Proceeding, Docket No.
2006–3 CRB DPRA (November 24, 2008).
On January 8, 2009, the Register
requested the participants’ views on
potential legal errors contained in the
CRJs’ final determination. In response,
the Register received written views from
RIAA, Copyright Owners, and DiMA on
January 15, 2009.
In accordance with the authority
granted to the Register of Copyrights
under 17 U.S.C. 802(f)(1)(D), the
Register of Copyrights has reviewed the
CRJs’ determination of rates and terms
of royalty payments under section 115
taking into account the views of the
participants as reported in the CRJs’
final determination and in response to
a request from the Register for written
comments on specific issues. Request
for Participants’ Views Regarding
Possible Legal ErrorsCcontained in the
Copyright Royalty Judges’ Final
Determination (January 8, 2009). The
Register concludes that certain
resolutions of material questions of
substantive law under title 17 which
underlie or are contained in the final
determination of the CRJs are in error.
Review of Copyright Royalty Judges’
Determination
1. Failure To Refer Novel Questions to
the Register
Under 17 U.S.C. 802(f)(1)(B), in any
case in which a novel material question
of substantive law concerning an
interpretation of those provisions of title
17 that are the subject of the proceeding
is presented, the CRJs are required to
request a written decision from the
Register of Copyrights to resolve such a
novel question. A ‘‘novel question of
law’’ is a question of law that has not
been determined in prior decisions,
determinations, and rulings described in
section 803(a) of the Copyright Act. See
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17 U.S.C. 802(f)(1)(B)(ii). During the
course of the proceeding, the CRJs
referred two novel questions of
substantive law to the Register, but they
did not refer two additional novel
material questions of substantive law
concerning an interpretation of
provisions of title 17. The CRJs’ failure
to refer a novel material question of
substantive law is itself an erroneous
legal resolution of ‘‘a material question
of substantive law under [title 17] that
underlies or is contained in a final
determination of the [CRJs].’’ Therefore
any failure to refer a novel material
question is subject to the Register’s
review under section 802(f)(1)(D).
One such novel question arose amidst
DiMA’s motion for referral to the
Register of what DiMA described as a
novel question of substantive law as to
whether ‘‘interactive streaming’’
constitutes a DPD under section 115.
See Motion of [DiMA] Requesting
Referral of a Novel Material Question of
Substantive Law (filed January 7, 2008).
After hearing the participants’
arguments on the motion, the CRJs
denied DiMA’s motion, finding that the
matter of what is ‘‘interactive
streaming’’ presented a question of fact
and not a question of law as required by
section 802(f)(l)(B); a view shared by
Copyright Owners. The CRJs accurately
noted that the statute does not define or
mention the term ‘‘interactive
streaming’’ and that there is no
agreement among the participants as to
the precise meaning of the term.
Additionally, the CRJs asserted that
resolution of DiMA’s question would
require a certain amount of inquiry into
the factual circumstances, and the types
of digital transmissions, that may or
may not result in reproductions of
musical works that are licensable under
section 115. See Order Denying Motion
of [DiMA], for a Referral of a Novel
Material Question of Substantive Law,
Docket No. 2006–3 CRB DPRA (February
4, 2008).
The Register notes that when the CRJs
are confronted with novel material
questions of law they are not restricted
to considering the motions and
formulations of questions as submitted
by the participants. Rather, they are
required to refer any novel questions (or
issues) of law ‘‘concerning an
interpretation of those provisions of
[title 17] that are the subject of the
proceeding.’’ 17 U.S.C. 802(f)(1)(B).
While the issue of what is ‘‘interactive
streaming’’ does appear to involve some
degree of factual inquiry, it also raises
at least one purely legal question that
does not require resolution of specific
factual disputes raised between the
participants. For some time, the Office
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has recognized a general agreement
among interested parties that streaming
necessarily involves reproductions that
are made on the receiving computer in
order to better facilitate the actual
performance of the work (often referred
to as ‘‘buffer’’ copies). See Notice of
Inquiry 66 FR 14099 (Mar. 9, 2001). The
view that ‘‘interactive streaming’’
necessarily involves the making and
delivery of buffer copies does not
appear to be disputed among the
participants to the proceeding. The
purely legal question raised under such
an undisputed understanding regarding
‘‘interactive streaming’’ is ‘‘What
constitutes a DPD?’’ This question
clearly requires an interpretation of a
provision of title 17. Specifically, it
requires an interpretation of the
definition of ‘‘digital phonorecord
delivery’’ as found in section 115(d).
Additionally, regardless of the factual
issues surrounding DiMA’s original
motion for referral, the Register observes
that when the CRJs considered two
novel questions concerning the scope of
the section 115 license with regard to
ringtones—a term also not defined or
even mentioned in title 17—the
participants submitted briefs that
revealed significant factual
disagreement as to whether certain
ringtones constituted derivative works.
In spite of this disagreement, the
questions regarding ringtones were
properly referred to the Register.
Moreover, the Register was able to
provide a responsive and instructive
decision on the legal questions which
acknowledged that factual distinctions
would continue to dictate whether
various ringtone activities fell within
the scope of the section 115 license
without needing to resolve any dispute
over specific factual situations. See
Memorandum Opinion on Material
Questions of Law, Docket No. RF 2008–
1 at 10 (August 8, 2008); see also, 73 FR
48396 (Aug. 19, 2008). Finally, the
Register notes that section 802(f)(1)(B)
does not confine the concept of novel
question of substantive law to those
involving interpretation of terms
defined or mentioned in title 17.
Failure to refer the question of what
constitutes a DPD to the Register has led
to the adoption of a regulation that, on
its face, overstates the scope of the
section 115 license with respect to
interactive streams. See 37 CFR 385.11
(defining an interactive stream as an
incidental DPD). As discussed in a
subsequent portion of this review, the
CRJs may exercise their continuing
jurisdiction to redraft the regulation to
clarify that an interactive stream that
delivers a reproduction of a sound
recording that qualifies as a DPD is, for
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purposes of the license, an incidental
DPD.
A second novel question was the
subject of DiMA and RIAA’s requests for
a clarification of the statute. DiMA and
RIAA, using slightly different language,
requested a determination as to the
scope of the license with respect to
copies made to facilitate the delivery of
digital music. See DiMA PFF at ¶240
(July 2, 2008); DiMA Second Amended
Proposed Rates and Terms at 4 (July 2,
2008); RIAA PFF at ¶1674–76, 1678–82
(July 2, 2008); RIAA Second Amended
Proposal at 6 (July 2, 2008). Citing to the
Register’s August 19, 2008,
Memorandum Opinion Responding to
Material Questions of Law, the CRJs
concluded that DiMA and RIAA’s
requests would require interpretation of
the scope, operation and/or obligations
of the section 115 license, which is
inconsistent with the CRJs’ authority.
Final Determination at 71–72, citing to
Memorandum Opinion on Material
Questions of Law, Docket No. RF 2008–
1 at 10 (Aug. 8, 2008); see also, 73 FR
48396, 48399 (August 19, 2008). The
CRJs are correct in this conclusion.
Furthermore, the CRJs are correct that
such questions of scope are inconsistent
with their authority. In making these
observations, the CRJs appear to
recognize that the participants’ requests
constituted a material question of
substantive law. However, they do not
appear to have recognized that the
question was a novel one, and therefore
required referral to the Register. Indeed,
in the same Memorandum Opinion
relied upon by the CRJs when they
declined to interpret the scope of the
license, the Register stated that ‘‘In
instances where particular rates are
being requested for the creation of
particular types of DPDs and there is
some question whether these DPDs fall
within the scope of the license, those
questions must be resolved in the
proceeding. When such a question has
not been determined before, it is a novel
question of law which should be
referred to the Register under section
802(f)(1)(B).’’ 73 FR at 48399.
Ultimately, the failure to refer this
question is a harmless error because the
Register has addressed the question and
has determined, on an interim basis,
that ‘‘server copies and intermediate
reproductions may come within the
scope of the license. The Register
note[d] that a person seeking to operate
under the section 115 license must still
satisfy the threshold requirements of the
license. But, having done so, that
licensee’s coverage may extend to
phonorecords other than those that are
actually distributed provided that they
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are made for the purpose of making and
distributing a DPD.’’ Id. at 66180.
Despite the fact that the failure to
refer this question was ultimately
harmless, had the CRJs referred the
question, the participants and the CRJs
could have adopted regulations that
more clearly reflect the Register’s
clarification of the legal issue. See 37
CFR 201.18(a)(3); 201.19(a)(3); and
255.4. (Noting that ‘‘a digital
phonorecord delivery includes all
phonorecords that are made for the
purpose of making the digital
phonorecord delivery.)’’.
2. Erroneous Conclusion Regarding
Authority Under Chapter and Section
115.
a. CRJs’ authority to review.
Section 801(b)(7)(A) generally directs
the CRJs to adopt as a basis for statutory
terms and rates ‘‘an agreement
concerning such matters reached among
some or all of the participants in a
proceeding at any time during the
proceeding between participants.’’ In
interpreting this provision, the CRJs
concluded that ‘‘[o]nly if an objection is
received by one or more of the parties
are we given any discretion over the
settlement, and then we are limited to
rejecting it if we determine that the
settlement ’does not provide a
reasonable basis for setting statutory
rates and terms.’’’ Final Determination
at 18–20, citing section 801(b)(7)(A)(ii)
(emphasis added). RIAA, DiMA, and the
Copyright Owners support the CRJs’
interpretation of section 801(b)(7)(A).
Views of RIAA at 6; Views of Copyright
Owners at 9–10; and Views of DiMA at
1 (January 15, 2009). This interpretation,
however, is in error.
While the provisions of section
801(b)(7)(A) do limit the circumstances
under which the CRJs are able to decline
to adopt aspects of an agreement, it does
not foreclose the CRJs from ascertaining
whether specific provisions are contrary
to law. The noted limitations only apply
to the CRJs’ ability to adopt an
agreement ‘‘as a basis for statutory rates
and terms,’’ 17 U.S.C. 801(b)(7)(A), and,
in doing so, they promote Congress’s
policy to encourage parties to negotiate
statutory rates and terms. See Views of
RIAA at 6 and Views of Copyright
Owners at 11–12 (January 15, 2009).
The CRJs are not compelled to adopt
a privately negotiated agreement to the
extent it includes provisions that are
inconsistent with the statutory license.
Thus, while the CRJs are able to review
the reasonableness of permissible terms
and rates contained in an agreement
only if a participant to the proceeding
objects to the agreement, this provision
does not preclude the CRJs from
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declining to adopt other portions of an
agreement that would be contrary to the
provisions of the applicable license(s) or
otherwise contrary to statutory law.
Furthermore, nothing in the statute
limits the CRJs from considering
comments filed by non-participants
which argue that proposed provisions
are contrary to statutory law.
This conclusion is consistent with the
CRJs’ decision that it had the authority
to decline to adopt language in the
participants’ agreement that stated that
the rates in the agreement have no
precedential effect and may not be
introduced or relied upon in any
governmental or judicial proceeding. 72
FR 61586. Moreover, courts have
consistently held that agencies cannot
adopt regulations that are contrary to
law. See, e.g., Vasquez-Lopez v.
Ashcroft, 343 F.3d 961, 965 (9th Cir.
2003) (‘‘The power of an administrative
officer or board to administer a federal
statute and to prescribe rules and
regulations to that end is not the power
to make law * * * but the power to
adopt regulations to carry into effect the
will of Congress as expressed by the
statute. A regulation which does not do
this, but operates to create a rule out of
harmony with the statute, is a mere
nullity.’’), cited in Joint Comment of
CTIA–The Wireless Association and the
National Association of Broadcasters at
6, filed with Copyright Royalty Judges
in response to their notice for comment
on the participants agreement. 73 FR
57033 (Oct. 1, 2008).
Since the purpose of this proceeding
is to establish rates and terms of
payment for a statutory license, an
agreement among the participants may
only extend to establishing rates and
terms which are permissible under the
statute. Neither the participants nor the
CRJs may add terms or conditions that
alter or expand the statutory license.
Hence, it was legal error for the CRJs to
conclude that the restrictions on its
authority to review the reasonableness
of specific valid terms and rates also
precluded its review of the legality of
the provisions of the agreement as a
threshold matter.
b. Register’s authority to review.
The CRJs’ erroneous conclusion that it
had no authority to review broad
aspects of the participants’ agreement
led them to also conclude that the
settlement does not represent a
resolution by the CRJs and that therefore
the Register’s review is not part of the
procedure applicable to the relevant
rates and terms established by the
settlement provisions of section
802(f)(1)(D). Final Determination at 19–
20. The CRJs, however, have no
authority to determine whether the
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Register, in her review of the CRJs’ final
determination, has the authority to
review for errors of law provisions in a
settlement that is adopted by the CRJs.
In reaching their conclusion, the CRJs
argue that the provisions of the
settlement do not constitute a finding of
fact or resolution of law by the CRJs.
However, as previously indicated, and
despite their mistaken belief, the CRJs
were not obligated to adopt any portion
of an agreement that would be contrary
to the provisions of the applicable
license(s) or otherwise contrary to
statutory law. By choosing to include
provisions that they were able to reject,
such provisions were freely adopted as
resolutions by the CRJs.
Furthermore, section 801(b)(7)(A)
requires the CRJs to ‘‘adopt as a basis for
statutory terms and rates or as a basis for
the distribution of statutory royalty
payments, an agreement concerning
such matters reached among some or all
of the participants in a proceeding,’’
(emphasis added). By ‘‘adopting’’ an
agreement, the CRJs necessarily accept
the terms of the agreement and
‘‘resolve’’ any material question of
substantive law that the adopted
agreement purports to resolve.
c. CRJs’ authority to determine rates
for future activities.
The CRJs indicate that in this
proceeding they were unable to adopt
rates for future activities without acting
arbitrarily and capriciously. Final
Determination at 60–62 (November 24,
2008). The Register acknowledges that
the CRJs decry the empty record in the
instant case and finds no error in their
decision not to set rates for future
activities in this instance. However, to
the extent the CRJs believe they lack the
authority to set rates for future
activities, the Register notes that the
statute does not foreclose that
possibility. Congress contemplated that
the CRJs may set rates for particular
activities, even prior to the inception of
such activities.2 Additionally, the
Register observes that the CRJs have
broad discretion in making their
determinations. See RIAA v. Copyright
Royalty Tribunal, 662 F.2d 1, 8 (D.C.
Cir. 1981) (stressing that ‘‘[t]he setting of
the royalty rate is not a routine exercise
in historical cost of service ratemaking
for a public utility’’). Furthermore, the
Register notes that Congress directed the
CRJs to set royalty rates based upon
broad policy objectives that require
judgments of an inescapably uncertain
and predictive character. See 17 U.S.C.
2 ‘‘In cases where rates and terms have not, prior
to the inception of an activity, been established for
that particular activity under the relevant license,
* * *’’ 17 U.S.C. 803(d)(2)(B).
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801(b)(1). For example, ‘‘some of the
statutory factors require the [Judges] to
estimate the effect of the royalty rate on
the future of the music industry,’’ or to
consider questions of ‘‘fairness.’’ RIAA,
662 F.2d at 8.
d. CRJs’ authority to limit scope of the
license by not setting certain rates.
The Register also observes that the
consequence of the CRJs having set rates
and terms for distinct categories of
phonorecords, does not mean that the
license is not available for additional
activities under section 115. This
observation is in contrast to the
participants’ views expressed in the
closing arguments of the proceeding
indicating that rights for categories of
phonorecords for which no rate is set
may only be cleared through
negotiation. See Closing Argument
Transcripts 7/24/08 at 7843–7844; 7954;
7975; and 7989.
As the Register observed in her
response to the CRJs’ referral of material
questions of substantive law concerning
the division of authority between the
CRJs and the Register, ‘‘[t]he CRJs do not
have the authority to issue rules setting
forth the scope of activities covered by
the license.’’ Final Order, Division of
Authority Between the Copyright
Royalty Judges and the Register of
Copyrights under the Section 115
Statutory License 73 FR 48399 (Aug. 19,
2008). Section 115 provides a license for
the making and distribution of
phonorecords, including DPDs. It does
not condition coverage on whether a
rate for the making and distribution of
the phonorecords has been set.
Consequently, failure to set a rate for
any particular category of phonorecords
cannot diminish or otherwise affect the
availability of the license. Rather, when
categories of phonorecords created in
the course of particular ongoing
activities within the scope of the license
are not assigned a rate, the result is that
there is no obligation to pay royalties for
those particular activities during the
relevant time period. Therefore,
contrary to the conclusion of RIAA,
there is no ‘‘gap’’ in coverage for DPDs
that do not qualify as permanent digital
downloads, limited downloads or
interactive streams. See Views of RIAA
at 5 (January 15, 2009). However, future
proceedings may retroactively apply
rates to a particular activity under
section 115 in cases where rates and
terms have not, prior to the inception of
that activity, been established for the
particular activity. Such retroactive
rates and terms shall then apply from
the inception of the particular activity.
See Infra section 3(b) regarding the final
determination’s treatment of
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‘‘retroactive rates’’ under 17 U.S.C.
803(d)(2)(B).
3. Problematic provisions in the
regulations promulgated in the final
determination.
In addressing the following regulatory
provisions contained in the final
determination, the Register
acknowledges that both RIAA and
Copyright Owners have argued that
section 385.10 of the regulations
satisfactorily addresses instances in
which the rates and terms are, on their
face, contrary to the statute. See Views
of RIAA at 8 (January 15, 2009); Views
of Copyright Owners at 15 (January 15,
2009). While section 385.10 states that
rates and terms shall be ‘‘in accordance
with the provisions of 17 U.S.C. 115’’
and requires that a licensee shall
‘‘comply with the requirements of that
section,’’ such a provision is insufficient
to address regulatory language that
directly conflicts with the statute. The
following regulations either conflict
with statutory provisions in title 17 or
could be read to alter or expand the
statutory license. Prior determinations
of the Librarian of Congress have
considered and rejected similar terms
that would have altered or expanded the
statutory licenses as contrary to law. See
Determination of Reasonable Rates and
Terms for the Digital Performance of
Sound Recordings, 63 FR 45269 (July 8,
2002) (The Librarian concluded that
neither the CARP nor the Librarian had
the authority to adopt a regulation,
whether as a condition of the license or
not, that would foreclose a legal remedy
for a breach of a legal obligation).
Therefore, consistent with prior
decisions specified in 803(a), and under
the authority conferred by 802(f)(1)(D),
the Register finds the following terms
erroneous to the extent indicated herein.
a. Interactive streams constitute
DPDs.
Section 385.11 of the regulations set
forth in the final determination, which
states that ‘‘[an] interactive stream is an
incidental digital phonorecord delivery
under 17 U.S.C. 115(c)(3)(C) and (D)’’ is
erroneous. This articulation of what
constitutes a DPD equates a means of
transmission to the reproduction and
delivery of a phonorecord. However,
regulations cannot alter statutory terms
of the section 115 license regarding
what constitutes a DPD.
The statutory criteria as to what
constitutes a DPD are set forth in the
notice announcing an Interim Rule in
which the Office explains that a DPD
requires a reproduction of a sound
recording that must meet all three
criteria specified in the statutory
definition: (1) It must be delivered, (2)
it must be a phonorecord, and (3) it
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must be specifically identifiable. 73 FR
66173, 66176 (Nov. 7, 2008). Moreover,
this Copyright Office rulemaking
proceeding also addressed the question
of interactive and non-interactive
streams, noting that the determination
of what constitutes a DPD is not dictated
by the characterization of the
transmission that delivers the
phonorecord as interactive or noninteractive. Nevertheless, the Office did
acknowledge that ‘‘it may be more
common for interactive streams to result
in DPDs and that it may be relatively
uncommon for non-interactive streams
to do so. However, if phonorecords are
delivered by a transmission service,
then under the last sentence of 115(d) it
is irrelevant whether the transmission
that created the phonorecords is
interactive or non-interactive.’’ Id. at
66180. In other words, a stream—
whether interactive or non-interactive—
may or may not result in a DPD
depending on whether all the
aforementioned criteria are met. A
regulation that provides categorically
that ‘‘[a]n interactive stream is an
incidental digital phonorecord delivery
under 17 U.S.C. 115 (c)(3)(C) and (D)’’,
without regard to whether any of those
required criteria have been met,
articulates an erroneous conclusion of
law.
Hence, in light of the Office’s analysis
accompanying its adoption of a more
particularized definition of a DPD, the
proposed regulation which states that
all interactive streams, as defined by the
agreement, are DPDs, is overbroad
because it would include interactive
streams that do not result in the delivery
of a DPD. The Office recognizes,
however, that the regulation may not
have been intended to set a rate for
interactive streams that do not result in
the delivery of a phonorecord and that
the problem may be the result of inartful
drafting of the regulation rather than an
erroneous conclusion over what
constitutes a DPD, an observation
confirmed by RIAA. Views of RIAA at 4
(January 15, 2009). Nevertheless,
because the regulatory text can easily be
misinterpreted as stating that all
interactive streams are incidental DPDs,
and therefore subject to the license, the
ambiguity in the regulatory text should
be clarified. In either case, the problem
is corrected by construing the regulation
as referring only to those DPDs made
and delivered during the course of an
interactive stream. Under the CRJs’
continuing jurisdiction, the regulation
may be redrafted to clarify that an
interactive stream that delivers a
reproduction of a sound recording that
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qualifies as a DPD is for purposes of the
license, an incidental DPD.
b. Limited retroactive effect of rates.
Section 385.14(e) of the regulations
set forth in the final determination
provides, in pertinent part, that ‘‘in the
case of licensed activity prior to the
publication date, the promotional
royalty rate shall apply to promotional
interactive streams, and to limited
downloads offered in the context of a
free trial period for a digital music
subscription service.’’ Such retroactive
application of promotional royalty rates
is erroneous to the extent that it is
overbroad in reaching—and
retroactively setting rates for—
promotional activity where rates
applicable to the activity were set for
the previous rate period. Neither the
CRJs nor the participants have the
power to engage in retroactive rate
setting other than that which is
expressly authorized by the statute. As
indicated in the Register’s August 19,
2008 Memorandum Opinion responding
to a material question of law,
‘‘retroactive rulemaking is in most cases
beyond the power of an agency’’
Memorandum Opinion on Material
Questions of Law, Docket No. RF 2008–
1 at 10 (August 8, 2008), Citing to
Bowen v. Georgetown University
Hospital, 488 U.S. 204 (1988). The
Bowen court elaborated on retroactive
rulemaking indicating that
‘‘[r]etroactivity is not favored by the
law’’ and that where rules may have
retroactive effect, the ‘‘power is
conveyed by Congress in express
terms.’’ Bowen, 488 U.S. at 208 (1988).
In the case of rates and terms set by
the CRJs, title 17 establishes
circumstances under which rates may
be retroactively applied to activities
under the section 115 license. Section
803(d)(2)(B) states that ‘‘[i]n cases where
rates and terms have not, prior to the
inception of an activity, been
established for that particular activity
under the relevant license, such rates
and terms shall be retroactive to the
inception of activity under the relevant
license covered by such rates and
terms.’’
With respect to limited downloads,
the previous rate-setting proceeding
established royalty fees that clearly
applied to limited downloads, whether
such downloads were promotional or
not. See 37 CFR 255.5 (1999) (setting
rates for DPDs ‘‘except for digital
phonorecord deliveries where the
reproduction or distribution of a
phonorecord is incidental to the
transmission which constitutes the
digital phonorecord delivery, as
specified in 17 U.S.C. 115(c)(3)(c) and
(D)’’). As the regulations adopted by the
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CRJs recite, ‘‘A limited download is a
general digital phonorecord delivery
under 17 U.S.C. 115(c)(3)(C) and (D)’’
Section 385.11 (definition of ‘‘Limited
download,’’ para. 3). Thus limited
downloads—whether or not for
promotional purposes—that took place
between the effective date of the rates
established in 1999 and the effective
date of the rates under review here are
governed by the rates set in 1999.3 This
error is corrected by clarifying that such
promotional royalty rates do not apply
retroactively to limited downloads
offered in the context of a free trial
period for a digital music subscription
service. Under the CRJs’ continuing
jurisdiction, the regulations may be
redrafted to conform with this
clarification.
With respect to interactive streams,
the regulations adopted by the CRJs
characterize interactive streams as
incidental DPDs (see section 385.11
(definition of ‘‘Interactive stream’’)), and
the Register accepts that
characterization. The 1999 rate-setting
proceeding did not set rates for
incidental DPDs. Instead, the setting of
rates for incidental DPDs was
‘‘deferred’’ for consideration until the
next adjustment proceeding. See 37 CFR
255.6 (1999). The question thus arises
whether, in light of the deferral of
setting of rates for incidental DPDs, the
retroactive application of the
promotional royalty rate to promotional
interactive streams would constitute a
material error of law. The Register
observes that both the meaning of the
previous ‘‘deferral’’ of setting rates for
incidental DPDs, (an activity whose
inception appears to have occurred
prior to the previous rate setting), as
well as the statutory language, which
was enacted after the previous
proceeding, present complex issues
which have not been fully briefed by the
parties in any context. Section
803(d)(2)(B) could be read to authorize
the retroactive setting of rates for
incidental DPDs when no such rates had
been previously set, even in cases where
the issue could and perhaps should
have been addressed in the previous
rate-setting proceeding. On the other
hand, the Register questions whether
permitting the retroactive setting of rates
under such circumstances is wise or
consistent with the intent of Congress
when it enacted the Copyright Royalty
and Distribution Reform Act of 2003
(which among other things, amended
Chapter 8 to include section
3 The Register finds so support for Copyright
Owners’ assertion that the previous rate for DPDs
aplied only to permanent downloads. See Views of
Copyright Owners at 17 (January 15, 2009).
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803(d)(2)(B). See H.R. Rep. 108–408
(2004), at 101 (remarks of co-sponsor
and subcommittee ranking member Rep.
Howard Berman: ‘‘The series of
interrelated changes ensures that all
rates and terms for statutory licenses
will be set prospectively, not
retroactively, and eliminate, therefore,
the possibility that a time period
covered by a statutory license will
commence before the establishment of
rates and terms.’’). However, given the
lack of any evidence or in-depth
argument on these questions and the
compressed period of time allotted by
section 802(f)(1)(D) for review by the
Register of the CRJs’ determination, the
Register declines to come to a
conclusion regarding application of the
promotional royalty rate to promotional
interactive streams.
c. Timing of payment.
Section 385.15 of the regulations
states that ‘‘[p]ayment for any
accounting period for which payment
otherwise would be due more than 180
days after the publication date shall be
due as otherwise provided under 17
U.S.C. 115 and its implementing
regulations. Payment for any prior
accounting period shall be due 180 days
after the publication date.’’ This
provision erroneously alters the timing
of payment already established in
section 115. Specifically, section
115(c)(5) states that ‘‘[r]oyalty payments
shall be made on or before the twentieth
day of each month and shall include all
royalties for the month next preceding;’’
and it is this provision in the law that
governs the payment schedule for use of
the statutory license. While the Register
understands the participants’ reasons
for adopting a term that would delay the
first payment under the new rate
schedule, there is no precedent for this
practice, contrary to the RIAA’s
interpretation of a term adopted in a
past rate setting proceeding. See Views
of RIAA at 11 (January 15, 2009).
Prior determinations of the Librarian
of Congress have considered and
rejected as contrary to law similar terms
on the basis that such terms would have
altered or nullified provisions in the
statutory licenses. For example, in 1998,
the Librarian, upon the recommendation
of the Register, rejected a term of
payment which would have altered a
payment schedule already established
by law and delayed the first payment for
six months. Determination of
Reasonable Rates and Terms for the
Digital Performance of Sound
Recordings, 63 FR at 25410, citing
section 114(f)(5)(B). In that proceeding,
the relevant statutory provision required
‘‘any royalty payments in arrears [to] be
made on or before the twentieth day of
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the month next succeeding the month in
which the royalty fees are set.’’ Because
the proposed term would not have
required payment to be made in
accordance with this provision, the
Librarian rejected the term as contrary
to law. Similarly, in a 2002 proceeding
to set rates and terms for the digital
performance of sound recordings and
the making of ephemeral reproductions,
the Librarian accepted the Register’s
recommendation to adopt September 1,
2002, as the effective date of the rates
and terms for the statutory license rather
than use the publication date of the
Librarian’s order. The purpose in setting
a later effective date was to delay the
adoption of the new rates and terms for
a period of time as a way to reduce the
financial burden on licensees who had
to pay royalties that had accrued since
1998, and to ensure that the date that
had been adopted for the first payment,
October 20, 2002, complied with the
statutory provision that required
payments in arrears to be paid ‘‘on a
date certain in the month following the
month in which the rate is set.’’ 67 FR
at 45271 (July 8, 2002). Had the rates
and terms become effective on the
publication date, this provision would
have been contrary to law.
Consequently, in both cases, the
Register recommended that the
Librarian adjust the effective date for the
adopted rates and terms under his
authority in 17 U.S.C. 802(g)(2002) to
align the date for the first payment
adopted through the rate setting
proceeding with the date for making the
first payment as specified in the
statutory license.
The CRJs have the same authority to
determine the date the adopted rates
and terms take effect. 17 U.S.C.
803(d)(2)(B). This provision first
establishes that ‘‘[i]n [other] cases where
rates and terms do not expire on a
specified date, successor rates and terms
shall take effect on the first day of the
second month that begins after the
publication of the determination of the
Copyright Royalty Judges in the Federal
Register.’’ It then continues, ‘‘except as
otherwise provided in this title, or by
the Copyright Royalty Judges, or as
agreed by the participants in the
proceeding that would be bound by the
rates and terms.’’ If the purpose of the
regulation on timing of payments was to
provide relief to licensees from an
onerous first payment, altering the
effective date of the license period
would be one way to provide the
licensees some relief in meeting its
royalty obligation when payment
becomes due. See, e.g., Determination of
Reasonable Rates and Terms for the
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Digital Public Performance of Sound
Recordings, 63 FR at 25412 (May 8,
1998) (adjusting the effective date of the
rate setting determination to provide
licensees with time to adjust their
business operations to meet obligation
to make timely payment of arrears). The
Register takes no position, however, on
whether the effective date should be
adjusted, noting that such a decision is
within the discretion of the CRJs and the
participants themselves.
d. Statements of account.
Section 385.14(a)(4) of the regulations
set forth in the final determination,
which provides, in pertinent part, that
‘‘[f]or the avoidance of doubt, however,
except as provided in paragraph (a) of
this section, statements of account
under 17 U.S.C. 115 need not reflect
interactive streams or limited
downloads subject to the promotional
royalty rate’’ is erroneous. Regulations
cannot alter statutory terms of the
section 115 license regarding Statements
of Account. Title 17 authorizes the
Register to ‘‘prescribe regulations under
which detailed cumulative annual
statements of account, certified by a
certified public accountant, shall be
filed for every compulsory license under
this section.’’ 17 U.S.C. 115(c)(5). The
CRJs cannot alter requirements issued
by the Register regarding statements of
account. As indicated in the Register’s
response to the CRJs’ referral of material
questions of substantive law concerning
the division of authority between the
CRJs and the Register, ‘‘[a]uthority to
issue regulations regarding these
statements of account is the exclusive
domain of the Register.’’ Final Order,
Division of Authority Between the
Copyright Royalty Judges and the
Register of Copyrights under the Section
115 Statutory License 73 FR 48398,
(August 19, 2008).
Additionally, section 115(c)(5)
indicates that ‘‘[t]he regulations [of the
Register] covering both the monthly and
the annual statements of account shall
prescribe the form, content, and manner
of certification with respect to the
number of records made and the
number of records distributed.’’ 17
U.S.C. 115(c)(5). There is no statutory
authority for an exception to this
requirement for certain types of
‘‘phonorecords’’ or for the participants
to alter this provision by agreement. As
previously referenced, prior
determinations of the Librarian of
Congress have considered and rejected
similar terms that altered or expanded
the statutory licenses. See supra at
section 3(c) citing 63 FR 25394, and 63
FR at 45269.
The problem is corrected by clarifying
that licensees are required to operate
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4543
within the Register’s Statements of
Account and Notice of Intention to Use
regulations, even if such regulations
foreclose the application of certain
provisions included in the CRJs’ final
determination. Any agreement among a
licensee and a copyright owner to adopt
terms that alter the statutory conditions
and terms necessarily means that the
licensee is operating under a private
license rather than the statutory license.
Harry Fox Agency, Inc. v. Mills Music,
Inc., 543 F. Supp. 844, 851–852
(S.D.N.Y. 1982). Under the CRJs’
continuing jurisdiction, the regulations
may be redrafted to clarify that licensees
must comply with the Register’s
regulations addressing Statements of
Account.
CRJs’ Continuing Jurisdiction
The Register notes that the CRJs enjoy
continuing jurisdiction to amend their
final determination. Under section
803(c)(4), ‘‘[t]he Copyright Royalty
Judges may issue an amendment to a
written determination to correct any
technical or clerical errors in the
determination or to modify the terms,
but not the rates, of royalty payments in
response to unforeseen circumstances
that would frustrate the proper
implementation of such determination.
Such amendment shall be set forth in a
written addendum to the determination
that shall be distributed to the
participants of the proceeding and shall
be published in the Federal Register.’’
This authority may be exercised to
codify the corrections identified and
made herein by the Register through her
authority under section 802(f)(1)(D).
Conclusion
Having reviewed the CRJs’ resolution
for legal error, pursuant to the
requirements established in section
802(f)(1)(D), the Register issues this
written decision correcting the above
referenced legal errors not later than 60
days after the date on which the final
determination by the CRJs was issued.
This decision shall be made part of the
record of the proceeding (Docket No.
2006–3 CRB DPRA), and the
conclusions of substantive law
involving and interpretation of title 17
contained herein shall be binding as
precedent upon the CRJs in subsequent
proceedings.
Dated: January 16, 2009.
Marybeth Peters,
Register of Copyrights.
[FR Doc. E9–1444 Filed 1–23–09; 8:45 am]
BILLING CODE 1410–30–P
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Agencies
[Federal Register Volume 74, Number 15 (Monday, January 26, 2009)]
[Notices]
[Pages 4537-4543]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-1444]
Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 /
Notices
[[Page 4537]]
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LIBRARY OF CONGRESS
Copyright Office
[Docket No. 2009-1]
Review of Copyright Royalty Judges Determination
AGENCY: Copyright Office, Library of Congress.
ACTION: Notice; correction.
-----------------------------------------------------------------------
SUMMARY: The Register of Copyrights issues the following decision
identifying and correcting erroneous resolutions of material questions
of substantive law under title 17 that underlie or are contained in the
Copyright Royalty Judges' final determination regarding adjustment of
reasonable rates and terms of royalty payments for the making and
distribution of phonorecords of musical works, Docket No. 2006-3 CRB
DPRA. The Register concludes that the Copyright Royalty Judges
erroneously did not refer two novel questions of law as required under
the statute; that they were in error in their conclusions regarding
both their and the Register's authority to review regulations submitted
to them under an agreement by the participants; and that their
conclusion that they could not review the agreement submitted by the
participants led to the inclusion of regulations that constitute
erroneous resolution by the CRJs of material questions of substantive
law under title 17. This decision corrects such errors and shall be
made part of the record of the proceeding (Docket No. 2006-3 CRB DPRA).
FOR FURTHER INFORMATION CONTACT: Tanya M. Sandros, Deputy General
Counsel, and 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 Royalty Judges (``CRJs'') are required by 17 U.S.C.
115(c)(3)(C) and Chapter 8 to make and issue determinations and
adjustments of reasonable rates and terms of royalty payments for the
making and distribution of phonorecords of musical works in accordance
with the provisions of 17 U.S.C. 115. Under 17 U.S.C. 802(f)(1)(D), the
Register of Copyrights may review for legal error the resolution by the
CRJs of a material question of substantive law under title 17 that
underlies or is contained in a final determination of the CRJs. If the
Register of Copyrights concludes, after taking into consideration the
views of the participants in the proceeding, that any resolution
reached by the CRJs was in material error, the Register of Copyrights
shall publish such decision correcting such legal errors in the Federal
Register, together with a specific identification of the legal
conclusion of the CRJs that is determined to be erroneous, which shall
be made part of the record of the proceeding.
On November 24, 2008, the CRJs issued to the participants, posted
to their Web site, and transmitted to the Register of Copyrights a copy
of their final determination setting such rates and terms. Final
Determination of Rates and Terms in the Matter of Mechanical and
Digital Phonorecord Delivery Rate Determination Proceeding, Docket No.
2006-3 CRB DPRA (November 24, 2008). The Register of Copyrights,
pursuant to section 802(f)(1)(D), has reviewed the CRJs' final
determination. The Register concludes that the resolution of certain
material questions of substantive law under title 17 that underlie or
are contained in the final determination were in error and issues this
decision correcting such errors.
In the course of their proceeding to set rates and terms of royalty
payments for the making and distribution of phonorecords of musical
works in accordance with the provisions of 17 U.S.C. 115, the CRJs
addressed several material questions of substantive law that were
properly referred to the Register of Copyrights under 17 U.S.C.
802(f)(1)(A)(ii) and 802(f)(1)(B). However, the Register determines
that they erroneously did not refer two additional novel questions of
law as required under the statute. The Register also finds that the
CRJs were in error in their conclusions regarding both their and the
Register's authority to review regulations submitted to them under an
agreement by the participants. The CRJs' conclusion that they could not
review these regulations led to the inclusion of regulations that
constitute erroneous resolutions of material questions of substantive
law under title 17, which as stated, are corrected herein.
The regulations ultimately contained in the CRJs' final
determination establishing rates and terms of royalty payments for the
activities under section 115, i.e. ``making and distributing
phonorecords, including by means of digital phonorecord deliveries,''
are divided into two subparts. The first portion, Subpart A, is the
product of the findings and deliberations of the CRJs, and delineates
the rates and terms for three distinct categories of phonorecords under
the section 115 license. These particular categories identify
phonorecords made under specific conditions and are categorized as
``Physical phonorecord deliveries,'' ``Permanent digital downloads''
and ``Ringtones.'' See 37 CFR 385.1-385.4.\1\ The second portion,
Subpart B, is the product of settlement negotiations among the
participants, and delineates the rates and terms for two additional
distinct categories identifying phonorecords made under the section 115
license. These particular categories identify phonorecords made under
specific conditions and are identified as ``Interactive streaming'' and
``Limited downloads.'' Subpart B also indicates specific conditions
under which ``promotional royalty rates'' are applicable to
``Interactive streaming'' and ``Limited downloads.'' See 37 CFR 385.10-
385.17. The Register observes that although the participants informed
the CRJs that their agreement would address Limited downloads and
Interactive streaming, including all known incidental digital
phonorecord deliveries, their agreement ultimately only addressed
``Interactive streaming'' and ``Limited downloads,'' thus addressing
less activity than might reasonably have been expected.
---------------------------------------------------------------------------
\1\ The Register cites to the regulations in the final
determination, 37 CFR 385.1-385.17, by the references adopted by the
CRJs. As of the date of this review, they have not been codified in
the Code of Federal Regulations.
---------------------------------------------------------------------------
The Register has also concluded that in setting forth rates and
terms for these five distinct categories of phonorecords, the CRJs'
final determination does not include rates and terms for certain
ongoing activities which may be licensable under the section 115
license, e.g., phonorecords made during the course of a non-interactive
stream. Nevertheless, if a licensee makes and distributes phonorecords
that do not fall within any of the five distinct categories of
phonorecords for which specific rates have been set, the making and
distribution of these phonorecords may still be covered by the section
115 license, so long as the licensee operates within the statutory
terms of the license, including the provisions addressing Notice of
Intention to Use and Statements of Account, but the licensee would
incur no obligation to pay royalties for such activity during the
relevant time period. However, under certain circumstances, which are
dictated by section 803(d)(2)(B), royalty rates may be set
retroactively in future proceedings.
Procedural Background of the CRJs' Proceeding
On January 9, 2006, the CRJs issued a Notice announcing
commencement of this proceeding with a request for
[[Page 4538]]
Petitions to Participate, which was published in the Federal Register.
71 FR 1453. In response to the Notice, the following parties submitted
petitions to participate: Royalty Logic, Inc. (``RLI''); the
Songwriters Guild of America (``SGA''); the National Music Publishers''
Association, Inc. (``NMPA''), the Songwriters Guild of America, and the
Nashville Songwriters Association International, jointly (collectively,
``Copyright Owners''); Apple Computer, Inc.; America Online, Inc.;
RealNetworks, Inc.; Napster, LLC; Sony Connect, Inc.; Digital Media
Association (``DiMA''); Yahoo! Inc.; MusicNet, Inc.; MTV Networks,
Inc.; and Recording Industry Association of America (``RIAA'').
On August 1, 2006, prior to the filing of written direct
statements, RIAA sought from the CRJs a referral of a novel question of
law to the Register of Copyrights (``Register''). See Motion of [RIAA]
Requesting Referral of a Novel Question of Substantive Law (filed
August 1, 2006). RIAA asserted that the CRJs were compelled to refer
the novel question of law to the Register under section 802(f)(1)(B).
After considering the views of all of the participants, the CRJs
granted RIAA's motion in part and referred to the Register two novel
questions of law regarding (1) whether ringtones--regardless of whether
the ringtone is monophonic, polyphonic or a mastertone--constitute
delivery of a digital phonorecord subject to statutory licensing under
section 115 and (2) if so, what legal conditions and/or limitations
would apply. See Order Granting in Part the Request for Referral of a
Novel Question of Law, Docket No. 2006-3 CRB DPRA (August 18, 2006). On
October 16, 2006, the Register transmitted a Memorandum Opinion to the
CRJs that addressed the novel questions of law. The Register's
Memorandum Opinion was published in the Federal Register on November 1,
2006. 71 FR 64303.
On January 7, 2008, DiMA requested referral to the Register of what
it described as a novel question of law as to whether ``interactive
streaming'' constituted a digital phonorecord delivery (``DPD''),
asserting that the CRJs were compelled to refer the novel question of
law to the Register under section 802(f)(1)(B). See Motion of [DiMA]
Requesting Referral of a Novel Material Question of Substantive Law
(``DiMA Motion'') (January 7, 2008). Copyright Owners opposed DiMA's
motion and RIAA took no position on it. The CRJs heard oral arguments
on the motion on January 28, 2008. On February 4, 2008, the CRJs denied
DiMA's motion, finding that the matter of what is ``interactive
streaming'' presented a question of fact and not a question of law as
required by section 802(f)(l)(B). See Order Denying Motion of [DiMA],
for a Referral of a Novel Material Question of Substantive Law, Docket
No. 2006-3 CRB DPRA (February 4, 2008).
Subsequent to the presentation of the rebuttal phase of their case,
on May 15, 2008, the participants informed the CRJs that they had
reached a settlement regarding the rates and terms for ``limited
downloads and interactive streaming, including all known incidental
digital phonorecord deliveries'' and agreed to submit the agreement to
the CRJs at a later date. See Joint Motion to Adopt Procedures for
Submission of Partial Settlement at 1 (filed May 15, 2008).
On July 2, 2008, after the evidentiary phase addressing the
remaining issues in the proceeding, the participants filed their
respective Proposed Findings of Fact and Conclusions of Law. The
participants filed replies on July 18, 2008. Closing arguments occurred
on July 24, 2008, after which time the record was closed.
On July 25, 2008, after closing arguments, the CRJs, on their own
motion and under authority established in section 802(f)(1)(A)(ii),
referred to the Register a material question of substantive law
concerning the division of authority between the CRJs and the Register
to establish terms under the section 115 statutory license. See Order
Referring Material Question of Substantive Law, Docket No. 2006-3 CRB
DPRA (July 25, 2008). On August 8, 2008, the Register transmitted a
Memorandum Opinion to the CRJs that addressed the material question of
substantive law. The Register's Memorandum Opinion was published in the
Federal Register on August 19, 2008. 73 FR 48396.
On September 22, 2008, the participants filed their partial
settlement with the CRJs, and it was published in the Federal Register
on October 1, 2008. 73 FR 57033. Public comments were due on October
31, 2008. CTIA-The Wireless Association and the National Association of
Broadcasters (``CTIA/NAB''), non-participants to the rate setting
proceeding, jointly filed the only comment on the agreement. They
argued that adoption of the settlement was beyond the CRJs' authority,
contrary to law and bad policy. See Comments of CTIA-The Wireless
Association and the National Association of Broadcasters (filed October
31, 2008).
On October 2, 2008, the CRJs issued their Initial Determination of
Rates and Terms subject to review by the participants and the filing of
motions for a rehearing. See 17 U.S.C. 803(c)(1) and (2)(A) and (b). On
October 17, 2008, RIAA filed a motion for rehearing to reconsider the
timing of the late payment fee of 1.5% per month. After reviewing the
motion, the CRJs denied the motion for rehearing, by Order dated
November 12, 2008. On November 24, 2008 the CRJs issued to the
participants a copy of their Final Determination of Rates and Terms in
the Matter of Mechanical and Digital Phonorecord Delivery Rate
Determination Proceeding, Docket No. 2006-3 CRB DPRA (``Final
Determination''), and transmitted a copy to the Register of Copyrights.
See Final Determination of Rates and Terms in the Matter of Mechanical
and Digital Phonorecord Delivery Rate Determination Proceeding, Docket
No. 2006-3 CRB DPRA (November 24, 2008).
On January 8, 2009, the Register requested the participants' views
on potential legal errors contained in the CRJs' final determination.
In response, the Register received written views from RIAA, Copyright
Owners, and DiMA on January 15, 2009.
In accordance with the authority granted to the Register of
Copyrights under 17 U.S.C. 802(f)(1)(D), the Register of Copyrights has
reviewed the CRJs' determination of rates and terms of royalty payments
under section 115 taking into account the views of the participants as
reported in the CRJs' final determination and in response to a request
from the Register for written comments on specific issues. Request for
Participants' Views Regarding Possible Legal ErrorsCcontained in the
Copyright Royalty Judges' Final Determination (January 8, 2009). The
Register concludes that certain resolutions of material questions of
substantive law under title 17 which underlie or are contained in the
final determination of the CRJs are in error.
Review of Copyright Royalty Judges' Determination
1. Failure To Refer Novel Questions to the Register
Under 17 U.S.C. 802(f)(1)(B), in any case in which a novel material
question of substantive law concerning an interpretation of those
provisions of title 17 that are the subject of the proceeding is
presented, the CRJs are required to request a written decision from the
Register of Copyrights to resolve such a novel question. A ``novel
question of law'' is a question of law that has not been determined in
prior decisions, determinations, and rulings described in section
803(a) of the Copyright Act. See
[[Page 4539]]
17 U.S.C. 802(f)(1)(B)(ii). During the course of the proceeding, the
CRJs referred two novel questions of substantive law to the Register,
but they did not refer two additional novel material questions of
substantive law concerning an interpretation of provisions of title 17.
The CRJs' failure to refer a novel material question of substantive law
is itself an erroneous legal resolution of ``a material question of
substantive law under [title 17] that underlies or is contained in a
final determination of the [CRJs].'' Therefore any failure to refer a
novel material question is subject to the Register's review under
section 802(f)(1)(D).
One such novel question arose amidst DiMA's motion for referral to
the Register of what DiMA described as a novel question of substantive
law as to whether ``interactive streaming'' constitutes a DPD under
section 115. See Motion of [DiMA] Requesting Referral of a Novel
Material Question of Substantive Law (filed January 7, 2008). After
hearing the participants' arguments on the motion, the CRJs denied
DiMA's motion, finding that the matter of what is ``interactive
streaming'' presented a question of fact and not a question of law as
required by section 802(f)(l)(B); a view shared by Copyright Owners.
The CRJs accurately noted that the statute does not define or mention
the term ``interactive streaming'' and that there is no agreement among
the participants as to the precise meaning of the term. Additionally,
the CRJs asserted that resolution of DiMA's question would require a
certain amount of inquiry into the factual circumstances, and the types
of digital transmissions, that may or may not result in reproductions
of musical works that are licensable under section 115. See Order
Denying Motion of [DiMA], for a Referral of a Novel Material Question
of Substantive Law, Docket No. 2006-3 CRB DPRA (February 4, 2008).
The Register notes that when the CRJs are confronted with novel
material questions of law they are not restricted to considering the
motions and formulations of questions as submitted by the participants.
Rather, they are required to refer any novel questions (or issues) of
law ``concerning an interpretation of those provisions of [title 17]
that are the subject of the proceeding.'' 17 U.S.C. 802(f)(1)(B).
While the issue of what is ``interactive streaming'' does appear to
involve some degree of factual inquiry, it also raises at least one
purely legal question that does not require resolution of specific
factual disputes raised between the participants. For some time, the
Office has recognized a general agreement among interested parties that
streaming necessarily involves reproductions that are made on the
receiving computer in order to better facilitate the actual performance
of the work (often referred to as ``buffer'' copies). See Notice of
Inquiry 66 FR 14099 (Mar. 9, 2001). The view that ``interactive
streaming'' necessarily involves the making and delivery of buffer
copies does not appear to be disputed among the participants to the
proceeding. The purely legal question raised under such an undisputed
understanding regarding ``interactive streaming'' is ``What constitutes
a DPD?'' This question clearly requires an interpretation of a
provision of title 17. Specifically, it requires an interpretation of
the definition of ``digital phonorecord delivery'' as found in section
115(d).
Additionally, regardless of the factual issues surrounding DiMA's
original motion for referral, the Register observes that when the CRJs
considered two novel questions concerning the scope of the section 115
license with regard to ringtones--a term also not defined or even
mentioned in title 17--the participants submitted briefs that revealed
significant factual disagreement as to whether certain ringtones
constituted derivative works. In spite of this disagreement, the
questions regarding ringtones were properly referred to the Register.
Moreover, the Register was able to provide a responsive and instructive
decision on the legal questions which acknowledged that factual
distinctions would continue to dictate whether various ringtone
activities fell within the scope of the section 115 license without
needing to resolve any dispute over specific factual situations. See
Memorandum Opinion on Material Questions of Law, Docket No. RF 2008-1
at 10 (August 8, 2008); see also, 73 FR 48396 (Aug. 19, 2008). Finally,
the Register notes that section 802(f)(1)(B) does not confine the
concept of novel question of substantive law to those involving
interpretation of terms defined or mentioned in title 17.
Failure to refer the question of what constitutes a DPD to the
Register has led to the adoption of a regulation that, on its face,
overstates the scope of the section 115 license with respect to
interactive streams. See 37 CFR 385.11 (defining an interactive stream
as an incidental DPD). As discussed in a subsequent portion of this
review, the CRJs may exercise their continuing jurisdiction to redraft
the regulation to clarify that an interactive stream that delivers a
reproduction of a sound recording that qualifies as a DPD is, for
purposes of the license, an incidental DPD.
A second novel question was the subject of DiMA and RIAA's requests
for a clarification of the statute. DiMA and RIAA, using slightly
different language, requested a determination as to the scope of the
license with respect to copies made to facilitate the delivery of
digital music. See DiMA PFF at 240 (July 2, 2008); DiMA Second
Amended Proposed Rates and Terms at 4 (July 2, 2008); RIAA PFF at
1674-76, 1678-82 (July 2, 2008); RIAA Second Amended Proposal
at 6 (July 2, 2008). Citing to the Register's August 19, 2008,
Memorandum Opinion Responding to Material Questions of Law, the CRJs
concluded that DiMA and RIAA's requests would require interpretation of
the scope, operation and/or obligations of the section 115 license,
which is inconsistent with the CRJs' authority. Final Determination at
71-72, citing to Memorandum Opinion on Material Questions of Law,
Docket No. RF 2008-1 at 10 (Aug. 8, 2008); see also, 73 FR 48396, 48399
(August 19, 2008). The CRJs are correct in this conclusion.
Furthermore, the CRJs are correct that such questions of scope are
inconsistent with their authority. In making these observations, the
CRJs appear to recognize that the participants' requests constituted a
material question of substantive law. However, they do not appear to
have recognized that the question was a novel one, and therefore
required referral to the Register. Indeed, in the same Memorandum
Opinion relied upon by the CRJs when they declined to interpret the
scope of the license, the Register stated that ``In instances where
particular rates are being requested for the creation of particular
types of DPDs and there is some question whether these DPDs fall within
the scope of the license, those questions must be resolved in the
proceeding. When such a question has not been determined before, it is
a novel question of law which should be referred to the Register under
section 802(f)(1)(B).'' 73 FR at 48399.
Ultimately, the failure to refer this question is a harmless error
because the Register has addressed the question and has determined, on
an interim basis, that ``server copies and intermediate reproductions
may come within the scope of the license. The Register note[d] that a
person seeking to operate under the section 115 license must still
satisfy the threshold requirements of the license. But, having done so,
that licensee's coverage may extend to phonorecords other than those
that are actually distributed provided that they
[[Page 4540]]
are made for the purpose of making and distributing a DPD.'' Id. at
66180.
Despite the fact that the failure to refer this question was
ultimately harmless, had the CRJs referred the question, the
participants and the CRJs could have adopted regulations that more
clearly reflect the Register's clarification of the legal issue. See 37
CFR 201.18(a)(3); 201.19(a)(3); and 255.4. (Noting that ``a digital
phonorecord delivery includes all phonorecords that are made for the
purpose of making the digital phonorecord delivery.)''.
2. Erroneous Conclusion Regarding Authority Under Chapter and Section
115.
a. CRJs' authority to review.
Section 801(b)(7)(A) generally directs the CRJs to adopt as a basis
for statutory terms and rates ``an agreement concerning such matters
reached among some or all of the participants in a proceeding at any
time during the proceeding between participants.'' In interpreting this
provision, the CRJs concluded that ``[o]nly if an objection is received
by one or more of the parties are we given any discretion over the
settlement, and then we are limited to rejecting it if we determine
that the settlement 'does not provide a reasonable basis for setting
statutory rates and terms.''' Final Determination at 18-20, citing
section 801(b)(7)(A)(ii) (emphasis added). RIAA, DiMA, and the
Copyright Owners support the CRJs' interpretation of section
801(b)(7)(A). Views of RIAA at 6; Views of Copyright Owners at 9-10;
and Views of DiMA at 1 (January 15, 2009). This interpretation,
however, is in error.
While the provisions of section 801(b)(7)(A) do limit the
circumstances under which the CRJs are able to decline to adopt aspects
of an agreement, it does not foreclose the CRJs from ascertaining
whether specific provisions are contrary to law. The noted limitations
only apply to the CRJs' ability to adopt an agreement ``as a basis for
statutory rates and terms,'' 17 U.S.C. 801(b)(7)(A), and, in doing so,
they promote Congress's policy to encourage parties to negotiate
statutory rates and terms. See Views of RIAA at 6 and Views of
Copyright Owners at 11-12 (January 15, 2009).
The CRJs are not compelled to adopt a privately negotiated
agreement to the extent it includes provisions that are inconsistent
with the statutory license. Thus, while the CRJs are able to review the
reasonableness of permissible terms and rates contained in an agreement
only if a participant to the proceeding objects to the agreement, this
provision does not preclude the CRJs from declining to adopt other
portions of an agreement that would be contrary to the provisions of
the applicable license(s) or otherwise contrary to statutory law.
Furthermore, nothing in the statute limits the CRJs from considering
comments filed by non-participants which argue that proposed provisions
are contrary to statutory law.
This conclusion is consistent with the CRJs' decision that it had
the authority to decline to adopt language in the participants'
agreement that stated that the rates in the agreement have no
precedential effect and may not be introduced or relied upon in any
governmental or judicial proceeding. 72 FR 61586. Moreover, courts have
consistently held that agencies cannot adopt regulations that are
contrary to law. See, e.g., Vasquez-Lopez v. Ashcroft, 343 F.3d 961,
965 (9th Cir. 2003) (``The power of an administrative officer or board
to administer a federal statute and to prescribe rules and regulations
to that end is not the power to make law * * * but the power to adopt
regulations to carry into effect the will of Congress as expressed by
the statute. A regulation which does not do this, but operates to
create a rule out of harmony with the statute, is a mere nullity.''),
cited in Joint Comment of CTIA-The Wireless Association and the
National Association of Broadcasters at 6, filed with Copyright Royalty
Judges in response to their notice for comment on the participants
agreement. 73 FR 57033 (Oct. 1, 2008).
Since the purpose of this proceeding is to establish rates and
terms of payment for a statutory license, an agreement among the
participants may only extend to establishing rates and terms which are
permissible under the statute. Neither the participants nor the CRJs
may add terms or conditions that alter or expand the statutory license.
Hence, it was legal error for the CRJs to conclude that the
restrictions on its authority to review the reasonableness of specific
valid terms and rates also precluded its review of the legality of the
provisions of the agreement as a threshold matter.
b. Register's authority to review.
The CRJs' erroneous conclusion that it had no authority to review
broad aspects of the participants' agreement led them to also conclude
that the settlement does not represent a resolution by the CRJs and
that therefore the Register's review is not part of the procedure
applicable to the relevant rates and terms established by the
settlement provisions of section 802(f)(1)(D). Final Determination at
19-20. The CRJs, however, have no authority to determine whether the
Register, in her review of the CRJs' final determination, has the
authority to review for errors of law provisions in a settlement that
is adopted by the CRJs. In reaching their conclusion, the CRJs argue
that the provisions of the settlement do not constitute a finding of
fact or resolution of law by the CRJs. However, as previously
indicated, and despite their mistaken belief, the CRJs were not
obligated to adopt any portion of an agreement that would be contrary
to the provisions of the applicable license(s) or otherwise contrary to
statutory law. By choosing to include provisions that they were able to
reject, such provisions were freely adopted as resolutions by the CRJs.
Furthermore, section 801(b)(7)(A) requires the CRJs to ``adopt as a
basis for statutory terms and rates or as a basis for the distribution
of statutory royalty payments, an agreement concerning such matters
reached among some or all of the participants in a proceeding,''
(emphasis added). By ``adopting'' an agreement, the CRJs necessarily
accept the terms of the agreement and ``resolve'' any material question
of substantive law that the adopted agreement purports to resolve.
c. CRJs' authority to determine rates for future activities.
The CRJs indicate that in this proceeding they were unable to adopt
rates for future activities without acting arbitrarily and
capriciously. Final Determination at 60-62 (November 24, 2008). The
Register acknowledges that the CRJs decry the empty record in the
instant case and finds no error in their decision not to set rates for
future activities in this instance. However, to the extent the CRJs
believe they lack the authority to set rates for future activities, the
Register notes that the statute does not foreclose that possibility.
Congress contemplated that the CRJs may set rates for particular
activities, even prior to the inception of such activities.\2\
Additionally, the Register observes that the CRJs have broad discretion
in making their determinations. See RIAA v. Copyright Royalty Tribunal,
662 F.2d 1, 8 (D.C. Cir. 1981) (stressing that ``[t]he setting of the
royalty rate is not a routine exercise in historical cost of service
ratemaking for a public utility''). Furthermore, the Register notes
that Congress directed the CRJs to set royalty rates based upon broad
policy objectives that require judgments of an inescapably uncertain
and predictive character. See 17 U.S.C.
[[Page 4541]]
801(b)(1). For example, ``some of the statutory factors require the
[Judges] to estimate the effect of the royalty rate on the future of
the music industry,'' or to consider questions of ``fairness.'' RIAA,
662 F.2d at 8.
---------------------------------------------------------------------------
\2\ ``In cases where rates and terms have not, prior to the
inception of an activity, been established for that particular
activity under the relevant license, * * *'' 17 U.S.C. 803(d)(2)(B).
---------------------------------------------------------------------------
d. CRJs' authority to limit scope of the license by not setting
certain rates.
The Register also observes that the consequence of the CRJs having
set rates and terms for distinct categories of phonorecords, does not
mean that the license is not available for additional activities under
section 115. This observation is in contrast to the participants' views
expressed in the closing arguments of the proceeding indicating that
rights for categories of phonorecords for which no rate is set may only
be cleared through negotiation. See Closing Argument Transcripts 7/24/
08 at 7843-7844; 7954; 7975; and 7989.
As the Register observed in her response to the CRJs' referral of
material questions of substantive law concerning the division of
authority between the CRJs and the Register, ``[t]he CRJs do not have
the authority to issue rules setting forth the scope of activities
covered by the license.'' Final Order, Division of Authority Between
the Copyright Royalty Judges and the Register of Copyrights under the
Section 115 Statutory License 73 FR 48399 (Aug. 19, 2008). Section 115
provides a license for the making and distribution of phonorecords,
including DPDs. It does not condition coverage on whether a rate for
the making and distribution of the phonorecords has been set.
Consequently, failure to set a rate for any particular category of
phonorecords cannot diminish or otherwise affect the availability of
the license. Rather, when categories of phonorecords created in the
course of particular ongoing activities within the scope of the license
are not assigned a rate, the result is that there is no obligation to
pay royalties for those particular activities during the relevant time
period. Therefore, contrary to the conclusion of RIAA, there is no
``gap'' in coverage for DPDs that do not qualify as permanent digital
downloads, limited downloads or interactive streams. See Views of RIAA
at 5 (January 15, 2009). However, future proceedings may retroactively
apply rates to a particular activity under section 115 in cases where
rates and terms have not, prior to the inception of that activity, been
established for the particular activity. Such retroactive rates and
terms shall then apply from the inception of the particular activity.
See Infra section 3(b) regarding the final determination's treatment of
``retroactive rates'' under 17 U.S.C. 803(d)(2)(B).
3. Problematic provisions in the regulations promulgated in the
final determination.
In addressing the following regulatory provisions contained in the
final determination, the Register acknowledges that both RIAA and
Copyright Owners have argued that section 385.10 of the regulations
satisfactorily addresses instances in which the rates and terms are, on
their face, contrary to the statute. See Views of RIAA at 8 (January
15, 2009); Views of Copyright Owners at 15 (January 15, 2009). While
section 385.10 states that rates and terms shall be ``in accordance
with the provisions of 17 U.S.C. 115'' and requires that a licensee
shall ``comply with the requirements of that section,'' such a
provision is insufficient to address regulatory language that directly
conflicts with the statute. The following regulations either conflict
with statutory provisions in title 17 or could be read to alter or
expand the statutory license. Prior determinations of the Librarian of
Congress have considered and rejected similar terms that would have
altered or expanded the statutory licenses as contrary to law. See
Determination of Reasonable Rates and Terms for the Digital Performance
of Sound Recordings, 63 FR 45269 (July 8, 2002) (The Librarian
concluded that neither the CARP nor the Librarian had the authority to
adopt a regulation, whether as a condition of the license or not, that
would foreclose a legal remedy for a breach of a legal obligation).
Therefore, consistent with prior decisions specified in 803(a), and
under the authority conferred by 802(f)(1)(D), the Register finds the
following terms erroneous to the extent indicated herein.
a. Interactive streams constitute DPDs.
Section 385.11 of the regulations set forth in the final
determination, which states that ``[an] interactive stream is an
incidental digital phonorecord delivery under 17 U.S.C. 115(c)(3)(C)
and (D)'' is erroneous. This articulation of what constitutes a DPD
equates a means of transmission to the reproduction and delivery of a
phonorecord. However, regulations cannot alter statutory terms of the
section 115 license regarding what constitutes a DPD.
The statutory criteria as to what constitutes a DPD are set forth
in the notice announcing an Interim Rule in which the Office explains
that a DPD requires a reproduction of a sound recording that must meet
all three criteria specified in the statutory definition: (1) It must
be delivered, (2) it must be a phonorecord, and (3) it must be
specifically identifiable. 73 FR 66173, 66176 (Nov. 7, 2008). Moreover,
this Copyright Office rulemaking proceeding also addressed the question
of interactive and non-interactive streams, noting that the
determination of what constitutes a DPD is not dictated by the
characterization of the transmission that delivers the phonorecord as
interactive or non-interactive. Nevertheless, the Office did
acknowledge that ``it may be more common for interactive streams to
result in DPDs and that it may be relatively uncommon for non-
interactive streams to do so. However, if phonorecords are delivered by
a transmission service, then under the last sentence of 115(d) it is
irrelevant whether the transmission that created the phonorecords is
interactive or non-interactive.'' Id. at 66180. In other words, a
stream--whether interactive or non-interactive--may or may not result
in a DPD depending on whether all the aforementioned criteria are met.
A regulation that provides categorically that ``[a]n interactive stream
is an incidental digital phonorecord delivery under 17 U.S.C. 115
(c)(3)(C) and (D)'', without regard to whether any of those required
criteria have been met, articulates an erroneous conclusion of law.
Hence, in light of the Office's analysis accompanying its adoption
of a more particularized definition of a DPD, the proposed regulation
which states that all interactive streams, as defined by the agreement,
are DPDs, is overbroad because it would include interactive streams
that do not result in the delivery of a DPD. The Office recognizes,
however, that the regulation may not have been intended to set a rate
for interactive streams that do not result in the delivery of a
phonorecord and that the problem may be the result of inartful drafting
of the regulation rather than an erroneous conclusion over what
constitutes a DPD, an observation confirmed by RIAA. Views of RIAA at 4
(January 15, 2009). Nevertheless, because the regulatory text can
easily be misinterpreted as stating that all interactive streams are
incidental DPDs, and therefore subject to the license, the ambiguity in
the regulatory text should be clarified. In either case, the problem is
corrected by construing the regulation as referring only to those DPDs
made and delivered during the course of an interactive stream. Under
the CRJs' continuing jurisdiction, the regulation may be redrafted to
clarify that an interactive stream that delivers a reproduction of a
sound recording that
[[Page 4542]]
qualifies as a DPD is for purposes of the license, an incidental DPD.
b. Limited retroactive effect of rates.
Section 385.14(e) of the regulations set forth in the final
determination provides, in pertinent part, that ``in the case of
licensed activity prior to the publication date, the promotional
royalty rate shall apply to promotional interactive streams, and to
limited downloads offered in the context of a free trial period for a
digital music subscription service.'' Such retroactive application of
promotional royalty rates is erroneous to the extent that it is
overbroad in reaching--and retroactively setting rates for--promotional
activity where rates applicable to the activity were set for the
previous rate period. Neither the CRJs nor the participants have the
power to engage in retroactive rate setting other than that which is
expressly authorized by the statute. As indicated in the Register's
August 19, 2008 Memorandum Opinion responding to a material question of
law, ``retroactive rulemaking is in most cases beyond the power of an
agency'' Memorandum Opinion on Material Questions of Law, Docket No. RF
2008-1 at 10 (August 8, 2008), Citing to Bowen v. Georgetown University
Hospital, 488 U.S. 204 (1988). The Bowen court elaborated on
retroactive rulemaking indicating that ``[r]etroactivity is not favored
by the law'' and that where rules may have retroactive effect, the
``power is conveyed by Congress in express terms.'' Bowen, 488 U.S. at
208 (1988).
In the case of rates and terms set by the CRJs, title 17
establishes circumstances under which rates may be retroactively
applied to activities under the section 115 license. Section
803(d)(2)(B) states that ``[i]n cases where rates and terms have not,
prior to the inception of an activity, been established for that
particular activity under the relevant license, such rates and terms
shall be retroactive to the inception of activity under the relevant
license covered by such rates and terms.''
With respect to limited downloads, the previous rate-setting
proceeding established royalty fees that clearly applied to limited
downloads, whether such downloads were promotional or not. See 37 CFR
255.5 (1999) (setting rates for DPDs ``except for digital phonorecord
deliveries where the reproduction or distribution of a phonorecord is
incidental to the transmission which constitutes the digital
phonorecord delivery, as specified in 17 U.S.C. 115(c)(3)(c) and
(D)''). As the regulations adopted by the CRJs recite, ``A limited
download is a general digital phonorecord delivery under 17 U.S.C.
115(c)(3)(C) and (D)'' Section 385.11 (definition of ``Limited
download,'' para. 3). Thus limited downloads--whether or not for
promotional purposes--that took place between the effective date of the
rates established in 1999 and the effective date of the rates under
review here are governed by the rates set in 1999.\3\ This error is
corrected by clarifying that such promotional royalty rates do not
apply retroactively to limited downloads offered in the context of a
free trial period for a digital music subscription service. Under the
CRJs' continuing jurisdiction, the regulations may be redrafted to
conform with this clarification.
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\3\ The Register finds so support for Copyright Owners'
assertion that the previous rate for DPDs aplied only to permanent
downloads. See Views of Copyright Owners at 17 (January 15, 2009).
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With respect to interactive streams, the regulations adopted by the
CRJs characterize interactive streams as incidental DPDs (see section
385.11 (definition of ``Interactive stream'')), and the Register
accepts that characterization. The 1999 rate-setting proceeding did not
set rates for incidental DPDs. Instead, the setting of rates for
incidental DPDs was ``deferred'' for consideration until the next
adjustment proceeding. See 37 CFR 255.6 (1999). The question thus
arises whether, in light of the deferral of setting of rates for
incidental DPDs, the retroactive application of the promotional royalty
rate to promotional interactive streams would constitute a material
error of law. The Register observes that both the meaning of the
previous ``deferral'' of setting rates for incidental DPDs, (an
activity whose inception appears to have occurred prior to the previous
rate setting), as well as the statutory language, which was enacted
after the previous proceeding, present complex issues which have not
been fully briefed by the parties in any context. Section 803(d)(2)(B)
could be read to authorize the retroactive setting of rates for
incidental DPDs when no such rates had been previously set, even in
cases where the issue could and perhaps should have been addressed in
the previous rate-setting proceeding. On the other hand, the Register
questions whether permitting the retroactive setting of rates under
such circumstances is wise or consistent with the intent of Congress
when it enacted the Copyright Royalty and Distribution Reform Act of
2003 (which among other things, amended Chapter 8 to include section
803(d)(2)(B). See H.R. Rep. 108-408 (2004), at 101 (remarks of co-
sponsor and subcommittee ranking member Rep. Howard Berman: ``The
series of interrelated changes ensures that all rates and terms for
statutory licenses will be set prospectively, not retroactively, and
eliminate, therefore, the possibility that a time period covered by a
statutory license will commence before the establishment of rates and
terms.''). However, given the lack of any evidence or in-depth argument
on these questions and the compressed period of time allotted by
section 802(f)(1)(D) for review by the Register of the CRJs'
determination, the Register declines to come to a conclusion regarding
application of the promotional royalty rate to promotional interactive
streams.
c. Timing of payment.
Section 385.15 of the regulations states that ``[p]ayment for any
accounting period for which payment otherwise would be due more than
180 days after the publication date shall be due as otherwise provided
under 17 U.S.C. 115 and its implementing regulations. Payment for any
prior accounting period shall be due 180 days after the publication
date.'' This provision erroneously alters the timing of payment already
established in section 115. Specifically, section 115(c)(5) states that
``[r]oyalty payments shall be made on or before the twentieth day of
each month and shall include all royalties for the month next
preceding;'' and it is this provision in the law that governs the
payment schedule for use of the statutory license. While the Register
understands the participants' reasons for adopting a term that would
delay the first payment under the new rate schedule, there is no
precedent for this practice, contrary to the RIAA's interpretation of a
term adopted in a past rate setting proceeding. See Views of RIAA at 11
(January 15, 2009).
Prior determinations of the Librarian of Congress have considered
and rejected as contrary to law similar terms on the basis that such
terms would have altered or nullified provisions in the statutory
licenses. For example, in 1998, the Librarian, upon the recommendation
of the Register, rejected a term of payment which would have altered a
payment schedule already established by law and delayed the first
payment for six months. Determination of Reasonable Rates and Terms for
the Digital Performance of Sound Recordings, 63 FR at 25410, citing
section 114(f)(5)(B). In that proceeding, the relevant statutory
provision required ``any royalty payments in arrears [to] be made on or
before the twentieth day of
[[Page 4543]]
the month next succeeding the month in which the royalty fees are
set.'' Because the proposed term would not have required payment to be
made in accordance with this provision, the Librarian rejected the term
as contrary to law. Similarly, in a 2002 proceeding to set rates and
terms for the digital performance of sound recordings and the making of
ephemeral reproductions, the Librarian accepted the Register's
recommendation to adopt September 1, 2002, as the effective date of the
rates and terms for the statutory license rather than use the
publication date of the Librarian's order. The purpose in setting a
later effective date was to delay the adoption of the new rates and
terms for a period of time as a way to reduce the financial burden on
licensees who had to pay royalties that had accrued since 1998, and to
ensure that the date that had been adopted for the first payment,
October 20, 2002, complied with the statutory provision that required
payments in arrears to be paid ``on a date certain in the month
following the month in which the rate is set.'' 67 FR at 45271 (July 8,
2002). Had the rates and terms become effective on the publication
date, this provision would have been contrary to law. Consequently, in
both cases, the Register recommended that the Librarian adjust the
effective date for the adopted rates and terms under his authority in
17 U.S.C. 802(g)(2002) to align the date for the first payment adopted
through the rate setting proceeding with the date for making the first
payment as specified in the statutory license.
The CRJs have the same authority to determine the date the adopted
rates and terms take effect. 17 U.S.C. 803(d)(2)(B). This provision
first establishes that ``[i]n [other] cases where rates and terms do
not expire on a specified date, successor rates and terms shall take
effect on the first day of the second month that begins after the
publication of the determination of the Copyright Royalty Judges in the
Federal Register.'' It then continues, ``except as otherwise provided
in this title, or by the Copyright Royalty Judges, or as agreed by the
participants in the proceeding that would be bound by the rates and
terms.'' If the purpose of the regulation on timing of payments was to
provide relief to licensees from an onerous first payment, altering the
effective date of the license period would be one way to provide the
licensees some relief in meeting its royalty obligation when payment
becomes due. See, e.g., Determination of Reasonable Rates and Terms for
the Digital Public Performance of Sound Recordings, 63 FR at 25412 (May
8, 1998) (adjusting the effective date of the rate setting
determination to provide licensees with time to adjust their business
operations to meet obligation to make timely payment of arrears). The
Register takes no position, however, on whether the effective date
should be adjusted, noting that such a decision is within the
discretion of the CRJs and the participants themselves.
d. Statements of account.
Section 385.14(a)(4) of the regulations set forth in the final
determination, which provides, in pertinent part, that ``[f]or the
avoidance of doubt, however, except as provided in paragraph (a) of
this section, statements of account under 17 U.S.C. 115 need not
reflect interactive streams or limited downloads subject to the
promotional royalty rate'' is erroneous. Regulations cannot alter
statutory terms of the section 115 license regarding Statements of
Account. Title 17 authorizes the Register to ``prescribe regulations
under which detailed cumulative annual statements of account, certified
by a certified public accountant, shall be filed for every compulsory
license under this section.'' 17 U.S.C. 115(c)(5). The CRJs cannot
alter requirements issued by the Register regarding statements of
account. As indicated in the Register's response to the CRJs' referral
of material questions of substantive law concerning the division of
authority between the CRJs and the Register, ``[a]uthority to issue
regulations regarding these statements of account is the exclusive
domain of the Register.'' Final Order, Division of Authority Between
the Copyright Royalty Judges and the Register of Copyrights under the
Section 115 Statutory License 73 FR 48398, (August 19, 2008).
Additionally, section 115(c)(5) indicates that ``[t]he regulations
[of the Register] covering both the monthly and the annual statements
of account shall prescribe the form, content, and manner of
certification with respect to the number of records made and the number
of records distributed.'' 17 U.S.C. 115(c)(5). There is no statutory
authority for an exception to this requirement for certain types of
``phonorecords'' or for the participants to alter this provision by
agreement. As previously referenced, prior determinations of the
Librarian of Congress have considered and rejected similar terms that
altered or expanded the statutory licenses. See supra at section 3(c)
citing 63 FR 25394, and 63 FR at 45269.
The problem is corrected by clarifying that licensees are required
to operate within the Register's Statements of Account and Notice of
Intention to Use regulations, even if such regulations foreclose the
application of certain provisions included in the CRJs' final
determination. Any agreement among a licensee and a copyright owner to
adopt terms that alter the statutory conditions and terms necessarily
means that the licensee is operating under a private license rather
than the statutory license. Harry Fox Agency, Inc. v. Mills Music,
Inc., 543 F. Supp. 844, 851-852 (S.D.N.Y. 1982). Under the CRJs'
continuing jurisdiction, the regulations may be redrafted to clarify
that licensees must comply with the Register's regulations addressing
Statements of Account.
CRJs' Continuing Jurisdiction
The Register notes that the CRJs enjoy continuing jurisdiction to
amend their final determination. Under section 803(c)(4), ``[t]he
Copyright Royalty Judges may issue an amendment to a written
determination to correct any technical or clerical errors in the
determination or to modify the terms, but not the rates, of royalty
payments in response to unforeseen circumstances that would frustrate
the proper implementation of such determination. Such amendment shall
be set forth in a written addendum to the determination that shall be
distributed to the participants of the proceeding and shall be
published in the Federal Register.'' This authority may be exercised to
codify the corrections identified and made herein by the Register
through her authority under section 802(f)(1)(D).
Conclusion
Having reviewed the CRJs' resolution for legal error, pursuant to
the requirements established in section 802(f)(1)(D), the Register
issues this written decision correcting the above referenced legal
errors not later than 60 days after the date on which the final
determination by the CRJs was issued. This decision shall be made part
of the record of the proceeding (Docket No. 2006-3 CRB DPRA), and the
conclusions of substantive law involving and interpretation of title 17
contained herein shall be binding as precedent upon the CRJs in
subsequent proceedings.
Dated: January 16, 2009.
Marybeth Peters,
Register of Copyrights.
[FR Doc. E9-1444 Filed 1-23-09; 8:45 am]
BILLING CODE 1410-30-P