Verification of Statements of Account Submitted by Cable Operators and Satellite Carriers, 31992-31995 [2014-12755]

Agencies

• Library of Congress

[Federal Register Volume 79, Number 106 (Tuesday, June 3, 2014)]
[Notices]
[Pages 31992-31995]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-12755]


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LIBRARY OF CONGRESS

 Copyright Office, Library of Congress

[Docket No. 2012-5]


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

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

ACTION: Notice of public roundtable.

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SUMMARY: The U.S. Copyright Office will host a public roundtable 
concerning a new procedure to allow copyright owners to audit the 
Statements of Account and royalty payments that cable operators and 
satellite carriers deposit with the Office. The roundtable is intended 
to elicit specific information concerning the topics listed in this 
notice. The Office is especially interested in hearing from accounting 
professionals with experience and expertise in auditing procedures and 
statistical sampling techniques.

DATES: The public roundtable will be held on July 9, 2014 beginning at 
10:00 a.m. at the address listed below. Requests to participate in the 
roundtable discussion must be submitted in writing no later than June 
26, 2014.

ADDRESSES: The public roundtable will take place in the Office of the 
Register of Copyrights, LM-403 of the Madison Building of the Library 
of Congress, 101 Independence Avenue SE., Washington, DC 20559. The 
Office strongly prefers that requests to participate in the discussion 
be submitted electronically using the form which will be posted on the 
Office's Web site at https://www.copyright.gov/docs/soaaudit/public-roundtable/. If electronic submission is not feasible, please contact 
the Office at (202) 707-8350 for special instructions.

FOR FURTHER INFORMATION CONTACT: Jacqueline C. Charlesworth, General 
Counsel and Associate Register of Copyrights, by email at 
jcharlesworth@loc.gov, or by telephone at 202-707-8350; Erik Bertin, 
Assistant General Counsel, by email at ebertin@loc.gov, or by telephone 
at 202-707-8350; or Sarang V. Damle, Special Advisor to the General 
Counsel, by email at sdam@loc.gov, or by telephone at 202-707-8350.

SUPPLEMENTARY INFORMATION:

I. Background

    The Satellite Television Extension and Localism Act of 2010 
(``STELA'') directed the Register of Copyrights to establish a new 
procedure to allow copyright owners to audit the Statements of Account 
(``SOAs'') and royalty fees that cable operators and satellite carriers 
file with the U.S. Copyright Office (the ``Office''). See 17 U.S.C. 
111(d)(6), 119(b)(2). Cable operators and satellite carriers file SOAs 
and deposit royalties every six months in order to obtain the benefits 
of the statutory licenses that allow for the retransmission of over-
the-air broadcast signals.
    On January 31, 2012, a group of copyright owners filed a Petition 
for Rulemaking and provided the Office with proposed language for the 
new audit procedure.\1\ See Petition at 1-4. On June 14, 2012, the 
Office published a notice of proposed rulemaking that set forth its 
initial proposal for this new procedure (the ``First NPRM''), which was 
based, in part, on audit regulations that the Office has adopted in the 
past, as well as the petition that the Office received from the 
copyright owners. See 77 FR 35643 (June 14, 2012).
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    \1\ This group included the Program Suppliers (commercial 
entertainment programming), Joint Sports Claimants (professional and 
college sports programming), National Association of Broadcasters 
(``NAB'') (commercial television programming), Commercial Television 
Claimants (local commercial television programming), Broadcaster 
Claimants Group (U.S. commercial television stations), American 
Society of Composers, Authors and Publishers (``ASCAP'') (musical 
works included in television programming), Broadcast Music, Inc. 
(``BMI'') (same), Public Television Claimants (noncommercial 
television programming), Public Broadcasting Service (``PBS'') 
(same), National Public Radio (``NPR'') (noncommercial radio 
programming), Canadian Claimants (Canadian television programming), 
and Devotional Claimants (religious television programming).
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    The Office received extensive comments from groups representing 
copyright owners, cable operators, and individual companies that use 
the statutory licenses. The Office carefully studied these comments and 
revised its proposal based on the suggestions it received. On May 9, 
2013 the Office issued a second notice of proposed rulemaking setting 
forth a revised proposal for the audit procedure (the ``Second NPRM''), 
which was largely based on a joint recommendation that the Office 
received from certain stakeholders.\2\ See 78 FR 27137 (May 9, 2013). 
Once again, the Office received extensive comments.
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    \2\ The joint recommendation was submitted by DIRECTV, the 
National Cable Television Association, and a group representing 
certain copyright owners, namely, the Program Suppliers, Joint 
Sports Claimants, ASCAP, BMI, SESAC, the Public Television 
Claimants, the Canadian Claimants Group, the Devotional Claimants, 
and NPR.
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    On December 26, 2013, the Office issued an interim rule that 
establishes one aspect of the audit procedure (the ``Interim Rule''). 
See 78 FR 78257 (Dec. 26, 2013). Specifically, the Interim Rule allows 
copyright owners to initiate an audit by filing a notice with the 
Office and by delivering a copy of that notice to the statutory 
licensee that will be subject to the procedure. See id. at 78257. The 
Office also explained that it was in the process of reviewing the 
comments submitted in response to the Second NPRM. See id. at 78258.
    After analyzing the latest round of comments, the Office has 
decided to revisit several issues that were identified and discussed in 
the First and Second NPRMs. In addition, the Office has identified some 
new issues that were not addressed in any of the comments. These issues 
are described in Sections II.A through II.E below. Many of them are 
overlapping in the sense that there may be a common solution for 
multiple issues.
    The public roundtable is intended to elicit specific information on 
these designated topics, preferably from individuals with experience 
and expertise in accounting. At this time, the Office is seeking input 
only on the topics specifically mentioned in this notice. Following the 
roundtable, the Office expects to issue another notice of proposed 
rulemaking (the ``Third NPRM''), which will set forth a revised 
proposal for the audit procedure. The Third NPRM will address various 
issues that the parties raised in response to the Second NPRM, as well 
as relevant input that the Office receives during the roundtable. The 
Third NPRM will be published in the Federal Register and copyright 
owners, cable operators, satellite carriers, accounting professionals, 
and other interested parties will be given an opportunity to submit 
written comments at that time.

II. Topics for the Public Roundtable

A. Concerns Regarding Backlogs of Pending Audits

    As noted above, the proposed rule set forth in the Second NPRM 
borrows heavily from the joint recommendation that the Office received 
from certain

[[Page 31993]]

stakeholders. After studying the comments received in response to the 
Second NPRM, the Office is concerned that the audit procedure 
contemplated by this rule could lead to significant backlogs in pending 
audits.
    This concern arises out of the interplay of several provisions of 
the proposed rule and the probable timeline for conducting most audits. 
First, the proposed rule limits the number of SOAs that may be audited 
at one time. Licensees may be subject to only one audit during a 
calendar year, and each audit may involve no more than two SOAs. See 78 
FR at 27152. For multiple system operators (``MSOs''), each audit may 
cover a sample of no more than ten percent of the MSO's systems, and 
the audit of each system may involve no more than two SOAs filed by 
each system. Id. at 27153. Significantly, the Second NPRM made clear 
that if a single audit spanned multiple years, the licensee would not 
be subject to any other audits during those years. For example, if an 
auditor initiated an audit in 2013, and delivered his or her final 
report in 2014, the licensee could not be subject to any other audits 
in calendar year 2013 or 2014, because the licensee would already be 
subject to an audit during those years. See id. at 27143. If copyright 
owners wished to audit additional SOAs filed by that licensee, they 
would have to wait until calendar year 2015 to review those statements.
    These limitations come with a safety valve of sorts: if the auditor 
concludes that there was a net aggregate underpayment of five percent 
or more, the copyright owners could audit all of the SOAs that the 
licensee filed during the previous six accounting periods.\3\ Id. at 
27153. But while this expanded audit was taking place copyright owners 
would be barred from commencing a separate audit of other SOAs filed by 
that licensee (e.g., more recently filed SOAs that were not included in 
the current audit).
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    \3\ In the case of an audit involving an MSO the copyright 
owners would be permitted to audit up to thirty percent of the MSO's 
systems and for each of those systems the auditor would be permitted 
to review up to six SOAs from the previous six accounting periods.
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    Second, under the Interim Rule, a copyright owner may preserve the 
right to audit a particular SOA so long as it files a notice of intent 
within three years after the last day of the year in which that 
statement was filed. 37 CFR 201.16(c)(1). Notably, however, the Interim 
Rule and the proposed rule do not specify a precise deadline by which a 
copyright owner must commence the actual audit. Likewise, the Office 
did not propose any deadline for the completion of a full audit, 
although the proposed rule included a detailed description of the steps 
necessary to complete the audit and provided several interim deadlines 
for completing some of those steps.
    The Office offered these proposals on the assumption that most 
audits could be completed within a single calendar year. But that may 
not be a realistic assumption in some cases, especially where the 
copyright owners conduct an expanded audit or where a licensee fails to 
cooperate with an auditor's requests for documentation in a timely 
manner. If an audit is not completed in the expected time frame, a 
backlog of pending audits could easily develop. For instance, if 
copyright owners initiate an audit of a cable operator's SOAs for the 
2014-1 and 2014-2 accounting periods during calendar year 2015, those 
audits would have to be fully completed by December 31, 2015 if 
copyright owners want to audit the operator's SOAs for the 2015-1 and 
2015-2 accounting periods in calendar year 2016. But if the audit of 
the 2014 SOAs extended into January of 2016, the fact that an operator 
would be subject to no more than one audit per calendar year would 
force the copyright owners to wait until the start of 2017 to begin the 
audit of the 2015 SOAs. And if the audit of the 2015 SOAs did not 
conclude by December 31, 2017, copyright owners would have to wait 
until 2019 to initiate a new audit involving no more than two of the 
seven other SOAs that the operator filed in 2016, 2017, 2018, and 2019. 
At the same time, the copyright owners could indefinitely preserve the 
right to audit those seven SOAs under the Interim Rule by timely filing 
notices of intent within the applicable three-year deadline. See 37 CFR 
201.16(c)(1).
    The problem of backlogs appears especially acute in the case of 
MSOs. Under the proposed rule, copyright owners are permitted to file 
notices of intent to audit the SOAs filed by all of the cable systems 
owned by an MSO, but in any given year they may audit only ten percent 
of those systems. As a result, backlogs would occur immediately and it 
could conceivably take decades for copyright owners to verify all of 
the statements that they wish to review for a given period.
    Such backlogs would obviously place an undue burden on both 
copyright owners and licensees. Copyright owners should be able to 
audit an SOA within a reasonable amount of time after it is filed, but 
this may not be possible if there are many pending audits in the queue. 
In such cases, copyright owners may feel obligated to file notices of 
intent to audit on a routine basis in order to preserve the option of 
auditing a particular licensee, even if they do not expect to proceed 
with the audit in the foreseeable future. At the same time, the 
licensee might be required to maintain records related to SOAs for many 
years before an audit gets underway, which creates administrative 
burdens and could increase the risk that records may be lost or damaged 
in the interim.
    The Office would like to discuss the concerns described above, and 
is interested in hearing stakeholders' views on possible safeguards 
against such backlogs. We believe there are a number of solutions that, 
individually or taken together, could help mitigate these concerns. One 
possibility is to set precise deadlines for starting and completing 
each audit. Once a notice has been filed with the Office, should the 
auditor be required to begin his or her review within a specified 
period of time? If so, should the deadline be one month, three months, 
six months, or some other time period? If the auditor does not proceed 
with the audit in a timely manner, should the copyright owners lose the 
opportunity to audit the SOAs identified in the notice of intent to 
audit? Once the audit begins, should the auditor be required to 
complete his or her review within a specified period of time? Should 
the licensee be penalized (for example, by allowing the commencement of 
a concurrent audit) if the auditor determines that the licensee did not 
reasonably cooperate with his or her requests and that this compromised 
the auditor's ability to complete the audit within the time allowed?
    Another possibility is to loosen the restrictions on the number of 
SOAs that may be included in each audit or the number of separate 
audits that can take place at any given time. Would it be more 
efficient to allow the copyright owners to audit more than two SOAs at 
a time? If the typical audit may require more than twelve months, would 
it be preferable if the licensee were subject to no more than one audit 
at a time, rather than no more than one audit per calendar year? Are 
there circumstances where it might make sense to allow audits to 
overlap?
    We are particularly interested in hearing potential solutions to 
the problem of MSOs. In the case of an audit involving an MSO, would it 
be reasonable to apply the auditor's findings to SOAs filed by other 
systems that were not included in the audit? In other words, if the 
auditor discovers an underpayment or overpayment in the SOAs filed by 
ten percent of the MSO's Form 2 and Form 3 systems, is it reasonable to 
assume that the auditor

[[Page 31994]]

would find similar discrepancies in the SOAs filed by the other systems 
owned by that MSO? What accounting methods, if any, could be used to 
extrapolate findings for one system to the other systems? Should the 
final rule specify the methods that may be used for this purpose? 
Should an MSO be given the opportunity to include a larger sample of 
systems in the audit if it is concerned that statistical sampling may 
yield unreliable results? If the auditor is allowed to audit more than 
two SOAs and/or to apply his or her findings to multiple cable systems, 
would there be any need to allow copyright owners to expand the scope 
of the initial audit to preceding periods as contemplated by the Second 
NPRM?
    In addition, there may be other possibilities for avoiding 
potential backlogs that the Office has not considered, and we welcome 
other ideas that could mitigate the significant concern that the audit 
process could lag far behind periods for which review may be sought.

B. The Proper Auditing Standard

    The proposed rule set forth in the Second NPRM specifies that the 
audit must be conducted ``according to generally accepted auditing 
standards.'' 78 FR at 27151. Guidance from the American Institute of 
Certified Public Accountants (``AICPA'') indicates that ``generally 
accepted auditing standards'' are those that are used by accountants to 
audit corporate financial statements.\4\ In modern accounting practice, 
are ``generally accepted auditing standards'' the proper standards to 
apply to the audits contemplated here? Or is there an alternative 
approach, such as ``attestation standards,'' that might be more 
appropriate? \5\
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    \4\ See AICPA, Clarified Statements on Auditing Standards AU-C 
Section 200.01, available at https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-C-00200.pdf.
    \5\ See AICPA, Statements on Standards for Attestation 
Engagements at Section 101.01, available at https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AT-00101.pdf.
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C. Limitation on Ex Parte Communications

    The Second NPRM contains a detailed provision governing ex parte 
communications. Specifically, the provision bans ex parte 
communications regarding the audit between the selected auditor and the 
participating copyright owners, except in certain narrow circumstances. 
The Office included this provision based on the joint stakeholder's 
recommendation and with the understanding that this provision was 
intended to maintain the independence of the auditor. See 78 FR at 
27151. We note, however, that such a restriction does not appear in 
other audit regulations promulgated by the Copyright Office or the 
Copyright Royalty Board.\6\ Could this restriction create 
inefficiencies in the audit process by preventing copyright owners from 
communicating with the auditor without first coordinating with the 
licensee? Is this restriction consistent with the relevant professional 
standards for auditors? Are the concerns that prompted the joint 
stakeholders to recommend this provision already addressed by those 
professional standards?
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    \6\ See 37 CFR 201.30 (verification of SOAs filed under Section 
1003(c)); 37 CFR 380.6 and 380.7 (verification of royalty payments 
made by commercial and noncommercial webcasters under Sections 
112(e) and 114); 37 CFR 380.15 and 380.16 (verification of royalty 
payments made by broadcasters under Sections 112(e) and 114); 37 CFR 
380.25 and 380.26 (verification of royalty payments made by 
noncommercial educational webcasters under Sections 112(e) and 114); 
37 CFR 382.6 and 382.7 (verification of royalty payments made by 
nonexempt preexisting subscription services under Sections 112(e) 
and 114); 37 CFR 382.15 and 382.16 (verification of royalty payments 
made by preexisting satellite digital audio radio services under 
Sections 112(e) and 114); 37 CFR 384.6 and 384.7 (verification of 
royalty payments made by business establishment services under 
Section 112(e)).
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D. Disputing the Facts and Conclusions Set Forth in the Auditor's 
Report

    Section 111(d)(6) of the Copyright Act directs the Office to issue 
regulations that ``require a consultation period for the independent 
auditor to review its conclusions with a designee of the cable 
system,'' ``establish a mechanism for the cable system to remedy any 
errors identified in the auditor's report,'' and ``provide an 
opportunity to remedy any disputed facts or conclusions.'' 17 U.S.C. 
111(d)(6)(C).
    The Second NPRM proposed to implement this directive by requiring 
the auditor to prepare a written report setting forth his or her 
conclusions, to consult with the licensee for a period of thirty days, 
and, if the auditor agreed that a mistake had been made, to correct the 
report before delivering it to the copyright owners. See 78 FR at 
27144-45. If the auditor and the licensee are unable to resolve their 
disagreements, the proposed rule states that the licensee may prepare a 
written response within fourteen days thereafter, which would be 
attached as an exhibit to the auditor's final report. Id.
    After further analysis, the Office is concerned that this may be 
unduly restrictive, in part due to the time constraints imposed by the 
proposed rule. The Office would like to know whether the auditor and 
licensee should have more flexibility in conducting this phase of the 
audit to increase the possibility that points of disagreement can be 
resolved. For instance, the Copyright Royalty Board adopted audit 
regulations for royalty payments made under Sections 112(e) and 114 
that simply state, ``the auditor shall review the tentative written 
findings of the audit with the appropriate agent or employee of the 
Licensee being audited in order to remedy any factual errors and 
clarify any issues relating to the audit; [p]rovided that an 
appropriate agent or employee of the Licensee reasonably cooperates 
with the auditor to remedy promptly any factual errors or clarify any 
issues raised by the audit.'' \7\ Should the Office consider a similar 
approach for audits involving cable operators and satellite providers? 
If so, how might such an approach impact the timing and completion of 
audits?
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    \7\ 37 CFR 380.6(f) and 380.7(f) (royalty payments made by 
commercial and noncommercial webcasters). Similar language appears 
in the regulations governing the verification of royalty payments 
made by broadcasters (37 CFR 380.15(f) and 380.16(f)), noncommercial 
educational webcasters (37 CFR 380.25(f) and 380.26(f)), preexisting 
satellite digital audio radio services (37 CFR 382.15(f) and 
382.16(f)), and business establishment services (37 CFR 384.6(f) and 
384.7(f)).
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    If the Office retains the approach set forth in the Second NPRM, 
should the licensee be given an opportunity to review the initial draft 
of the auditor's report before the consultation period begins? Is 
thirty days a sufficient amount of time for the consultation period? 
Should the auditor provide the licensee with a revised draft of the 
report at the end of the consultation period reflecting any errors or 
mistakes that have been corrected? If the licensee disagrees with the 
conclusions set forth in the revised draft, should the licensee be 
given an opportunity to prepare a written response, and if so, is 
fourteen days a sufficient amount of time to prepare that response? 
Should the auditor be given more than five days to prepare the final 
draft of his or her report?

E. Cost of the Audit Procedure

    The Office would appreciate input on two issues related to the cost 
of the audit procedure. First, the proposed rule set forth in the 
Second NPRM states that if the auditor discovers a net aggregate 
underpayment of more than ten percent, the statutory licensee shall pay 
the copyright owners for the cost of the audit. See 78 FR at 27152. If, 
however, ``the statutory licensee provides the auditor with a written 
explanation of its

[[Page 31995]]

good faith objections to the auditor's report pursuant to paragraph 
(h)(2) of this section and the net aggregate underpayment made by the 
statutory licensee on the basis of that explanation is not more than 
[ten] percent and not less than [five] percent, the costs of the 
auditor shall be split evenly between the statutory licensee and the 
participating copyright owners.'' Id.
    The Office is inclined to keep the provision providing for cost 
shifting where the auditor concludes there was a net aggregate 
underpayment of more than ten percent. But after further analysis, we 
question whether the provision providing for cost splitting should be 
included in the final rule. Under the proposed rule, the determination 
of whether there has been a net aggregate underpayment would be based 
on the auditor's final report, i.e., after the auditor has evaluated 
the licensee's ``written explanation of its good faith objections'' to 
the initial report. If the auditor considered and rejected those 
objections, it is unclear why they should gain renewed significance for 
the purpose of allocating costs. Would it make more sense to adopt a 
simple rule that the copyright owners would pay the audit costs if the 
final report concludes that the underpayment is ten percent or less, 
and the licensee would pay the cost if the final report concludes that 
the underpayment is more than ten percent (with the qualification that 
the licensee would never be required to pay costs that exceed the 
amount of the underpayment identified in the final report)?
    Second, the proposed rule states that ``if a court, in a final 
judgment (i.e., after all appeals have been exhausted) concludes that 
the statutory licensee's net aggregate underpayment, if any, was [ten] 
percent or less, the participating copyright owner(s) shall reimburse 
the licensee, within [sixty] days of the final judgment, for any costs 
of the auditor that the licensee has paid.'' 78 FR at 27152. In the 
Second NRPM the Office assumed that if the licensee disagrees with the 
auditor's conclusions, the licensee might seek a declaratory judgment 
of non-infringement and an order directing the copyright owners to 
reimburse the licensee for the cost of the audit. See 78 FR at 27149. 
Do the parties in fact expect to be engaged in this sort of litigation 
as an outgrowth of the audit process? Do stakeholders anticipate that a 
royalty underpayment or overpayment would be addressed in a federal 
infringement (or non-infringement) action? Have the stakeholders given 
any thought to whether or how the statute of limitations might affect 
such claims? Should the appropriate remedy in any such proceeding, 
including reimbursement of audit costs, be left to the court?
    In any event, if it is necessary to include a provision requiring 
the copyright owners to reimburse the licensee, we are interested in 
the stakeholders' views on alternate ways in which this might be 
accomplished, given the concerns expressed by some commenters about the 
potential difficulty of recovering costs from multiple copyright owners 
in the event an auditor's findings are overturned. See AT&T Second 
Comment at 2; ACA Second Comment at 3-4. If the licensee disagrees with 
the auditor's conclusions, should the licensee place the cost of the 
audit procedure into escrow pending the resolution of any litigation 
between the licensee and the copyright owners? Should the licensee be 
required to release those funds to the copyright owners if the parties 
fail to take legal action within a specified period of time? If so, 
what would be a reasonable amount of time for the funds to remain in 
escrow?

III. Requests To Participate in the Public Roundtable

    The Office invites copyright owners, cable operators, satellite 
carriers, accounting professionals, and other interested parties to 
participate in the public roundtable to address these issues. The 
Office is particularly interested in hearing from accounting 
professionals with experience and expertise regarding auditing 
procedures and statistical sampling techniques. The Office encourages 
parties that share interests and views to designate common spokespeople 
to discuss the topics listed in this notice. The Office also encourages 
copyright owners and licensees to confer with each other prior to the 
meeting to identify common ground or areas of disagreement concerning 
these issues.
    Persons wishing to participate in the discussion should submit a 
request electronically no later than June 26, 2014 using the form 
posted on the Office's Web site at https://www.copyright.gov/docs/soaaudit/public-roundtable/. If electronic submission is not feasible, 
please contact the Office at (202) 707-8350 for special instructions. 
Seating in the room where the roundtable will be held is limited and 
will be offered first to persons who submitted a timely request to 
participate. To the extent available, observer seats will be offered on 
a first-come, first-served basis on the day of the meeting.
    Parties do not need to submit written comments or prepared 
testimony in order to participate in the public roundtable. However, 
the Office strongly encourages participants to familiarize themselves 
with the Notices of Proposed Rulemaking and the Interim Rule that the 
Office issued in this proceeding, as well as the questions presented in 
this notice and the comments that have been submitted to date.

    Dated: May 28, 2014.
Jacqueline C. Charlesworth,
General Counsel and Associate Register of Copyrights.
[FR Doc. 2014-12755 Filed 6-2-14; 8:45 am]
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