Copyhype

The House Judiciary Committee will be holding a hearing on music licensing today at 11:30EST. The hearing, which will be streamed live online, looks to focus on recent proposed legislation that concerns internet radio royalties. Representatives from Pandora, the National Association of Broadcasters, SoundExchange, and the Recording Academy will be testifying, as well as economist Dr. Jeffrey A. Eisenach and venture capitalist David B. Pakman.

In anticipation of the hearing, I thought it would be helpful to provide a brief history of internet royalty rates. It’s not the most exciting topic, but it’s also difficult to find a singular, satisfactory source on the subject. For this article, I’m going to focus primarily on “webcasting”, or internet radio services like Pandora.

The Digital Performance Right for Sound Recordings

Musical compositions — songs — and sound recordings are each is separately protected by copyright. Copyright protection for songs came first, implicitly under the original Copyright Act of 1790 and explicitly under the Copyright Act of 1831. This copyright was limited to reproduction of the works until 1897, when Congress added the right to publicly perform musical compositions.

Recorded sound, of course, only appeared toward the end of the 19th century, and it wasn’t until 1972 that the US Congress granted separate federal copyright protection to sound recordings. But this protection excluded the right to publicly perform sound recordings. So while copyright owners of songs were paid anytime a venue or radio station performed their work, the same was not true for sound recording owners.

This changed somewhat in 1995, when Congress passed Digital Performance Right in Sound Recordings Act (DPRA). Though it didn’t give sound recording owners a full public performance right, it did give them the exclusive right “to perform the copyrighted work publicly by means of a digital audio transmission.” ¹17 USC § 106(6).

This right was modified in two major ways. First the right did not extend to “eligible non-subscription transmissions”, which primarily meant retransmission of AM/FM radio broadcasts over the internet. Second was a compulsory blanket license for “noninteractive subscription transmissions.” Any service under this definition could, so long as it complied with the license terms, play any sound recording without needing permission from the copyright owner at a royalty rate set by the Copyright Arbitration Royalty Panel (CARP), an ad hoc body that set rates for the various compulsory licenses under the Copyright Act. The Act provided, however, that CARP would only step in if copyright owners and noninteractive subscription services failed to reach voluntary agreement over rates under the compulsory license. When this occurred, CARP was directed to set a rate using the standard set in § 801(b)(1) of the Copyright Act, subject to revisions by the Librarian of Congress.

Any other type of transmission under DPRA required direct licensing from sound recording owners, which led to the first dispute. Non-subscription webcasters — webcasters who relied on advertising or other forms of revenue — disagreed with the recording industry over whether they were exempt from DPRA. ²In the matter of rate setting for digital performance right in sound recordings and ephemeral recordings, Report of the Copyright Arbitration Royalty Panel, No. 2000-9, 8 (2002). This led to Congress revisiting the digital performance right in the Digital Millennium Copyright Act (DMCA) a few years later (the same Act that created safe harbors for online intermediaries, among other things).

The DMCA affected digital performances in a number of ways. First, it added “eligible non-subscription services” to the types of webcasters who qualified for the compulsory license (interactive services still needed to privately negotiate for performance rights). Second, it altered the standard the CARP must apply when determining royalty rates for these compulsory licenses — instead of the §802(b)(1) standard, CARP would “establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller” (the “willing buyer/willing seller” standard). However, it “grandfathered” the existing §802(b)(1) standard for “preexisting subscription services” and preexisting satellite radio services — at the time, these consisted solely of five services: DMX, Music Choice, Muzak, Sirius, and XM (since then, the last two have merged to form Sirius XM Radio).

One quick note: the DMCA also expanded the term “interactive service” to include services “that are specially created for a particular individual.” ³H.R.Rep. No. 105-796, at 87 (1998) (Conf.Rep.). In 2001, a group of record labels then under the umbrella of BMG sued internet radio provider Launch Media for copyright infringement, alleging that its service, which, like Pandora, allows listeners to create “custom” radio stations based on genre or artist, was required to obtain direct licenses from BMG because it was an “interactive service” under the DMCA. ⁴Arista Records v Launch Media, 578 F.3d 148 (2nd Cir. 2009). The 2nd Circuit disagreed with the labels, holding that Launch Media was not an “interactive service” under the definition of the statute.

Since then, webcasting has been the subject of three rate proceedings, each involving issues that have spilled over into Congress and the courts.

Webcaster I

The Copyright Office announced in November 1998 the beginning of the voluntary negotiation period for the first round of licensing, which would cover through the end of 2000. ⁵67 FR 45239. No private agreement was reached, so a CARP proceeding was commenced, and, because of procedural delays, was consolidated with a proceeding on licensing for the next period, through 2002.

The CARP reached its determination on royalty rates February 2002 (informally referred to as “Webcaster I”), which was revised and published by the Librarian of Congress on July 8, 2002. ⁶Id. Among its determinations, the LOC accepted the Panel’s rejection of a “percentage of revenue” rate in favor of a “per performance” rate. It noted:

A key reason for rejecting the percentage-of-revenue approach was the Panel’s determination that a per performance fee is directly tied to the right being licensed. The Panel also found that it was difficult to establish the proper percentage because business models varied widely in the industry, such that some services made extensive music offerings while others made minimal use of the sound recordings. The final reason and perhaps the most critical one for rejecting this model was the fact that many webcasters generate little revenue under their current business models. As the Panel noted, copyright owners should not be ‘‘forced to allow extensive use of their property with little or no compensation.’’ ⁷Id. at 45249.

The LOC adopted the Panel’s tiered rate structure for different classes of licensees. Webcasters and commercial broadcasters would pay $0.0007 per performance, non-commercial broadcasters $0.0002. The LOC also designated SoundExchange, a non-profit organization established by the RIAA in 2000 and later spun-off as an independent entity in 2003, as a Designated Agent for collecting and distributing royalties under the compulsory license. ⁸Id. at 45267.

Smaller commercial and noncommercial webcasters immediately protested the LOC’s final determination, and Congress acted quickly in response, introducing the Small Webcaster Settlement Act of 2002 (SWSA) less than 20 days after the determination and passing the bill in December. SWSA provided a grace period for small webcasters for paying royalties and encouraged SoundExchange to engage in negotiations for alternative rates with these webcasters. Such agreements were reached — one for small commercial webcasters that same December and one with noncommercial webcasters the following June. Under these agreements, “small” webcasters (defined by annual revenues) would pay a graduated “percentage of revenue” rate while noncommercial webcasters would pay a flat annual fee, plus a $0.0002 per performance rate on any performances that exceeded a monthly “Aggregate Tuning Hours” cap.

These agreements would remain in effect through 2004, extended through 2005 by The Copyright Royalty and Distribution Reform Act of 2004.

Through this Act, Congress also replaced the ad hoc Copyright Arbitration Royalty Panel with the current system of three standing Copyright Royalty Judges. Judges were to be appointed by the Librarian of Congress and serve staggered six year terms. The Act established qualifications for the Judges. “Each judge must be an attorney with at least seven years of legal experience. The Chief Copyright Royalty Judge must have at least five years experience in administrative hearings or court trials and may hire 3 full-time staff members. Of the other two CRJs, one must have expertise in the area of copyright law and the other economics.” ⁹Robin Jeweler, CRS Report Report for Congress, The Copyright Royalty and Distribution Reform Act of 2004, Order code RS21512 (2004).

The Act also removed the Librarian of Congress from any role in revising final determinations by Copyright Royalty Judges — determinations were directly appealable to the DC Circuit Court.

Webcaster II

The first rate determination proceeding for digital performances conducted by the new Copyright Royalty Board (CRB) concerned license rates for 2006-2010, but despite the changes Congress had made, this proceeding (“Webcaster II”) played out in much the same way as Webcaster I. Notice announcing commencement of the proceedings was published by the CRB February 2006. The Board announced its final determination on March 2007. ¹⁰72 FR 24084. Again, the CRB rejected a percentage of royalty rate for a per performance rate. ¹¹In doing so, the CRB stated in a footnote:

It must be emphasized that, in reaching a determination, the Copyright Royalty Judges cannot guarantee a profitable business to every market entrant. Indeed, the normal free market processes typically weed out those entities that have poor business models or are inefficient. To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners. Furthermore, it would involve the Copyright Royalty Judges in making a policy decision rather than applying the willing buyer/willing seller standard of the Copyright Act.

The CRB set rates for commercial webcasters at “per play” rates of $0.0008 for 2006, $0.0011 for 2007, $0.0014 for 2008, $0.0018 for 2009 and $0.0019 for 2010. Non-commercial webcasters would pay an annual $500 flat rate for performances under the same “Aggregated Tuning Hours” cap as was set by the SWSA, with performances above the cap assessed at the same rates as commercial webcasters.

Several webcasters again raised objections to the rate determinations in Webcaster II. A petition for rehearing was filed but denied by the CRB, and appeals were filed by several parties for review in the DC Circuit Court. In a 2009 opinion, the DC Circuit affirmed nearly all of the CRB’s determination. ¹²Intercollegiate Broadcasting System v Copyright Royalty Board, 574 F.3d 748. The exception was the court’s remand of the CRB’s omission of a cap on minimum fees for commercial webcasters.

And as in Webcaster I, webcasters turned to Congress, which responded with the Webcaster Settlement Act of 2008. ¹³Pub. L. No. 110-435, 122 Stat. 4974. The Act was essentially a rewrite of the Small Webcaster Settlement Act of 2002 and encouraged the private negotiation of alternative licensing rates. The timeframe for these negotiations was extended by Congress the following year through the Webcaster Settlement Act of 2009. ¹⁴Pub.L. 111−36, 123 Stat. 1926.

Following these Settlement Acts, settlements with webcasters in a wide variety of segments of the webcasting market were reached — eight total agreements resulting in around a dozen different royalty schedules. ¹⁵See Notification of Agreements Under the Webcaster Settlement Act of 2008, 74 FR 9293 (March 3, 2009), Notification of Agreements Under the Webcaster Settlement Act of 2009, 74 FR 34796 (July 17, 2009), Notification of Agreements Under the Webcaster Settlement Act of 2009, 74 FR 40614 (August 12, 2009. The “Pureplay” agreement, for example, which Pandora operates under, set a per play rate lower than the one set by the CRB or 25% of gross revenues, whichever is greater. In nearly all cases, these agreements set royalty rates through 2015.

Webcaster III

While these agreements covered nearly 95% of all digital performances administered by SoundExchange, the Copyright Royalty Board was still required to conduct proceedings for rates for 2011-2015 for those webcasters who did not elect any of the settlements — Intercollegiate Broadcasting System and Live365 being the only two — or webcasters that weren’t in existence at the time. These proceedings began January 9, 2009 and concluded with a final determination only three months later, dubbed “Webcaster III.” The CRB largely applied the royalty schedules from the recent settlements across the board.

The CRB rejected, however, Intercollegiate’s proposal for different rate structures for “small” and “very small” noncommercial webcasters. Intercollegiate appealed the CRB’s determination to the DC Circuit and also raised a collateral attack on the constitutionality of the appointment of the Copyright Royalty Judges. Just this past July, the DC court held (wrongly, in my opinion) that the appointment of Copyright Royalty Judges violated the Appointments Clause. ¹⁶Intercollegiate Broadcasting v Copyright Royalty Board, 684 F.3d 1332 (DC Cir. 2012). It remedied the infirmity by striking statutory language that limited the ability of the Librarian of Congress to remove Judges and vacated Webcaster III. The existing settlement agreements were unaffected by this decision.

Webcaster IV?

Current rates for webcasters under the compulsory license are set to expire in 2015. The hearings today will perhaps offer one of the earliest glimpses at some of the issues we can expect during the CRB’s next rate proceeding.

At center stage is the recently introduced Internet Radio Fairness Act (H.R. 6480). The primary effect of the bill, supported most publicly by Pandora, would be to change the standard used by the Copyright Royalty Judges from the current “willing buyer/willing seller” standard to the §801(b) standard used for satellite radio and pre-existing subscription services. The bill would also implement a host of procedural changes to CRB proceedings, discussion of which would make this post longer than it already is.

Discussion of a competing bill circulated last August by Rep. Nadler, the Interim FIRST Act, may also come up. That bill would instead subject all digital performance rate proceedings to the “willing buyer/willing seller” standard.

The Competing Standards

Before wrapping up, I thought it would be worthwhile to take a closer look at the two standards that have been discussed above.

§ 801(b)(1) was created as part of the Copyright Act of 1976. Draft bills establishing the agency to administer the new statutory licenses created by the Act originally provided only that the rates be “reasonable.” ¹⁷73 FR 4080. Some concerns were raised about the constitutionality of delegating rate-setting authority under such a vague standard. In response, Congress added four factors to guide the setting of rates. Prior to the DPRA, the Copyright Royalty Tribunal — the precursor to the CARP — had only applied this standard in two other proceedings: the 1980 Jukebox License Proceeding and the 1981 Mechanical License Proceeding.

The standard requires that royalty rates be set in order—

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

The “willing buyer/willing seller” standard, found in 17 USC § 114(f)(2)(B), requires the Copyright Royalty Board to set a rate—

that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In determining such rates and terms, the Copyright Royalty Judges shall base their decision on economic, competitive and programming information presented by the parties, including—

(i) whether use of the service may substitute for or may promote the sales of phonorecords or otherwise may interfere with or may enhance the sound recording copyright owner’s other streams of revenue from its sound recordings; and

(ii) the relative roles of the copyright owner and the transmitting entity in the copyrighted work and the service made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, and risk.

The two standards are essentially the same, save for the fourth factor of the § 801(b) standard. Very broadly speaking, copyright owners tend to favor the “willing buyer/willing seller” standard while services using copyrighted works tend to favor the § 801(b) standard. And while I’ve detailed above lengthy proceedings over the past decade regarding royalty rates for webcasters, that is not necessarily a result of the standard used — keep in mind that these proceedings involved thousands of separate webcasters while only a small handful of services continue to operate under the § 801(b) standard. So it is no surprise that there has been more disagreement during proceedings that affect the vast majority of digital music services.