[Federal Register Volume 64, Number 146 (Friday, July 30, 1999)]
[Rules and Regulations]
[Pages 41286-41289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19458]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. RM 98-7C]


Notice and Recordkeeping for Making and Distributing Phonorecords

AGENCY: Copyright Office, Library of Congress.

ACTION: Interim regulations.

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SUMMARY: The Copyright Office is announcing interim regulations which 
specify notice and recordkeeping requirements associated with the 
making of digital phonorecord deliveries. The Digital Performance Right 
in Sound Recordings Act of 1995 requires the Librarian of Congress to 
establish these regulations to insure proper payment to copyright 
owners for the use of their works.

EFFECTIVE DATE: The interim regulations shall become effective on 
August 30, 1999.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya M. Sandros, Attorney Advisor, Copyright Arbitration Royalty Panel 
(``CARP''), P.O. Box 70977, Southwest Station, Washington, D.C. 20024. 
Telephone: (202) 707-8380. Telefax: (202) 252-3423.

SUPPLEMENTARY INFORMATION:

Background

    On November 1, 1995, Congress enacted the Digital Performance Right 
in Sound Recordings Act of 1995 (``DPRA''), Pub. L. 104-39 (1995). 
Among other things, this law clarifies that the compulsory license for 
making and distributing phonorecords includes the distribution of a 
phonorecord of a nondramatic musical work by means of a digital 
phonorecord delivery. 17 U.S.C. 115(c)(3).
    The DPRA requires the Librarian of Congress to ``establish 
requirements by which copyright owners may receive reasonable notice of 
the use of their works under this section, and under which records of 
such use shall be kept and made available by persons making digital 
phonorecord deliveries.'' 17 U.S.C. 115(c)(3)(D).
    The Copyright Office initiated the process to promulgate 
regulations on the subject of the notice and recordkeeping requirements 
on September 4, 1998, with the publication of a Notice of Inquiry. 63 
FR 47215 (September 4, 1998). The notice sought comment on whether the 
existing regulations, 37 CFR 201.18 and 201.19, governing the 
administration of the section 115 compulsory license, could be amended 
to accommodate the additional notice and recordkeeping requirements. 
Comments were due on October 19, 1998, and reply comments were due on 
November 18, 1998.
    On October 19, 1998, the Recording Industry Association of America 
(``RIAA'') and the National Music Publishers' Association of America, 
Inc. (``NMPA'') filed a joint petition with the Copyright Office. The 
petition requested a six-month extension of the filing period in order 
to allow these parties additional time to work out a joint proposal 
that would address the complex technical and business issues involved 
in the making of digital phonorecord deliveries (``DPDs''). In response 
to the parties' concerns expressed in the petition and a second request 
for additional time, the Copyright Office reopened the comment period 
twice. 63 FR 65567 (November 27, 1998); 63 FR 69251 (December 16, 
1998).

The Commenters

    The Copyright Office received five comments from six parties: NMPA 
and the Songwriters Guild of America (``SGA''), jointly; RIAA; Digital 
Media Association (``DiMA''); Broadcast Music, Inc. (``BMI''), and the 
American Society of Composers, Authors, and Publishers (``ASCAP'').

The Scope of This Proceeding

    BMI and ASCAP filed comments to underscore their understanding that 
the DPRA does not in any way diminish the right of public performance 
and that the current rulemaking does not involve the right of public 
performance, but rather is limited to the right of reproduction and the 
right of distribution. BMI's and ASCAP's assessment as to the scope of 
this proceeding is correct. It implicates only the rights of 
reproduction and distribution in the making and distribution of 
phonorecords, and not the right of public performance.

A Request for Interim Regulations

    NMPA/SGA, RIAA, and DiMA indicate a strong preference for delaying 
the adoption of final regulations on notice and recordkeeping because 
the industry is in its infancy and business models to handle the 
transactions involved in making DPDs are still evolving. These 
commenters encourage the Office to adopt interim regulations for a 
period of between six months to two years in order to allow continued 
negotiations among industry representatives. BMI and ASCAP also have no 
objections to adopting interim regulations so long as such amendments 
do not apply to the right of public performance. The Copyright Office 
agrees with the commenters and is adopting interim regulations for a 
period of two years; however, a party with a substantial interest in 
notice and recordkeeping requirements for DPDs may petition the Office 
to reopen the rulemaking for good cause before the expiration of this 
period. The interim regulations are promulgated without prejudice to 
the parties who, at the appropriate time, may propose final regulations 
that may differ significantly from the interim rules based upon the 
developing business trends in the industry.

Proposed Amendments to 37 CFR 201.18 and 201.19

    Section 115(b)(1) of the Copyright Act, title 17 of the United 
States Code, requires ``[a]ny person who wishes to obtain a compulsory 
license under this section . . . [to] serve notice of intention to do 
so on the copyright owner.'' This section also requires the Copyright 
Office to prescribe regulations specifying the form, content, and 
manner of service of the notice of intention. Section 201.18 of title 
37 of the Code of Federal Regulations meets this requirement. 
Similarly, the regulations in Sec. 201.19 address the requirement that 
each compulsory licensee file monthly and annual

[[Page 41287]]

statements of account for each section 115 compulsory license in 
accordance with 17 U.S.C. 115(c)(5).
    NMPA/SGA, RIAA, and DiMA proposed amendments to Secs. 201.18 and 
201.19 that would adapt these rules to digital phonorecord deliveries 
at least for purposes of filing notices of intention to use the license 
and statements of account. However, NMPA and SGA do not believe that 
amending the current regulations will be sufficient to address the 
requirements of section 115(c)(3)(D), of title 17 of the United States 
Code, relating to notice and recordkeeping. They contend that the 
requirements of section 115(c)(3)(D) are separate and distinct from the 
requirements to file a notice of intention to use the license and 
statements of account specified in sections 115(b)(1) and (c)(5), 
respectively, but acknowledge that the requirements share some common 
ground. On the other hand, RIAA states that it believes the proposed 
amendments would fulfill the notice and recordkeeping requirements set 
out in 17 U.S.C. 115(c)(3)(D), in addition to the traditional 
requirements for filing a notice of intention to use the license and 
statements of account set out in 17 U.S.C. 115(b)(1) and (c)(5). Reply 
comments of RIAA at 5 n.1.
    While acknowledging the potential need to draft additional 
amendments, for purposes of the interim regulations the Copyright 
Office accepts RIAA's analysis on this point. The interim regulations 
will require those users who avail themselves of the section 115 
license for the purpose of making DPDs to file a notice of intention to 
use the license and statements of account with the copyright owner in 
those cases where the public records of the Copyright Office identify 
the owner. Certainly, direct notice to the copyright owner fulfills the 
section 115(c)(3)(D) requirement for notice, and the detailed 
statements of account filed with the copyright owner should provide 
sufficient information to document the use of the copyrighted works to 
meet the recordkeeping requirement. Nevertheless, the Office supports 
NMPA/SGA's suggestion for further discussion on these issues, 
especially as to whether the current regulations, as amended herein, go 
far enough to prescribe how ``records of such use shall be kept and 
made available by persons making digital phonorecord deliveries.'' 17 
U.S.C. 115(c)(3)(D).
    As to the actual amendments proposed, we note that each party 
proposed modest changes to the existing rules that would allow a user 
to take advantage of the compulsory license, but that the commenters 
differed in their view on whether the traditional concepts of 
``relinquished from possession,'' ``phonorecord reserves,'' or 
``returns'' applied to DPDs. NMPA/SGA contend that the terms, 
``voluntarily distributed,'' ``reserves,'' and ``returns'' do not 
properly apply to DPDs as used in the current regulations. ``NMPA and 
SGA are not aware of any `returns' of DPDs or even how such returns 
could technically be accomplished. Accordingly, we see no basis to 
provide for `reserves' with respect to such `returns' of DPDs.'' 
Further comments of NMPA and SGA at 4 n.3.
    RIAA and DiMA, however, have less trouble applying these same 
concepts to DPDs. Citing the possibility of a failed transmission or an 
incomplete reproduction, RIAA and DiMA foresee a need to be able to 
offer DPD recipients credits or replacements. RIAA argues that ``(w)hen 
the relevant commercial arrangements provide for a credit or 
replacement and generally accepted accounting principles require such 
treatment, RIAA believes that a maker of DPDs should have the 
opportunity to make mechanical royalty payments reflecting such credits 
or replacements and any corresponding reserve.'' Reply comments of RIAA 
at 4; see also DiMA at 3. Similarly, DiMA foresees a business model 
that allows a distributor to prepay for a preset number of DPDs in 
conjunction with the right to return the unsold portion for a credit or 
as an offset. Both approaches incorporate the concepts of ``reserves'' 
and ``returns,'' and require that the rules define the term 
``voluntarily distributed'' as it relates to a DPD. Under either model, 
the user must be able to account for and receive credit for the 
``returns'' and the ``reserves.''
    The Copyright Office has weighed the arguments of the commenting 
parties and agrees with RIAA that a distributor should be allowed to 
provide a replacement DPD in order to rectify a problem on the 
receiving end of the transmission, or to account for a failed 
transmission or an incomplete reproduction. However, the Office has 
found no basis for adopting the concept of ``reserves'' to DPDs. 
Therefore, the interim regulations require accounting for all DPDs, 
both attempted and completed, but at the same time, provide a mechanism 
whereby a distributor may adjust for failed transmissions and 
replacement DPDs made for the purpose of delivering a complete and 
usable DPD to an intended recipient. We also adopt DiMA's suggestion to 
add the term, ``digital phonorecord delivery,'' to the list of 
phonorecord configurations in Secs. 201.18(c)(1)(vi) and 
201.19(e)(3)(ii)(D).
    To effect the proposed scheme, it is necessary to ascertain when a 
DPD is made, manufactured, or distributed for purposes of the section 
115 license such that the obligation to pay the royalty fee attaches. 
RIAA and NMPA/SGA define the point as the ``date the digital delivery 
is completed,'' but neither commenter offered any insight on how to 
ascertain the date of completion. The answer to this question is of 
critical import, because royalties will be paid only for those DPDs 
which are completed. In anticipation of this problem, DiMA suggests 
amending Sec. 201.19(a)(5) to define the concept of ``voluntarily and 
permanently part(ing) with,'' a DPD as ``the time when the delivery and 
making of the digital phonorecord can be confirmed as completed.'' DiMA 
at 3. According to DiMA, the transmitting entity could confirm ``that 
the transmission arrived intact,'' DiMA at 3, but it need not do so. 
Instead, DiMA proposes a presumption in favor of a successful 
transmission in the absence of a notification from the intended 
recipient that the transmission or reproduction failed.
    The Copyright Office finds that DiMA's approach sets the mark too 
far down the line when determining the point at which delivery is 
complete because it leaves the resolution of when the DPD actually 
occurs in the hands of the intended recipient. This approach fails to 
account for a misdirected DPD or for a successful transmission to a 
recipient who, for whatever reason, cannot access and utilize the 
phonorecord. Therefore, for purposes of the interim regulations, the 
Office will start with a rebuttable presumption that a DPD is complete 
on the date the transmission is made. However, the Office recognizes 
that if a transmission fails or results in an incomplete reproduction, 
as determined by means within the sole control of the distributor, no 
delivery has occurred and no copyright liability accrues. In such 
cases, the distributor may overcome the presumption by explaining when 
and why the transmission failed and deduct one unit DPD from the 
monthly total. A distributor may also deduct a unit DPD from the 
monthly tally for a retransmission of a sound recording to an intended 
recipient in the case where although the initial transmission to the 
intended recipient resulted in a specifically identifiable reproduction 
of that sound recording, for some reason it remained inaccessible to 
the intended recipient.

[[Page 41288]]

    This interpretation comports with the statutory definition of a 
digital phonorecord delivery. Section 115(d)(1) defines a digital 
phonorecord delivery as ``each individual delivery of a phonorecord by 
digital transmission of a sound recording which results in a 
specifically identifiable reproduction by or for any transmission 
recipient.'' The statutory definition requires only that transmission 
of an identifiable reproduction of a sound recording be successfully 
completed. It does not require that the intended recipient actually 
receive and verify receipt of a usable reproduction. The key factor is 
the delivery of a specifically identifiable reproduction of a sound 
recording and not verification by an intended recipient. Consequently, 
receipt of an identifiable, but unusable reproduction still will 
require payment of an initial copyright royalty fee. Under such 
circumstances, the distributor may retransmit a phonorecord of the same 
sound recording and treat the retransmission as a replacement for the 
initial phonorecord.
    The Office takes this approach because it accounts for every 
transaction without imposing additional liability on the distributor in 
those cases where replacements need to be supplied to a customer. While 
it is arguable that each transmission constitutes a separate DPD, the 
Office has determined that it is unreasonable to impose additional 
costs for replacements on a distributor, since retransmissions are not 
likely to increase the risk of further copying at the expense of the 
copyright owner. A recipient who wishes to make further copies can do 
so easily from a single reproduction of the sound recording. Such is 
the nature of the digital environment. Therefore, the Copyright Office 
can see no reason to prevent a distributor from making multiple 
transmissions to the same recipient for the sole purpose of completing 
the DPD of a particular sound recording, nor can it see any reason why 
a customer would request a second transmission once he or she has 
received a complete and usable file. Consequently, the interim 
regulations will allow a maker of DPDs to adjust the total monthly 
count of DPDs to account for subsequent transmissions of a sound 
recording made to an intended recipient in an attempt to complete 
delivery of the initial request. However, this does not mean that the 
distributor can avoid payment on an initial transmission which results 
in a specifically identifiable reproduction, or extend a credit to a 
customer for a different sound recording because the customer was 
unable to make use of the initial DPD.
    The Office rejects RIAA's proposal to adopt a regulatory scheme 
that would allow a distributor of DPDs to offer credits to a consumer 
in the event of a purported faulty or incomplete transmission, because 
the potential for abuse is too high. This is true because there is no 
apparent means to verify whether a request for a credit is legitimate. 
Nothing would prevent a customer from claiming a credit upon the mere 
assertion that the DPD was incomplete, even though the initial DPD was 
properly made. The intended recipient could then use the credit to 
order a different DPD, ultimately receiving two DPDs for the price of 
one. Such a result is contrary to the purpose of the compulsory license 
and must be avoided. For purposes of the compulsory license, the 
royalty obligation accrues upon the initial transmission of the 
phonorecord. Corrections for defective transmissions or for replacement 
DPDs are made as adjustments to the total number of transmissions. Such 
offsets benefit the distributor only, and may not be extended to the 
consumer directly under the auspices of the statutory license. Of 
course, a distributor may decide to grant a credit to a consumer who 
does not receive a complete reproduction or cannot access a file, but 
that decision does not alter how the distributor meets his obligations 
under the statutory license.
    The Copyright Office also rejects DiMA's concept of reserves. Under 
its model, a distributor would prepay for the right to deliver a preset 
number of DPDs, and consequently, would have need of a system that 
allowed the distributor to receive a credit or offset for the 
authorized DPDs that never occurred. Yet, under section 115, the 
distributor incurs no copyright liability until the DPD is completed. 
For this reason, the Office can see no rationale for prepaying a 
copyright owner for DPDs which may not occur, when all that is needed 
is an accurate accounting mechanism for registering those that do. Of 
course, a distributor may enter into a contractual relationship with a 
copyright owner which calls for prepayment. In such cases, the parties 
could provide for additional credits or offsets.
    In addition, the Office has not adopted the suggested language that 
would require the recipient to delete or destroy an original DPD before 
a second transmission is made, since such actions cannot be verified 
nor do they seem calculated to alleviate any identifiable problem. 
However, if the technology develops to the point where such actions 
prove useful in controlling the distribution of sound recordings by 
means of a digital transmission, an interested party may petition for 
reconsideration of the regulations on this point.
    We adopt these amendments on an interim basis in order to adapt the 
existing regulatory framework to the immediate needs of the compulsory 
licensee who wishes to make DPDs in today's marketplace. Nevertheless, 
we acknowledge that the developing technologies associated with making 
DPDs may require a different system for notice and recordkeeping and 
will consider any new proposals, suggestions, or adjustments when we 
revisit the issue before finalizing regulations governing the notice 
and recordkeeping requirements associated with making DPDs.

Regulatory Flexibility Act

    Although the Copyright Office, as a department of the Library of 
Congress and part of the legislative branch, is not an ``agency'' 
subject to the Regulatory Flexibility Act, 5 U.S.C. 601-612, the 
Register of Copyrights has considered the effect of these interim 
regulations on small businesses. The Register has determined that the 
regulations would not have a significant economic impact on a 
substantial number of small entities that would require provision of 
special relief for small entities in the regulations. The interim 
regulations are designed to minimize any significant economic impact on 
small entities.

List of Subjects in 37 CFR Part 201

    Copyright.

Interim Regulations

    For the reasons set forth in the preamble, part 201 of title 37 of 
the Code of Federal Regulations is amended as follows:

PART 201--GENERAL PROVISIONS

    1. The authority citation for part 201 continues to read as 
follows:

    Authority: 17 U.S.C. 702.

    2. Section 201.18 is amended as follows:
    (a) By adding a new paragraph (a)(4); and
    (b) In paragraph (c)(1)(vi), by adding the phrase ``a digital 
phonorecord delivery,'' in the parenthetical clause before the words 
``or a combination of them''.
    The new paragraph (a)(4) reads as follows:

[[Page 41289]]

Sec. 201.18  Notice of intention to obtain a compulsory license for 
making and distributing phonorecords of nondramatic musical works.

    (a) * * *
    (4) For the purposes of this section, a digital phonorecord 
delivery shall be treated as a type of phonorecord configuration, and a 
digital phonorecord delivery shall be treated as a phonorecord 
manufactured, made, and distributed on the date the phonorecord is 
digitally transmitted.
* * * * *
    3. Section 201.19 is amended as follows:
    (a) By redesignating paragraphs (a)(5), (a)(6) and (a)(7) as 
(a)(6), (a)(8) and (a)(9) respectively;
    (b) By adding a new paragraph (a)(5);
    (c) By revising the first sentence of newly designated paragraph 
(a)(6);
    (d) By adding new paragraphs (a)(7), (a)(10), and (a)(11);
    (e) In paragraph (e)(3)(i)(A), by adding the phrase ``, including 
digital phonorecord deliveries,'' after the phrase ``The number of 
phonorecords'';
    (f) In paragraph (e)(3)(i)(B), by removing the word ``or'' after 
the fourth undesignated clause ``Returned to the compulsory licensee 
for credit or exchange;'' and adding two new clauses to the end of the 
section;
    (g) By revising paragraph (e)(3)(ii)(D);
    (h) By adding a new paragraph (e)(3)(ii)(E); and
    (i) In paragraph (e)(4)(ii), by adding paragraphs (d) and (e) to 
Step 4.
    The additions and revisions to Sec. 201.19 read as follows:


Sec. 201.19  Royalties and statements of account under compulsory 
license for making and distributing phonorecords of nondramatic musical 
works.

    (a) * * *
    (5) For the purposes of this section, a digital phonorecord 
delivery shall be treated as a type of phonorecord configuration, and a 
digital phonorecord delivery shall be treated as a phonorecord, with 
the following clarifications:
    (i) A digital phonorecord delivery shall be treated as a 
phonorecord made and distributed on the date the phonorecord is 
digitally transmitted; and
    (ii) A digital phonorecord delivery shall be treated as having been 
voluntarily distributed and relinquished from possession, and a 
compulsory licensee shall be treated as having permanently parted with 
possession of a digital phonorecord delivery, on the date that the 
phonorecord is digitally transmitted.
    (6) Except as provided in paragraph (a)(5), a phonorecord is 
considered voluntarily distributed if the compulsory licensee has 
voluntarily and permanently parted with possession of the phonorecord.
* * * * *
    (7) To the extent that the terms reserve, credit and return appear 
in this section, such provisions shall not apply to digital phonorecord 
deliveries.
* * * * *
    (10) An incomplete transmission is any digital transmission of a 
sound recording which, as determined by means within the sole control 
of the distributor, does not result in a specifically identifiable 
reproduction of the entire sound recording by or for any transmission 
recipient.
    (11) A retransmission is a subsequent digital transmission of the 
same sound recording initially transmitted to an identified recipient 
for the purpose of completing the delivery of a complete and usable 
reproduction of that sound recording to that recipient.
* * * * *
    (e) * * *
    (3) * * *
    (i) * * *
    (B) * * *

    Never delivered due to a failed transmission; or
    Digitally retransmitted in order to complete a digital 
phonorecord delivery.
* * * * *
    (ii) * * *
    (D) Each phonorecord configuration involved (for example: single 
disk, long-playing disk, cartridge, cassette, reel-to-reel, digital 
phonorecord delivery, or a combination of them).
    (E) The date of and a reason for each incomplete transmission.
* * * * *
    (4) * * *
    (ii) * * *
    Step 4: * * *
    (d) Incomplete transmissions. If, in the month covered by the 
Monthly Statement, there are any digital transmissions of a sound 
recording which do not result in specifically identifiable 
reproductions of the entire sound recording by or for any transmission 
recipient, as determined by means within the sole control of the 
distributor, the number of such phonorecords is subtracted from the 
Step 3 subtotal.
    (e) Retransmitted digital phonorecords. If, in the month covered by 
the Monthly Statement, there are retransmissions of a digital 
phonorecord to a recipient who did not receive a complete and usable 
phonorecord during an initial transmission, and such transmissions are 
made for the sole purpose of delivering a complete and usable 
reproduction of the initially requested sound recording to that 
recipient, the number of such retransmitted digital phonorecords is 
subtracted from the Step 3 subtotal.
* * * * *
    Dated: July 15, 1999.
Marybeth Peters,
Register of Copyrights.

James H. Billington,
The Librarian of Congress.
[FR Doc. 99-19458 Filed 7-29-99; 8:45 am]
BILLING CODE 1410-30-P