[Federal Register Volume 68, Number 76 (Monday, April 21, 2003)]
[Proposed Rules]
[Pages 19482-19485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9783]


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LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 260

[Docket No. 96-5 CARP DSTRA]


Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Copyright Office is publishing for public comment proposed 
rules that will govern SoundExchange, an unincorporated division of the 
Recording Industry Association of America, Inc., when it functions as 
the designated agent for the purpose of receiving royalty payments and 
statements of accounts from nonexempt subscription digital transmission 
services which make digital transmissions of sound recordings under a 
statutory license.

DATES: Comments are due no later than May 21, 2003.

ADDRESSES: An original and five copies of any comment shall be 
delivered by hand to: Office of the General Counsel, Copyright Office, 
James Madison Building, Room LM-403, First and Independence Avenue, 
SE., Washington, DC; or mailed to: Copyright Arbitration Royalty Panel 
(CARP), PO Box 70977, Southwest Station, Washington, DC 20024-0977.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya M. Sandros, Senior Attorney, Copyright Arbitration Royalty Panel, 
PO Box 70977, Southwest Station, Washington, DC 20024. Telephone: (202) 
707-8380. Telefax: (202) 252-3423.

SUPPLEMENTARY INFORMATION:

Background

    Section 106(6) of the Copyright Act, title 17 of the United States 
Code, gives copyright owners of sound recordings an exclusive right to 
perform their copyrighted work publicly by means of a digital audio 
transmission. This right is limited by section 114(d), which allows 
certain noninteractive digital audio services to transmit sound 
recordings under a compulsory license,

[[Page 19483]]

provided that the services pay a reasonable royalty fee and comply with 
the terms of the statutory license. Among the categories of services 
that may use the section 114 license are preexisting subscription 
services \1\ of which there are only three: Digital Cable Radio 
Associates, now known as Music Choice; DMX Music, Inc. (``DMX''); and 
Muzak, L.P. (``Muzak'').
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    \1\ A ``preexisting subscription service'' is defined as: A 
service that performs sound recordings by means of noninteractive 
audio-only subscription digital audio transmissions, which was in 
existence and was making such transmissions to the public for a fee 
on or before July 31, 1998, and may include a number of limited 
number of sample channels representative of the subscription service 
that are made available on a nonsubscription basis in order to 
promote the subscription service. 17 U.S.C. 114(j)(11).
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    Rates and terms for this license are established in one of two 
ways. Interested parties may either negotiate rates and terms which, if 
approved through a notice and public comment proceeding, become the 
final rules for the relevant license period. Alternatively, if industry 
representatives cannot reach a voluntary settlement, the Librarian of 
Congress convenes a three-person Copyright Arbitration Royalty Panel 
(``CARP'') for the purpose of determining the applicable rates and 
terms.
    In 1995, the Librarian of Congress initiated the first rate 
adjustment proceeding for the purpose of setting rates and terms of 
payment for use of sound recordings by the preexisting services 
pursuant to the section 114 license. The three preexisting subscription 
services and the Recording Industry Association of America (``RIAA'') 
participated in this proceeding which concluded with the issuance of a 
final rule and order by the Librarian of Congress. See 63 FR 25394 (May 
8, 1998).
    In that proceeding, the parties proposed, and the CARP adopted, a 
term which gave the RIAA the responsibility for collecting and 
distributing the royalty fees to all copyright owners. Id. at 25397. 
The Librarian adopted this term, then crafted additional regulations 
that afforded copyright owners a means to verify the accuracy of the 
royalty payments made by the RIAA collective,\2\ established the value 
of each performance, specified the nature of the costs that RIAA may 
deduct from the royalty fees prior to distribution, and set forth a 
procedure for handling royalty fees in the case where the collective is 
unable to identify or locate a copyright owner who is entitled to 
receive royalties collected under the statutory license.
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    \2\ In November 2000, RIAA formed ``SoundExchange,'' an 
unincorporated division of RIAA, to administer statutory licenses, 
including its responsibilities under the Librarian's May 8 Order. 
See, Revised RIAA Petition to Establish Terms Governing 
SoundExchange at 1 n.1.
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    RIAA appealed both the rate set by the Librarian and the additional 
conditions imposed on the RIAA collective in its capacity as the 
collection agent for copyright owners. See, Recording Industry Ass'n v. 
Librarian of Congress, 176 F.3d 528 (D.C. Cir. 1999). The United States 
Court of Appeals for the District of Columbia Circuit upheld the rate 
set by the Librarian and found that the Librarian has the authority to 
impose terms on copyright owners or their agents. However, it remanded 
for further consideration certain terms imposed on RIAA under 37 CFR 
260.2(d), 260.3(d), 260.6(b), and 260.7, because the CARP had not 
considered these issues, leaving the record devoid of any evidence upon 
which to fashion any terms concerning the collection and distribution 
of the royalty fees. Id. at 536.
    On February 13, 2001, the Copyright Office initiated a new 
proceeding to consider the terms remanded by the court with the 
issuance of a scheduling order, directing the parties to this 
proceeding to file their direct cases with the Office on April 17, 
2001. See, Order in Docket No. 96-5 CARP DSTRA (February 13, 2001). 
However, instead of filing a direct case on April 17, RIAA filed a 
petition to establish terms governing the RIAA collective and to 
suspend the scheduled proceeding. No party to the original proceeding 
objected to the proposed terms. In fact, Music Choice had already 
informed the Office by letter dated February 26, 2001, of its intent 
not to participate further in this proceeding and that it did not 
object to the terms to be proposed by RIAA.
    Subsequently, RIAA revised these terms to remove a reference to the 
section 112 statutory license for the making of ephemeral copies and to 
make clear that membership in the collective is open only to those 
copyright owners whose works are subject to statutory licensing and 
thus generate the funds to be distributed by the collective. RIAA also 
asked the Copyright Office to publish the revised terms pursuant to 
Sec.  251.63(b). This provision allows the Librarian of Congress to 
adopt proposed terms that are the result of settlement negotiations, 
provided that no person with a substantial interest and an intent to 
participate in a CARP proceeding files an objection. This procedure to 
adopt negotiated rates and terms in the case where an agreement has 
been reached has been specifically endorsed by Congress.

    If an agreement as to rates and terms is reached and there is no 
controversy as to these matters, it would make no sense to subject 
the interested parties to the needless expense of an arbitration 
proceeding conducted under (section 114(f)(2) (1995)). Thus, it is 
the Committee's intention that in such a case, as under the 
Copyright Office's current regulations concerning rate adjustment 
proceedings, the Librarian of Congress should notify the public of 
the proposed agreement in a notice-and-comment proceeding and, if no 
opposing comment is received from a party with a substantial 
interest and an intent to participate in an arbitration proceeding, 
the Librarian of Congress should adopt the rates embodied in the 
agreement without convening an arbitration panel.

S. Rep. No. 104-128, at 29 (1995)(citations omitted).
    Accordingly, the Copyright Office published the proposed terms in 
the Federal Register and requested public comment. 66 FR 38226 (July 
23, 2001). In response to this notice, the American Federation of 
Musicians (``AFM'') and the American Federation of Television and Radio 
Artists (``AFTRA'') filed a Notice of Intent to Participate and 
objections to certain of the proposed terms. Shortly thereafter, RIAA 
began discussions with AFTRA and AFM, regarding their objections, and 
the matter has been held in abeyance.
    Since that time, a significant event has occurred that bears 
directly on the resolution of this proceeding. In December of 2002, 
Congress passed the Small Webcaster Settlement Act of 2002 (``SWSA''), 
Public Law 107-321, 116 Stat. 2780. Among other things, the SWSA 
amended 17 U.S.C. 114(g) in two important ways which address specific 
issues which are the subject of this proceeding. First, the SWSA 
provides for direct payment to featured recording artists and to the 
administrators of the escrow accounts provided for in 17 U.S.C. 
114(g)(2)(B)&(C). Second, the act allows a designated agent, prior to 
the distribution of the royalty receipts, to deduct reasonable costs 
incurred by that agent in the administration of those receipts, 
including, but not limited to, costs associated with the collection and 
distribution of the royalty fees and the costs incurred in the 
participation of negotiations or arbitration proceedings under sections 
112 and 114.
    Because of these changes in the law, RIAA has again revised its 
proposed amendments to 37 CFR 260 to conform the terms in dispute to 
the new law and, in doing so, it has addressed the concerns of AFM and 
AFTRA. Consequently, AFM and AFTRA have withdrawn their objections to 
the proposed terms and their Notice of Intent to Participate in a CARP

[[Page 19484]]

proceeding. At this juncture, Sec.  251.63(b) requires the publication 
of the proposed rules to provide those persons with a substantial 
interest in the proceeding with an opportunity to comment on the rules. 
Provided that no party who is entitled to participate in a CARP on 
remand of this proceeding and who has a substantial interest in the 
rules files an objection and a Notice of Intent to Participate in a 
CARP proceeding to resolve an objection within the scope of this 
proceeding, the proposed rules will be adopted as final regulations.
    The proposed terms shall govern SoundExchange, the collecting 
rights entity that was formed from the designated RIAA collective, in 
its capacity as the sole agent designated to receive royalty payments 
from the three subscription services that were parties to this 
proceeding. Terms governing the administrative functions of any future 
collective or the designation of alternative agents shall be decided in 
future rate adjustment proceedings either through negotiations or after 
a hearing before a CARP based upon a fully developed written record. 
See, e.g., 67 FR 45239 (July 8, 2002). For this reason, parties must 
limit their comments to the terms offered in the context of the 
proceeding to set rates and terms for the three subscription services--
Music Choice, DMX, and Muzak--for the period October 28, 1998 (the 
effective date of the Digital Millennium Copyright Act) through 
December 31, 2001, the remand order, and the law as amended by the 
SWSA.
    Should a person object to the proposed terms, he or she must file a 
written objection with the Copyright Office and an accompanying Notice 
of Intent to Participate. Any proceeding convened to consider these 
terms would be a continuation of the prior CARP proceeding, Docket No. 
96-5 CARP DSTRA, on remand from the United States Court of Appeals for 
the District of Columbia Circuit. See, 17 U.S.C. 802(g). Therefore, the 
content of the written challenge must include a statement explaining 
the basis of the person's substantial interest in that proceeding and 
entitlement to participate in that proceeding, the proposed rule the 
person finds objectionable, and the reasons for the challenge. If no 
comments are received, the regulations shall become final upon 
publication of a final rule.

List of Subjects in 37 CFR Part 260

    Copyright, Digital Audio Transmissions, Performance Right, Sound 
Recordings.

Proposed Regulation

    In consideration of the foregoing, the Copyright Office proposes 
amending part 260 of 37 CFR as follows:

PART 260--USE OF SOUND RECORDINGS IN A DIGITAL PERFORMANCE

    1. The authority citation for part 260 continues to read as 
follows:

    Authority: 17 U.S.C. 114, 801(b)(1).


Sec.  260.2  [Amended]

    2. In Sec.  260.2, remove paragraph (d).
    3. Section 260.3 is amended by revising paragraphs (c), (d), and 
(e) to read as follows:


Sec.  260.3  Terms for making payments of royalty fees.

* * * * *
    (c) The agent designated to receive the royalty payments and the 
statements of account shall have the responsibility of making further 
distribution of these payments to those parties entitled to receive 
such payments according to the provisions set forth at 17 U.S.C. 
114(g)(2); Provided that the designated agent shall only be responsible 
for making distributions to those parties who provide the designated 
agent with such information as is necessary to identify and pay the 
correct recipient for such payments. The agent shall distribute royalty 
payments on a reasonable basis that values all performances by a 
Licensee equally based upon the information provided by the Licensee 
pursuant to the regulations governing records of use of performances by 
Licensees; Provided, however, that parties who have designated the 
agent may agree to allocate their shares of the royalty payments made 
by any Licensee among themselves on an alternative basis. Parties 
entitled to receive payments under 17 U.S.C. 114(g)(2) may agree with 
the designated agent upon payment protocols to be used by the 
designated agent that provide for alternative arrangements for the 
payment of royalties consistent with the percentages in 17 U.S.C. 
114(g)(2).
    (d) The designated agent may deduct from the payments made by 
Licensees under Sec.  260.2, prior to the distribution of such payments 
to any person or entity entitled thereto, all incurred costs permitted 
to be deducted under 17 U.S.C. 114(g)(3); Provided, however, that any 
party entitled to receive royalty payments according to 17 U.S.C. 
114(g)(2) may agree to permit the designated agent to deduct any 
additional costs.
    (e) Commencing June 1, 1998, and until such time as a new 
designation is made, SoundExchange, which currently is an 
unincorporated division of the Recording Industry Association of 
America, Inc., shall be the agent that receives royalty payments and 
statements of account under this part 260 and shall continue to be 
designated as such if it should be separately incorporated.
    4. Section 260.6 is revised to read as follows:


Sec.  260.6  Verification of royalty payments.

    (a) General. This section prescribes general rules pertaining to 
the method of verification of the payment of royalty fees by the 
designated agent to interested parties; Provided, however, that the 
designated agent and any interested person may agree as to an 
alternative method of verification.
    (b) Frequency of verification. Interested parties may conduct a 
single audit of the designated agent during any given calendar year and 
no calendar year shall be subject to audit more than once.
    (c) Notice of intent to audit. Interested parties must file with 
the Copyright Office a notice of intent to audit the designated agent. 
Such notice of intent shall also be served at the same time on the 
designated agent to be audited. Within 30 days of the filing of the 
notice of intent, the Copyright Office shall publish in the Federal 
Register a notice announcing such filing.
    (d) Retention of records. The interested party requesting the 
verification procedure shall retain the report of the verification for 
a period of three years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent auditor, shall serve as an acceptable verification 
procedure for all interested parties.
    (f) Costs of the verification procedure. The interested parties 
requesting the verification procedure shall pay for the cost of the 
verification procedure, unless an independent auditor concludes that 
there was an underpayment of five (5) percent or more, in which case, 
the designated agent shall bear the costs of the verification 
procedure.
    (g) Interested parties. For purposes of this section, interested 
parties are those individuals or entities who are entitled to receive 
royalty payments pursuant to 17 U.S.C. 114(g)(2), or their designated 
agents.

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    5. Section 260.7 is amended by removing the word ``collecting'' 
after the phrase ``If the designated''; by removing the word 
``collecting'' each place it appears and adding the word ``designated'' 
in its place; and in the last sentence, by removing the word ``fees'' 
and adding the word ``payments'' in its place.

    Dated: April 15, 2003.
David O. Carson,
General Counsel.
[FR Doc. 03-9783 Filed 4-18-03; 8:45 am]
BILLING CODE 1410-33-P