[Federal Register Volume 68, Number 117 (Wednesday, June 18, 2003)]
[Rules and Regulations]
[Pages 36469-36470]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15384]


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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: Final regulation.

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SUMMARY: The Copyright Office is announcing the final regulations 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: Effective Date: July 18, 2003.
    Applicability Date: The regulations apply to the license period 
which began on November 1, 1995.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya M. Sandros, Senior Attorney, Copyright Arbitration Royalty Panel, 
P.O. 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, 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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    In 1998, the Librarian of Congress adopted final rates and terms 
applicable to the preexisting services after a hearing before a 
copyright arbitration royalty panel (``CARP''). See 63 FR 25394 (May 8, 
1998). In that proceeding, the parties proposed 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 (March 12, 2003).
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    RIAA appealed both the rate and the additional terms announced in 
the Librarian's determination and final order. 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 and found that the Librarian had the authority to 
impose additional 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.
    In 2001, RIAA petitioned the Copyright Office to adopt new terms 
that would govern the RIAA collective. These terms were to be adopted 
pursuant to Sec.  251.63(b) which 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.
    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 was held in abeyance, pending the outcome of those 
discussions.
    In the meantime, Congress passed the Small Webcaster Settlement Act 
of 2002 (``SWSA''), Public Law 107-321, 116 Stat. 2780, which, among 
other things, amended 17 U.S.C. 114(g) in two important ways that bear 
directly on two key issues raised in 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 
participating in negotiations or arbitration proceedings under sections 
112 and 114.
    Because of these changes in the law, RIAA revised its proposed 
amendments to 37 CFR part 260 to conform the terms in question to the 
new law and, in doing so, it addressed the concerns of AFM and AFTRA. 
However, the proposed rules could not be adopted until all interested 
parties had an opportunity to comment. Therefore, pursuant to Sec.  
251.63(b) of the CARP rules, the Library published in the Federal 
Register the proposed terms and sought comment from any party with a 
substantial interest in this proceeding. 68 FR 19482 (April 21, 2003).

[[Page 36470]]

    Having received no objections to the recently proposed terms, the 
Librarian is adopting the proposed amendments 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).

List of Subjects in 37 CFR Part 260

    Copyright, Digital audio transmissions, Performance right, Sound 
recordings.

Final Regulation

0
For the foregoing reasons, the Library amends part 260 of 37 CFR as 
follows:

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

0
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]

0
2. In Sec.  260.2, remove paragraph (d).

0
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.

0
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.


Sec.  260.7  [Amended]

0
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: May 27, 2003.
Marybeth Peters,
Register of Copyrights.
Approved by:
James H. Billington,
The Librarian of Congress.
[FR Doc. 03-15384 Filed 6-17-03; 8:45 am]
BILLING CODE 1410-33-P