Federal Register, Volume 73 Issue 89 (Wednesday, May 7, 2008)

[Federal Register Volume 73, Number 89 (Wednesday, May 7, 2008)]
[Proposed Rules]
[Pages 25627-25633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10088]

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LIBRARY OF CONGRESS

37 CFR Part 201

[Docket No. RM 2007-11]

Definition of Cable System

AGENCY: Copyright Office, Library of Congress.

ACTION: Termination of rulemaking proceeding.

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SUMMARY: The Copyright Office previously sought comment on issues
associated with the definition of the term ``cable system'' under the
Copyright Act as well as on the National Cable and Telecommunications
Association's request for the creation of subscriber groups for the
purposes of eliminating the ``phantom signal'' phenomenon. After
reviewing the record in this proceeding, the Copyright Office finds
that it lacks the statutory authority to adopt rules sought by the
cable industry. The Copyright Office, however, clarifies regulatory
policy regarding the application of the 3.75[percnt] fee to phantom
signals. This proceeding is terminated.

FOR FURTHER INFORMATION CONTACT: Ben Golant, Assistant General Counsel,
and Tanya M. Sandros, General Counsel, Copyright GC/I&R, P.O. Box
70400, Washington, DC 20024. Telephone: (202) 707-8380. Telefax: (202)
707-8366.

SUPPLEMENTARY INFORMATION: Section 111 of the Copyright Act (``Act''),
title 17 of the United States Code (``Section 111''), provides cable
systems with a statutory license to retransmit a performance or display
of a work embodied in a primary transmission made by a television or
radio station licensed by the Federal Communications Commission
(``FCC''). Cable systems that retransmit broadcast signals in
accordance with the provisions governing the statutory license set
forth in Section 111 are required to pay royalty fees to the Copyright
Office. Payments made under the cable statutory license are remitted
semi-annually to the Copyright Office which invests the royalties in
United States Treasury securities pending distribution of these funds
to those copyright owners who are entitled to receive a share of the
fees.

I. Introduction

In 2007, the Copyright Office published a Notice of Inquiry
(``NOI'') seeking comment on issues associated with the definition of
the term ``cable system'' under the Copyright Act and the Copyright
Office's implementing rules. The Copyright Office also sought comment
on the National Cable and Telecommunications Association's (``NCTA'')
request for the creation of subscriber groups for the purposes of
eliminating the ``phantom signal'' phenomenon. 72 FR 70529 (Dec. 12,
2007). The purpose of the NOI was to solicit input on, and address
possible solutions to, the complex issues presented when only a subset
of a cable system's subscriber base receive a particular distant
signal.

II. Background

Section 111(f) of the Copyright Act defines a ``cable system'' as:

``a facility, located in any State, Territory, Trust Territory, or
Possession, that in whole or in part receives signals transmitted or
programs broadcast by one or more television broadcast stations
licensed by the Federal Communications Commission, and makes
secondary transmissions of such signals or programs by wires,
cables, microwave, or other communications channels to subscribing
members of the public who pay for such service. For purposes of
determining the royalty fee under subsection (d)(1)[of Section 111],
two or more cable systems in contiguous communities under common
ownership or control or operating from one headend shall be
considered one system.'' 17 U.S.C. 111(f).

In implementing the cable statutory license provisions of the
Copyright Act, the Copyright Office adopted a definition of the term
``cable system'' that replicated the statutory provision. The Copyright
Office, however, separated the text of the provision into two parts in
order to clarify that a cable system can be defined in either of two
ways for the purpose of calculating royalty fees. Thus, the regulatory
definition provides that ``two or more facilities are considered as one
individual cable system if the facilities are either: (1) in contiguous
communities under common ownership or control or (2) operating from one
headend.'' 37 CFR 201.17(b)(2). The Copyright Office stated that its
interpretation of the statutory ``cable system'' definition was
consistent with Congress's goal of avoiding the ``artificial
fragmentation'' of systems (a large system purposefully broken up into
smaller systems) and the consequent reduction in royalty payments to
copyright owners. See Compulsory License for Cable Systems, 43 FR 958
(Jan. 5, 1978).
The Copyright Office has, in the past, recognized certain practical
problems associated with the definition when cable systems merge. For
example, in 1997, the Copyright Office stated that ``[s]o long as there
is a subsidy in the rates for the smaller cable systems, there will be
an incentive for cable systems to structure themselves to qualify as a
small system.'' See A Review of the Copyright Licensing Regimes
Covering Retransmission of Broadcast Signals (``1997 Report'') (Aug. 1,
1997) at 45. The Copyright Office further stated that although Section
111(f) has worked well to avoid artificial fragmentation, ``it has had
the result of raising the royalty rates some cable systems pay when
they merge. This happens because, if the two systems have different
distant signal

[[Page 25628]]

offerings, then all the signals are being paid for based on the total
number of subscribers of the two systems, even if some of those signals
are not reaching all the subscribers.'' Id. at 46. The Copyright
Office, echoing the NCTA's nomenclature, called this phenomenon the
``phantom signal'' problem. Id. In the 1997 Report, the Copyright
Office recommended to Congress, as part of a broader effort to reform
Section 111, that cable statutory royalties be based on ``subscriber
groups'' that actually receive the signal. The Copyright Office also
recommended that systems under common ownership and control be
considered as one system only when they are either in contiguous
communities or use the same headend (i.e., two unrelated operators
sharing a single headend would not be treated as one system). Id. at
47. Believing that it lacked the authority to alter the definition of
cable system as established in Section 111, the Copyright Office
suggested that Congress amend the Copyright Act in accordance with its
recommendations. Id at 46.
NCTA has proposed a three part remedy to rectify the phantom signal
problem as it sees it. First, it urged the Copyright Office to change
its cable system regulatory definition. Second, it requested that the
Copyright Office adopt a new rule permitting cable operators that
operate a cable system serving multiple communities with varying
complements of distant broadcast signals to use a community-by-
community approach when determining the royalties due from that system,
seemingly without regard to whether a phantom signal problem exists.
NCTA, in short, advocated the creation of ``subscriber groups'' for
cable royalty purposes where the operator pays royalties only where
distant signals are actually received by a particular household.
Finally, NCTA urged the Copyright Office to announce that it would not
challenge Statements of Account on which the cable operator has used a
community-by-community approach for determining Section 111 royalties.
Specifically, NCTA proposed that Section 201.17(b)(2) of the
Copyright Office's rules be amended so that the last sentence reads as
follows: ``For these purposes, two or more cable facilities are
considered as one individual cable system if the facilities are in
contiguous communities, under common ownership or control, and
operating from one headend.'' Stated another way, under NCTA's proposed
rule change, cable facilities serving multiple communities would be
treated as a single system for statutory license purposes only when
three distinct conditions are satisfied: (1) the facilities are in
contiguous communities; (2) the facilities are under common ownership
or control; and (3) the facilities are operating from the same headend.
The significant change NCTA suggests is that the word ``or'' be
replaced by the word ``and'' before the clause ``operating from one
headend.'' NCTA asserted that this regulatory change would help resolve
the phantom signal issue because it would base royalty payments on
signals that are carried throughout the cable system and made available
to all subscribers. According to NCTA, a cable operator would still be
deterred from ``artificially fragmenting'' its facility under this
approach because any operator who attempts to do so would lose the
operational efficiencies concomitant with a single headend. NCTA also
stated that while its proposed definition is narrower than the existing
definition, it would ensure that facilities, which were truly
technically and managerially distinct from one another, would not be
artificially joined together for purposes of the statutory license. In
the NOI, we noted that NCTA's proposed rule change raises significant
statutory interpretation issues and sought comment on this possibility.
73 FR at 70532.
In addition to arguing for a change in the Copyright Office's cable
system definition, NCTA also advocated the adoption of a new paragraph
(g) in Section 201.17 of the Copyright Office's rules. NCTA's proposed
rule amendment would create subscriber groups, based on cable
communities and partial carriage, for the purpose of calculating
royalties in a manner that would eliminate phantom signals.
Specifically, the NCTA proposed that: (1) ``A cable system serving
multiple communities shall use the system's total gross receipts from
the basic service of providing secondary transmissions of primary
broadcast transmitters to determine which of the Statement of Account
forms identified in paragraph (d)(2) is applicable to the system;'' and
(2) ``Where the complement of distant stations actually available for
viewing by subscribers to a cable system is not identical in all of the
communities served, the royalties due for the system may be computed on
a community-by-community basis by multiplying the total distant signal
equivalents derived from signals actually available for viewing by
subscribers in a community by the gross receipts from secondary
transmissions from subscribers in that community.'' NCTA adds that the
total copyright royalty fee for a system to which this rule would apply
must be equal to the larger of (1) the sum of the royalties computed
for the system on a community-by-community basis or (2) 1.013 percent
of the systems' gross receipts from all subscribers (which is the
current minimum royalty fee payment for SA-3 systems beginning with the
July 1-December 31, 2005, accounting period). We sought comment on the
overall structure and formulation of NCTA's ``combined revenues/
community-specific royalty determination'' proposal. We also sought
comment on several examples comparing royalties calculated under the
current regulatory structure and how they might be calculated if we
were to adopt NCTA's proposed rule changes. 72 FR at 70533, 70537-40.
In the NOI, we questioned whether NCTA's proposals were limited
only to those situations where two or more systems have recently
merged. It appeared that NCTA's expansive proposals likely covered any
situation where a cable operator provides a different set of distant
signals to different subscriber groups served by the same cable system.
We noted that its regulatory proposal was much different from the
matter the Copyright Office raised and addressed in its 1989 and 1997
rulemaking proceedings on cable system mergers and acquisitions. We
therefore sought comment on whether our interpretation of NCTA's
proposals were correct. 72 FR at 70531.

III. Comments

Section 111 Royalty Structure and Phantom Signals. NCTA admits that
the ``phantom signal'' problem is not confined to circumstances such as
where System A and System B, each carrying a unique set of distant
signals, merge and are not yet technically integrated. It notes that,
in this situation, the Copyright Office suggests that the phantom
signal issue is temporary, until the systems can become technically
integrated. It states, however, the phantom signal problem can arise in
other contexts. It notes that in some cases it may not be possible to
technically integrate multiple systems with identical line-ups system-
wide. In other cases, it comments that phantom signals can arise when
cable operators pursue a regional strategy of clustering systems, or
where commonly-owned System A and System B become contiguous with each
other through system expansion. NCTA asserts that where there are
legitimate reasons for maintaining separate headends, the rules
unfairly require the operator to artificially ``merge'' these systems
and inflate royalty payments. In addition to

[[Page 25629]]

technical reasons, NCTA remarks that channel lineups may be different
because customers of two different systems may have different settled
viewing expectations based on historical distant signal carriage. It
states that this circumstance cannot be solved simply by adding a
distant signal to a particular channel line-up because of the scarcity
of available channels on a basic service tier.
NCTA asserts that the Office's phantom signal policy affords
copyright owners a ``bonanza based upon non-performance of their
works.'' NCTA also asserts that the current ``phantom signal policy''
presents operators with a series of choices, none of them good for
consumers or competition. It states that, on the one hand, application
of the phantom signal policy may result in an increase in royalty
payments that the operator either must pass through to subscribers (who
receive nothing of value in return) or must absorb itself (reducing the
resources available to provide other services). NCTA states, on the
other hand, that the operator may simply be deterred from carrying
stations that might trigger phantom signal payments, depriving
consumers of programming that they desire. It concludes that neither of
these results is good for consumers or good for competition.
The American Cable Association (``ACA'') asserts that the phantom
signal problem requires cable operators to pay for a license for the
non-use of copyrighted works and posits that no theory of intellectual
property rights supports an obligation to pay for a license for works
not used. ACA asserts that the current royalty scheme requires a cable
operator to pay more royalties for distant signals that are not carried
than for distant signals actually carried. It provides the following
example: two cable systems in Missouri serving equal-sized subscriber
groups. System A carries only WGN, system B carries both WGN and KVTJ.
If the owner of system B purchases system A, connects the systems with
fiber optics, and eliminates system A's headend, the nonexistent KVTJ
signal broadcast to subscriber group A becomes a ``phantom signal'' and
accounts for 58[percnt] of all royalties payable by the combined cable
system. It argues that this is irrational and unfair.
At the outset, Copyright Owners\1\ comment that the ``phantom
signal'' problem is one of the industry's own creation; that is, a
cable operator purposefully chooses to make certain distant signals
available to only some of its customers. They comment that NCTA's
proposals are not limited to situations where mergers result in the
combined system offering phantom signals, but also cover any situation
where a cable operator provides a different set of distant signals to
different subscriber groups. Copyright Owners then assert that the
formula for calculating Section 111 royalties represents a statutory
compromise where the cable operator pays ``miniscule royalty rates''
that are derived from a broad revenue base. Copyright Owners believe
that the rates in the statutory formula are inequitable, and favor the
cable operator, even when applied to the broad revenue base. They state
that if the Copyright Office adopts NCTA's suggestions, then merging
Form 3 systems would pay even less royalties after a merger. They
remark that Congress adopted a ``convenient revenue base,'' not one
that was congruent to programming actually received by subscribers.
They request that the Copyright Office act expeditiously to reject
NCTA's proposal and end the controversy so that all participants in the
Section 111 royalty scheme have a degree of certainty to move forward.
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\1\ Copyright Owners are comprised of the Joint Sports
Claimants, the Music Claimants, Program Suppliers, National
Association of Broadcasters, Devotional Claimants, Public Television
Claimants, and National Public Radio.
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Copyright Owners state that aside from the statutory minimum fee,
the Office's interpretation of Section 111 does not require cable
operators to pay for any distant signals they do not ``use'' or works
they do not ``perform.'' They assert that cable systems pay for only
those distant signals that they actually carry and therefore ``use;''
once they carry a station in any portion of their system, they engage
in a public performance of each work broadcast by the station,
regardless of the total number of subscribers who actually receive that
work. 17 U.S.C. 101 (definition of ``to perform publicly''). They add
that if a cable system does not carry a distant signal in any portion
of its system (and thus does not perform any work included in that
signal), the system does not ascribe any DSE value to that signal in
its Section 111 royalty calculation. They assert that nothing in the
Office's existing rules governing phantom signals requires payment for
``non-use'' or affords copyright owners a ``bonanza for non-
performance,'' as NCTA and ACA contend.
Copyright Owners take issue with NCTA's complaint that the law
``makes no sense'' because it requires payment of royalties for works
that ``are not being seen by the operator's customers.'' They comment
that ``It is more than strange'' that the principal representative of
the cable television industry would complain about requiring payments
for programming ``not being seen'' by cable subscribers. Copyright
Owners remark that the cable business model is premised on requiring
each subscriber to pay for packages of programming, the majority of
which programming is never ``seen'' by that subscriber. In defense of
that business model, they note that NCTA itself has been a vocal
opponent of any ``a la carte'' requirement that would allow consumers
to pay for only programming they want to see. See A La Carte - Fewer
Choices, Less. Diversity, Higher Prices, http://www.ncta.com/IssueBrief. aspx?contentId=15 (last visited March 25, 2008). Copyright
Owners note that, in any event, there is nothing in Section 111 that
restricts royalty payment to copyrighted works actually ``seen'' by
cable subscribers. They conclude by stating that ``the fact that NCTA's
proposals are based upon the notion that only programming actually seen
should be compensated under Section 111 provides further confirmation
of the impropriety of those proposals.''
Program Suppliers comment that NCTA does not provide any real-life
examples of where the phantom signal problem has had any adverse
effect. They state that NCTA's proposal would rewrite the royalty
payment system for all cable systems, not just those with a supposed
phantom signal problem. They also reply that ACA's effort to eliminate
the phantom signal problem is based on a pre-determined hypothetical
with no real-world counterpart.
NCTA, in reply, states that the Copyright Owners that have
attempted to defend phantom signal payments do not, and cannot,
demonstrate that there is anything rational about requiring a cable
operator to pay more for the retransmission of a distant signal simply
because the operator happens to serve subscribers in a neighboring
community where it does not retransmit that signal. It states that,
instead, they try to justify phantom signal payments based on the false
notion that an obligation to compensate copyright owners for the
fictional use of their works is somehow embedded in the structure of
the Act and the Office is powerless to change it.
Section 111(f) and the Cable System Definition. Copyright Owners
state that NCTA has asked the Office to substitute the word ``and'' for
the word ``or'' above, so that cable systems would be considered a
single system only if they were in contiguous communities under common
ownership and control, and operated from one headend. They argue that
this proposal is inconsistent with

[[Page 25630]]

the canons of statutory interpretation as well as the legislative
purpose behind Section 111.
Copyright Owners note that NCTA claims, as justification for the
rule change, that the existing cable system definition inhibits the
practice of clustering. They point out, however, that the number and
size of clusters have risen, and no cable system would make a decision
to cluster solely based on its Section 111 royalty obligations. In any
event, they remark that Congress intended that two merging systems
should pay more in royalties than if they remained as two smaller
systems. They state that this position is consistent with Section 111,
which establishes a royalty schedule based on a cable operator's
ability to pay. Program Suppliers also note that system clustering has
not been inhibited by Section 111's definitions or its royalty
structure. They note that the number of cable subscribers served by
clusters has more than doubled from 1994 to 2003 and the proportion of
subscribers in clusters has risen from 34[percnt] to 81[percnt] of all
basic cable subscribers. They further note, at the same time, total
annual cable royalty fees paid fell from $161 million to $132 million.
NCTA recognizes that Congress's purpose in enacting the cable
system definition was to prevent artificial fragmentation in order to
reduce royalty fees owed. It asserts that while the Office cannot
change the ``cable system'' definition, it can protect against
artificial fragmentation without requiring irrational fee calculations.
NCTA comments that its proposal would still require operators to
continue to combine revenues from separate-but commonly-owned and
contiguous-cable systems to determine their filing status as a Form 1,
2 or 3 system.
Statutory Authority. Program Suppliers assert that the Copyright
Office does not have the authority to interpret the statutory term
``or'' in the Section 111(f) definition of cable system to mean
``and.'' They comment that the Office must follow the explicit language
of the statute in formulating its regulations. Copyright Owners add
that Section 111 specifies only one situation where a cable system may
``prorate'' its ``gross receipts;'' that is, where the system carries a
``partially distant'' signal. They state that NCTA is asking the Office
to permit proration of ``gross receipts'' and the creation of
subscriber groups in many additional circumstances. They argue that
Congress did not give the Copyright Office the authority to expand the
language of the Act in the manner proposed by the NCTA. In any event,
Copyright Owners submit that the Copyright Office has already
articulated that it has no authority to adopt NCTA proposals, yet, NCTA
keeps claiming this issue is unresolved.
NCTA replies that the Copyright Owners' comments ignore that the
Office has adopted a similar method of calculating royalties,
permitting community-specific calculations in cases of partially
permitted, partiallynon-permitted distant signal carriage. NCTA asserts
that the Act does not expressly require this exception either, but no
one is suggesting that the Office exceeded its authority by adopting a
rational solution to that administrative problem. Rather, the Office
has an obligation to make ``common sense'' responses to problems that
arise during implementation, so long as those responses are not
inconsistent with congressional intent.
Subscriber Group Proposal. NCTA argues that its subscriber group
proposal does not require a statutory amendment to Section 111. It
notes that Program Suppliers, at one time, supported a very similar
method for calculating royalties. It comments that even though Section
111 is silent on whether subscriber groups can be created, it certainly
does not expressly mandate phantom signal treatment. It notes, for
example, that the Copyright Office's rules already authorize operators
to create subscriber groups to calculate royalties for ``partially-
permitted, partially non-permitted'' distant signals. It concludes that
the Copyright Office is able to remedy the phantom signal problem even
if the definition of ``cable system'' is not changed.
NCTA states that calculating royalties based on actual carriage is
entirely consistent with the Act's structure. It argues that the
requirement that operators pay a minimum fee, regardless of whether any
distant signals are carried at all, is the one narrow exception to the
general principle of paying only for what is carried. NCTA notes that
the legislative history explains the minimum payment for the privilege
of retransmitting distant signals served a particular purpose: ``the
purpose of this initial rate, applicable to all cable systems in this
class, is to establish a basic payment, whether or not a particular
cable system elects to transmit distant non-network programming.''
Beyond this basic payment required of all operators retransmitting
broadcast signals, NCTA asserts that the Act and its legislative
history show no intent to inflate the amount of other payments through
some artificial levy for non-use.
According to Copyright Owners, NCTA states that the Office's
current regulations prohibiting the creation of subscriber groups are
inconsistent with the ``fundamental principle'' that a cable system
should be required to pay royalties only for ``actual signal carriage''
and thus ``use'' of copyrighted works. Copyright Owners argue that the
Act's legislative history does not support this assertion. Copyright
Owners also suggest that NCTA's proposal introduces methodological
wrangles and monitoring expenses. They assert that current statement of
account forms do not provide all the necessary information needed to
ensure compliance.\2\ They conclude that adopting NCTA's proposal would
not only increase uncertainty and disputes, but upset the entire
regulatory scheme set up by the Copyright Office.
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\2\ Copyright Owners argue that the Copyright Office needs to
create an audit right so that royalty claimants may investigate SOAs
and also request that the Office post on its website a list of cable
Statements of Account that do not calculate royalties in accordance
with Office regulations.
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In Reply, Program Suppliers assert that NCTA's proposed rewrite of
Section 201.17(b)(2) appears as nothing more than a new effort to
legitimize artificial fragmentation designed to reduce royalty fees.
They further assert that NCTA's proposal would allow cable operators to
choose what is a ``separate'' system on the basis of whatever makes
sense from a business standpoint. Program Suppliers conclude that
NCTA's plan would bestow on operators both the motive and the means to
fragment their systems so as to reduce the applicable royalty fees,
exactly the situation that the current Section 111(f) definition was
intended to prevent. They state that such a result would unfairly
penalize copyright owners, allowing cable operators to contort the
statutory license scheme to reduce for their benefit the already
limited compensation copyright owners receive.
Program Suppliers comment that NCTA's contention that no statutory
amendment is required to adopt a ``not carried'' subscriber group
category is belied by its own discussion of the existing subscriber
groups allowed by the current regulations: one each for a non-permitted
distant signal, a permitted distant signal, or a local signal. Program
Suppliers state that each of those regulations is anchored on an
explicit statutory provision: the permitted, non-permitted subscriber
groups rely on Section 801(b)(2)(B) that applies the 3.75[percnt] rate
only to nonpermitted signals, while Section 111(d)(1)(B) allows
subscriber groups for partially distant and partially local

[[Page 25631]]

signals. They argue that there is no comparable statutory provision for
NCTA's proposed fourth designation ``not carried''' signals that
explicitly allows the use of ``not carried'' subscriber groups. Program
Suppliers conclude that because Section 111 does not exempt ``not
carried'' distant signals from royalty fee payments, no valid basis
exists on which to promulgate such a subscriber group methodology for
calculating royalties.
In Reply, NCTA notes that its proposal would simply require
contiguous communities to combine revenues, and calculate royalties
based on distant signals actually retransmitted in that community. It
asserts that Program Suppliers and Copyright Owners have not provided a
sufficient policy reason why its subscriber group proposal should not
be adopted.
ACA argues that if the Copyright Office concludes that it lacks the
statutory authority to adopt NCTA's proposal, then it should recommend
that Congress amend Section 111 to clarify that a cable operator is
only obligated to pay royalties on revenues derived from the actual
retransmission of a signal to subscribers.
NOI examples. In the NOI, we sought comment on several royalty
scenarios, based on actual Statement of Account filings, to illustrate
NCTA's proposals in action. 72 FR at 70537-40. To provide context, we
reiterate that there are two types of cable system SOAs currently in
use. The SA1-2 Short Form is used for cable systems whose semi-annual
gross receipts are less than $527,600.00. There are three levels of
royalty fees for cable operators using the SA1-2 Short Form: (1) a
system with gross receipts of $137,000 or less pays a flat fee of
$52.00 for the retransmission of all broadcast station signals; (2) a
system with gross receipts greater than $137,000.00 and equal to or
less than $263,800.00, pays between $52.00 to $1,319.00; and (3) a
system grossing more than $263,800.00, but less than $527,600.00 pays
between $1,319.00 to $3,957.00. Cable systems falling under the latter
two categories pay royalties based upon a fixed percentage of gross
receipts. The SA-3 Long Form is used by larger cable systems grossing
$527,600.00 or more semi-annually. We used the terms ``Form 1,'' ``Form
2,'' and ``Form 3'' to describe the SOA-type systems that were being
merged in the scenarios. We used the terms ``System 1'' and ``System
2'' as the generic names of the systems in each of the examples; these
terms do not reflect the type of SOA that such a system would file with
the Copyright Office.''
With regard to the royalty scenarios, NCTA comments that the Office
``strangely'' focuses on the size of the royalty pool and ignores
everything else. It notes that the examples in Set 1 show a 900[percnt]
increase in royalties paid by System 2 users under the current
approach, but only a 70[percnt] increase under its proposal. In Set 2,
it notes that while its proposal does not result in an increase, there
should still be no concern with artificial fragmentation because two
Form 3 systems are being merged. In Set 3, it notes that total royalty
payments would be the same post-merger as they are pre-merger under its
proposal where the line-ups are the same, but under the current
approach rates would go up 55[percnt] - from $41,401 to $64,447. With
regard to the latter result, NCTA comments that ``Only an Alice in
Wonderland `through the looking glass' perspective could lead one to
conclude that its proposal results in a ``reduction'' in an operator's
royalty payments.'' NCTA comments that its proposal merely prevents the
large, and unjustified, increases in royalty payments that can be
produced by the irrational phantom signal policy.
NCTA comments that other hypothetical examples are unlikely to
occur in the real world and do not justify inaction on its petition. It
notes, for example, the comment on application of the syndicated
exclusivity surcharge to subscriber groups. It states that only seven
systems paid syndex surcharge royalties last accounting period, and the
amount paid ($25,000) is de minimis when compared to the total semi-
annual royalty payments of more than $70 million. Similarly, it notes
that the Office suggests that there could be scenarios where a Form 1
system merging with a Form 3 system might pay less than the $52 minimum
fee if it carries no distant signals and has gross revenues less than
$5,133. It argues that concerns about these relatively farfetched
scenarios, though, do not justify inaction here. NCTA admits that
anomalous situations might occasionally arise if subscriber groups are
used for calculating royalties, but remarks that the Office could tweak
NCTA's proposed regulations to address these issues. It emphasizes that
these unusual situations do not provide a legitimate reason to avoid
remedying this situation altogether.
Program Suppliers state that the disconnect between NCTA's claim
that actual carriage should control the royalty plan and should be the
basis for calculation of royalty payments is demonstrated by the
hypothetical in Set 1, Scenario 1, which NCTA mistakenly asserts shows
a phantom signal problem. According to Program Suppliers, NCTA uses
this hypothetical, involving merger of a Form 2 with no distant
carriage and a Form 3 system with distant carriage, for the proposition
that ``the mere fact that these two systems are combined for filing
purposes results in a 900 percent increase in copyright costs for
subscribers to System 2 [the Form 2 system].'' Program Suppliers note
that they have previously demonstrated in their Section 109 comments
that royalty payment obligations of cable operators do not correlate to
subscriber fees. See Program Suppliers' Section 109 Comments, Docket
No. 2007-1, at 8-10. Second, They state that NCTA assumes the
900[percnt] increase is due solely to phantom signals, but the same
increase would apply post-merger if System 2 carried exactly the same
complement of distant signals as System 1 pre- and post-merger. They
assert that no phantom signal claim could be made based on that
hypothetical. To the contrary, they argue that the 900[percnt] increase
would occur due to the extremely low Form 2 flat fee, $1,931,
postulated for pre-merger System 2. They state that the flat fee does
not change even if pre-merger System 2 carried the same signals as did
System 1. They conclude that the royalty payment increases contained in
the Set 1 Scenarios follow exactly the statutory plan intended by
Congress, viz., royalties for Form 3 systems are substantially higher
than the de minimis payments made by smaller systems.
Copyright Owners add that the Copyright Office did not misapply
NCTA's subscriber group proposals; rather, the Office has applied it in
the way some of NCTA's members have done. They note that, according to
NCTA, cable operators using the subscriber group proposal must
calculate a minimum fee for each subscriber group with less than one
DSE -- and then add those minimum fees to the royalties calculated for
each subscriber group with one or more DSEs. See NCTA Comments at 12
n.31 (stating that Copyright Office ``miscalculates'' the royalty owed
by one of its hypothetical cable systems because it ``mistakenly failed
to compute the minimum fee due from subscribers in Group 1'').
Copyright Owners assert that cable operators have not been following
NCTA's own approach; rather, they have been routinely ascribing a zero
royalty -- rather than the minimum fee -- to any subscriber group with
no DSEs. Copyright Owners add that NCTA has been using fractional DSE
values (rather

[[Page 25632]]

than a minimum fee) to calculate the royalty for any subscriber group
with less than one, but more than zero, DSEs. Copyright Owners conclude
that ``there are multiple methods for implementing a subscriber group
policy for phantom signals. The one trait they all share in common is
that none is consistent with Section 111.''

IV. Discussion

We published the NOI to gather comments on the long-debated issue
of phantom signals. The responses to the NOI have substantially aided
our effort to understand the issues surrounding the cable industry's
proposals. Based on the record evidence, we find that NCTA has not
adequately demonstrated that its proposed changes are permissible under
Section 111. We cannot read the statute or its legislative history to
permit the creation of subscriber groups as suggested. NCTA argues
about public policy and the inherent unfairness of the current system,
but it ignores the underlying legal construct that binds the Office. We
believe Section 111 is clear. As long as a cable operator subjects
itself to the statutory license, and publicly performs the non-network
programming carried by a distant signal, it must pay royalties for such
use no matter if some subscribers are unable to receive it.
Further, as we have stated in the past, we do not believe we have
the statutory authority to change the royalty fee structure in the
manner suggested by the cable industry. While the NCTA argues that the
Office has the authority to adopt its proposed rule change, it ignores
our limited role under Section 111, which allows the Office to
administer a statutory rate structure, but gives us no discretion to
alter that scheme. The cable industry has long been aware of our
perspective on this issue and our policy of requesting additional
payment when a cable operator does not submit the appropriate amount of
royalties for a partially carried distant signal, yet it has maintained
that it has been an unresolved issue. The cable industry can no longer
cite to any inaction on our part for not paying royalties that are due
for the use of the Section 111 license.
In any event, we believe that NCTA has made cogent policy arguments
concerning the inadequacies of the current statute. However, Congress
is the proper forum to address its concerns. In 1997, the Copyright
Office recommended to Congress, as part of a broader effort to reform
Section 111, that cable statutory royalties should be paid on a flat
per subscriber-per system basis just as satellite carriers are required
to do under Section 119 of the Copyright Act. See A Review of the
Copyright Licensing Regimes Covering Retransmission of Broadcast
Signals (Aug. 1, 1997) at 60. This approach would eliminate the phantom
signal problem. In lieu of this proposal, and assuming that operators
would continue to pay royalties based on gross receipts, the Office
recommended that the Section 111 royalty fee structure be based on
``subscriber groups'' that actually receive the signal. Id. at 59. The
Copyright Office also recommended that systems under common ownership
and control be considered as one system only when they are either in
contiguous communities or use the same headend (i.e., two unrelated
operators sharing a single headend would not be treated as one system).
Id. at 47.
On this point, we note that Section 109 of the Satellite Home
Viewer Extension and Reauthorization Act of 2004 (``SHVERA'') requires
the Office to examine and compare the statutory licensing systems for
the cable and satellite television industries under Sections 111, 119,
and 122 of the Copyright Act and recommend any necessary legislative
changes no later that June 30, 2008. In the NOI in this proceeding, we
stated that we understood our responsibilities under SHVERA to closely
examine the continued relevancy of Section 111 and its many
provisions.\3\ We also noted that the matters raised by the parties on
the phantom signals issue deserved consideration, sooner rather than
later. 72 FR at 70536-37. Consequently, we proceeded with the current
rulemaking and, with the publication of today's notice, conclude that
the proposed regulatory changes cannot solve the problem. Nevertheless,
we continue to consider the issues raised in this proceeding in the
context of the pending Section 109 Report and possible legislative
solutions.
---------------------------------------------------------------------------

\3\ Several parties commented on phantom signals in response to
the Section 109NOI. See, e.g., ACA comments at 10-13, NCTA comments
at 18-19, Joint Sports reply comments at 11, NAB comments at 11, and
Program Suppliers comments at 6.
---------------------------------------------------------------------------

We are nevertheless compelled to resolve one issue before
terminating this docket. In the NOI, we noted that we have historically
accepted the retransmission of phantom signals at the permitted rate
(``base rate fee''). We stated, however, that some cable operators have
raised concern that the Office might find, at some point in the future,
that the retransmission of a phantom signal should be treated as if it
were actually carried and thus subject to the 3.75[percnt] fee as a
non-permitted signal. In the absence of a clear policy statement on
this matter, the Office has not stipulated payment of the 3.75[percnt]
fee and has left the decision as to which rate applies to the
operator's discretion. 72 FR at 70535. In response to questions raised
about the 3.75[percnt] fee in the NOI, NCTA stated that there is no
rationale for applying the fee simply because two systems merge. It
stated that the 3.75[percnt] fee was only meant to apply to newly added
signals carried for the first time, not for phantom signals. Neither
Copyright Owners nor Program Suppliers commented on the relationship
between the 3.75[percnt] fee and phantom signals.
We find it is necessary to resolve the application of the
3.75[percnt] fee to phantom signals to provide closure on the matter.
In the NOI, we noted that on one hand, the 3.75[percnt] fee could be
applied to non-permitted phantom signals because there is no specific
statutory provision or Office regulation exempting such payment. We
also commented that, on the other hand, the cable industry generally
has, for nearly three decades, reported and paid royalties under the
assumption that the 3.75[percnt] fee would not be applied to non-
permitted phantom signals. Further, our review of the Statements of
Account indicate that most cable systems have paid either the Base Rate
Fee or no fee for phantom signals while very few cable systems have
paid the 3.75[percnt] fee for these signals. In the NOI, we sought
comment on the appropriate policy in this context.
We believe that cable operators, under the law, do not have to pay
the 3.75[percnt] fee for the retransmission of distant broadcast
signals that a subset of the subscriber population served by a cable
system is unable to receive. Under Section 801 of the Copyright Act,
the 3.75[percnt] fee royalty adjustment was intended to address
carriage by cable systems of additional television broadcast signals
beyond the local service area of the primary transmitters of such
signals. 17 U.S.C. 801(b)(2)(B). The United States Court of Appeals for
the District of Columbia Circuit explained that the 3.75[percnt] fee
was to apply only to ``newly added signals, i.e., those carried for the
first time after the change in the FCC's distant signal rules.'' See
National Cable Television Association, Inc. v. Copyright Royalty
Tribunal, 724 F.2d 176, 180 (D.C. Cir. 1983). Based upon the language
of the statute and relevant legal precedent, it is reasonable to
conclude that the 3.75[percnt] fee is intended to only apply to
``newly'' carried distant broadcast signals and not to other situations
such as those where signals are not available on a system-wide basis.
As NCTA argues, ``[i]mposing the 3.75[percnt] rate on a signal

[[Page 25633]]

not carried in a particular community would be completely unmoored from
any justification for the penalty rate in the first place.'' NCTA
comments at 14. In any event, we note that if two cable systems merge,
and the operator then carries a non-permitted distant signal above its
market quota, under the analysis stated herein, this ``newly added''
signal would be subject to the 3.75[percnt] fee.

V. Conclusion

Based on the preceding, we hereby terminate this proceeding. The
Office will not consider the issues raised by NCTA in any further
proceeding unless Congress so requires by statute. This constitutes a
final action by the Copyright Office.

Dated: May 2, 2008.
Marybeth Peters,
Register of Copyrights.
[FR Doc. E8-10088 Filed 5-6-08; 8:45 am]
BILLING CODE 1410-30-S