[Federal Register Volume 74, Number 15 (Monday, January 26, 2009)]
[Notices]
[Pages 4537-4543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1444]



  Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / 
Notices  

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LIBRARY OF CONGRESS

Copyright Office

[Docket No. 2009-1]


Review of Copyright Royalty Judges Determination

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice; correction.

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SUMMARY: The Register of Copyrights issues the following decision 
identifying and correcting erroneous resolutions of material questions 
of substantive law under title 17 that underlie or are contained in the 
Copyright Royalty Judges' final determination regarding adjustment of 
reasonable rates and terms of royalty payments for the making and 
distribution of phonorecords of musical works, Docket No. 2006-3 CRB 
DPRA. The Register concludes that the Copyright Royalty Judges 
erroneously did not refer two novel questions of law as required under 
the statute; that they were in error in their conclusions regarding 
both their and the Register's authority to review regulations submitted 
to them under an agreement by the participants; and that their 
conclusion that they could not review the agreement submitted by the 
participants led to the inclusion of regulations that constitute 
erroneous resolution by the CRJs of material questions of substantive 
law under title 17. This decision corrects such errors and shall be 
made part of the record of the proceeding (Docket No. 2006-3 CRB DPRA).

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

SUPPLEMENTARY INFORMATION: 

Background

    The Copyright Royalty Judges (``CRJs'') are required by 17 U.S.C. 
115(c)(3)(C) and Chapter 8 to make and issue determinations and 
adjustments of reasonable rates and terms of royalty payments for the 
making and distribution of phonorecords of musical works in accordance 
with the provisions of 17 U.S.C. 115. Under 17 U.S.C. 802(f)(1)(D), the 
Register of Copyrights may review for legal error the resolution by the 
CRJs of a material question of substantive law under title 17 that 
underlies or is contained in a final determination of the CRJs. If the 
Register of Copyrights concludes, after taking into consideration the 
views of the participants in the proceeding, that any resolution 
reached by the CRJs was in material error, the Register of Copyrights 
shall publish such decision correcting such legal errors in the Federal 
Register, together with a specific identification of the legal 
conclusion of the CRJs that is determined to be erroneous, which shall 
be made part of the record of the proceeding.
    On November 24, 2008, the CRJs issued to the participants, posted 
to their Web site, and transmitted to the Register of Copyrights a copy 
of their final determination setting such rates and terms. Final 
Determination of Rates and Terms in the Matter of Mechanical and 
Digital Phonorecord Delivery Rate Determination Proceeding, Docket No. 
2006-3 CRB DPRA (November 24, 2008). The Register of Copyrights, 
pursuant to section 802(f)(1)(D), has reviewed the CRJs' final 
determination. The Register concludes that the resolution of certain 
material questions of substantive law under title 17 that underlie or 
are contained in the final determination were in error and issues this 
decision correcting such errors.
    In the course of their proceeding to set rates and terms of royalty 
payments for the making and distribution of phonorecords of musical 
works in accordance with the provisions of 17 U.S.C. 115, the CRJs 
addressed several material questions of substantive law that were 
properly referred to the Register of Copyrights under 17 U.S.C. 
802(f)(1)(A)(ii) and 802(f)(1)(B). However, the Register determines 
that they erroneously did not refer two additional novel questions of 
law as required under the statute. The Register also finds that the 
CRJs were in error in their conclusions regarding both their and the 
Register's authority to review regulations submitted to them under an 
agreement by the participants. The CRJs' conclusion that they could not 
review these regulations led to the inclusion of regulations that 
constitute erroneous resolutions of material questions of substantive 
law under title 17, which as stated, are corrected herein.
    The regulations ultimately contained in the CRJs' final 
determination establishing rates and terms of royalty payments for the 
activities under section 115, i.e. ``making and distributing 
phonorecords, including by means of digital phonorecord deliveries,'' 
are divided into two subparts. The first portion, Subpart A, is the 
product of the findings and deliberations of the CRJs, and delineates 
the rates and terms for three distinct categories of phonorecords under 
the section 115 license. These particular categories identify 
phonorecords made under specific conditions and are categorized as 
``Physical phonorecord deliveries,'' ``Permanent digital downloads'' 
and ``Ringtones.'' See 37 CFR 385.1-385.4.\1\ The second portion, 
Subpart B, is the product of settlement negotiations among the 
participants, and delineates the rates and terms for two additional 
distinct categories identifying phonorecords made under the section 115 
license. These particular categories identify phonorecords made under 
specific conditions and are identified as ``Interactive streaming'' and 
``Limited downloads.'' Subpart B also indicates specific conditions 
under which ``promotional royalty rates'' are applicable to 
``Interactive streaming'' and ``Limited downloads.'' See 37 CFR 385.10-
385.17. The Register observes that although the participants informed 
the CRJs that their agreement would address Limited downloads and 
Interactive streaming, including all known incidental digital 
phonorecord deliveries, their agreement ultimately only addressed 
``Interactive streaming'' and ``Limited downloads,'' thus addressing 
less activity than might reasonably have been expected.
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    \1\ The Register cites to the regulations in the final 
determination, 37 CFR 385.1-385.17, by the references adopted by the 
CRJs. As of the date of this review, they have not been codified in 
the Code of Federal Regulations.
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    The Register has also concluded that in setting forth rates and 
terms for these five distinct categories of phonorecords, the CRJs' 
final determination does not include rates and terms for certain 
ongoing activities which may be licensable under the section 115 
license, e.g., phonorecords made during the course of a non-interactive 
stream. Nevertheless, if a licensee makes and distributes phonorecords 
that do not fall within any of the five distinct categories of 
phonorecords for which specific rates have been set, the making and 
distribution of these phonorecords may still be covered by the section 
115 license, so long as the licensee operates within the statutory 
terms of the license, including the provisions addressing Notice of 
Intention to Use and Statements of Account, but the licensee would 
incur no obligation to pay royalties for such activity during the 
relevant time period. However, under certain circumstances, which are 
dictated by section 803(d)(2)(B), royalty rates may be set 
retroactively in future proceedings.

Procedural Background of the CRJs' Proceeding

    On January 9, 2006, the CRJs issued a Notice announcing 
commencement of this proceeding with a request for

[[Page 4538]]

Petitions to Participate, which was published in the Federal Register. 
71 FR 1453. In response to the Notice, the following parties submitted 
petitions to participate: Royalty Logic, Inc. (``RLI''); the 
Songwriters Guild of America (``SGA''); the National Music Publishers'' 
Association, Inc. (``NMPA''), the Songwriters Guild of America, and the 
Nashville Songwriters Association International, jointly (collectively, 
``Copyright Owners''); Apple Computer, Inc.; America Online, Inc.; 
RealNetworks, Inc.; Napster, LLC; Sony Connect, Inc.; Digital Media 
Association (``DiMA''); Yahoo! Inc.; MusicNet, Inc.; MTV Networks, 
Inc.; and Recording Industry Association of America (``RIAA'').
    On August 1, 2006, prior to the filing of written direct 
statements, RIAA sought from the CRJs a referral of a novel question of 
law to the Register of Copyrights (``Register''). See Motion of [RIAA] 
Requesting Referral of a Novel Question of Substantive Law (filed 
August 1, 2006). RIAA asserted that the CRJs were compelled to refer 
the novel question of law to the Register under section 802(f)(1)(B). 
After considering the views of all of the participants, the CRJs 
granted RIAA's motion in part and referred to the Register two novel 
questions of law regarding (1) whether ringtones--regardless of whether 
the ringtone is monophonic, polyphonic or a mastertone--constitute 
delivery of a digital phonorecord subject to statutory licensing under 
section 115 and (2) if so, what legal conditions and/or limitations 
would apply. See Order Granting in Part the Request for Referral of a 
Novel Question of Law, Docket No. 2006-3 CRB DPRA (August 18, 2006). On 
October 16, 2006, the Register transmitted a Memorandum Opinion to the 
CRJs that addressed the novel questions of law. The Register's 
Memorandum Opinion was published in the Federal Register on November 1, 
2006. 71 FR 64303.
    On January 7, 2008, DiMA requested referral to the Register of what 
it described as a novel question of law as to whether ``interactive 
streaming'' constituted a digital phonorecord delivery (``DPD''), 
asserting that the CRJs were compelled to refer the novel question of 
law to the Register under section 802(f)(1)(B). See Motion of [DiMA] 
Requesting Referral of a Novel Material Question of Substantive Law 
(``DiMA Motion'') (January 7, 2008). Copyright Owners opposed DiMA's 
motion and RIAA took no position on it. The CRJs heard oral arguments 
on the motion on January 28, 2008. On February 4, 2008, the CRJs denied 
DiMA's motion, finding that the matter of what is ``interactive 
streaming'' presented a question of fact and not a question of law as 
required by section 802(f)(l)(B). See Order Denying Motion of [DiMA], 
for a Referral of a Novel Material Question of Substantive Law, Docket 
No. 2006-3 CRB DPRA (February 4, 2008).
    Subsequent to the presentation of the rebuttal phase of their case, 
on May 15, 2008, the participants informed the CRJs that they had 
reached a settlement regarding the rates and terms for ``limited 
downloads and interactive streaming, including all known incidental 
digital phonorecord deliveries'' and agreed to submit the agreement to 
the CRJs at a later date. See Joint Motion to Adopt Procedures for 
Submission of Partial Settlement at 1 (filed May 15, 2008).
    On July 2, 2008, after the evidentiary phase addressing the 
remaining issues in the proceeding, the participants filed their 
respective Proposed Findings of Fact and Conclusions of Law. The 
participants filed replies on July 18, 2008. Closing arguments occurred 
on July 24, 2008, after which time the record was closed.
    On July 25, 2008, after closing arguments, the CRJs, on their own 
motion and under authority established in section 802(f)(1)(A)(ii), 
referred to the Register a material question of substantive law 
concerning the division of authority between the CRJs and the Register 
to establish terms under the section 115 statutory license. See Order 
Referring Material Question of Substantive Law, Docket No. 2006-3 CRB 
DPRA (July 25, 2008). On August 8, 2008, the Register transmitted a 
Memorandum Opinion to the CRJs that addressed the material question of 
substantive law. The Register's Memorandum Opinion was published in the 
Federal Register on August 19, 2008. 73 FR 48396.
    On September 22, 2008, the participants filed their partial 
settlement with the CRJs, and it was published in the Federal Register 
on October 1, 2008. 73 FR 57033. Public comments were due on October 
31, 2008. CTIA-The Wireless Association and the National Association of 
Broadcasters (``CTIA/NAB''), non-participants to the rate setting 
proceeding, jointly filed the only comment on the agreement. They 
argued that adoption of the settlement was beyond the CRJs' authority, 
contrary to law and bad policy. See Comments of CTIA-The Wireless 
Association and the National Association of Broadcasters (filed October 
31, 2008).
    On October 2, 2008, the CRJs issued their Initial Determination of 
Rates and Terms subject to review by the participants and the filing of 
motions for a rehearing. See 17 U.S.C. 803(c)(1) and (2)(A) and (b). On 
October 17, 2008, RIAA filed a motion for rehearing to reconsider the 
timing of the late payment fee of 1.5% per month. After reviewing the 
motion, the CRJs denied the motion for rehearing, by Order dated 
November 12, 2008. On November 24, 2008 the CRJs issued to the 
participants a copy of their Final Determination of Rates and Terms in 
the Matter of Mechanical and Digital Phonorecord Delivery Rate 
Determination Proceeding, Docket No. 2006-3 CRB DPRA (``Final 
Determination''), and transmitted a copy to the Register of Copyrights. 
See Final Determination of Rates and Terms in the Matter of Mechanical 
and Digital Phonorecord Delivery Rate Determination Proceeding, Docket 
No. 2006-3 CRB DPRA (November 24, 2008).
    On January 8, 2009, the Register requested the participants' views 
on potential legal errors contained in the CRJs' final determination. 
In response, the Register received written views from RIAA, Copyright 
Owners, and DiMA on January 15, 2009.
    In accordance with the authority granted to the Register of 
Copyrights under 17 U.S.C. 802(f)(1)(D), the Register of Copyrights has 
reviewed the CRJs' determination of rates and terms of royalty payments 
under section 115 taking into account the views of the participants as 
reported in the CRJs' final determination and in response to a request 
from the Register for written comments on specific issues. Request for 
Participants' Views Regarding Possible Legal ErrorsCcontained in the 
Copyright Royalty Judges' Final Determination (January 8, 2009). The 
Register concludes that certain resolutions of material questions of 
substantive law under title 17 which underlie or are contained in the 
final determination of the CRJs are in error.

Review of Copyright Royalty Judges' Determination

1. Failure To Refer Novel Questions to the Register

    Under 17 U.S.C. 802(f)(1)(B), in any case in which a novel material 
question of substantive law concerning an interpretation of those 
provisions of title 17 that are the subject of the proceeding is 
presented, the CRJs are required to request a written decision from the 
Register of Copyrights to resolve such a novel question. A ``novel 
question of law'' is a question of law that has not been determined in 
prior decisions, determinations, and rulings described in section 
803(a) of the Copyright Act. See

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17 U.S.C. 802(f)(1)(B)(ii). During the course of the proceeding, the 
CRJs referred two novel questions of substantive law to the Register, 
but they did not refer two additional novel material questions of 
substantive law concerning an interpretation of provisions of title 17. 
The CRJs' failure to refer a novel material question of substantive law 
is itself an erroneous legal resolution of ``a material question of 
substantive law under [title 17] that underlies or is contained in a 
final determination of the [CRJs].'' Therefore any failure to refer a 
novel material question is subject to the Register's review under 
section 802(f)(1)(D).
    One such novel question arose amidst DiMA's motion for referral to 
the Register of what DiMA described as a novel question of substantive 
law as to whether ``interactive streaming'' constitutes a DPD under 
section 115. See Motion of [DiMA] Requesting Referral of a Novel 
Material Question of Substantive Law (filed January 7, 2008). After 
hearing the participants' arguments on the motion, the CRJs denied 
DiMA's motion, finding that the matter of what is ``interactive 
streaming'' presented a question of fact and not a question of law as 
required by section 802(f)(l)(B); a view shared by Copyright Owners. 
The CRJs accurately noted that the statute does not define or mention 
the term ``interactive streaming'' and that there is no agreement among 
the participants as to the precise meaning of the term. Additionally, 
the CRJs asserted that resolution of DiMA's question would require a 
certain amount of inquiry into the factual circumstances, and the types 
of digital transmissions, that may or may not result in reproductions 
of musical works that are licensable under section 115. See Order 
Denying Motion of [DiMA], for a Referral of a Novel Material Question 
of Substantive Law, Docket No. 2006-3 CRB DPRA (February 4, 2008).
    The Register notes that when the CRJs are confronted with novel 
material questions of law they are not restricted to considering the 
motions and formulations of questions as submitted by the participants. 
Rather, they are required to refer any novel questions (or issues) of 
law ``concerning an interpretation of those provisions of [title 17] 
that are the subject of the proceeding.'' 17 U.S.C. 802(f)(1)(B).
    While the issue of what is ``interactive streaming'' does appear to 
involve some degree of factual inquiry, it also raises at least one 
purely legal question that does not require resolution of specific 
factual disputes raised between the participants. For some time, the 
Office has recognized a general agreement among interested parties that 
streaming necessarily involves reproductions that are made on the 
receiving computer in order to better facilitate the actual performance 
of the work (often referred to as ``buffer'' copies). See Notice of 
Inquiry 66 FR 14099 (Mar. 9, 2001). The view that ``interactive 
streaming'' necessarily involves the making and delivery of buffer 
copies does not appear to be disputed among the participants to the 
proceeding. The purely legal question raised under such an undisputed 
understanding regarding ``interactive streaming'' is ``What constitutes 
a DPD?'' This question clearly requires an interpretation of a 
provision of title 17. Specifically, it requires an interpretation of 
the definition of ``digital phonorecord delivery'' as found in section 
115(d).
    Additionally, regardless of the factual issues surrounding DiMA's 
original motion for referral, the Register observes that when the CRJs 
considered two novel questions concerning the scope of the section 115 
license with regard to ringtones--a term also not defined or even 
mentioned in title 17--the participants submitted briefs that revealed 
significant factual disagreement as to whether certain ringtones 
constituted derivative works. In spite of this disagreement, the 
questions regarding ringtones were properly referred to the Register. 
Moreover, the Register was able to provide a responsive and instructive 
decision on the legal questions which acknowledged that factual 
distinctions would continue to dictate whether various ringtone 
activities fell within the scope of the section 115 license without 
needing to resolve any dispute over specific factual situations. See 
Memorandum Opinion on Material Questions of Law, Docket No. RF 2008-1 
at 10 (August 8, 2008); see also, 73 FR 48396 (Aug. 19, 2008). Finally, 
the Register notes that section 802(f)(1)(B) does not confine the 
concept of novel question of substantive law to those involving 
interpretation of terms defined or mentioned in title 17.
    Failure to refer the question of what constitutes a DPD to the 
Register has led to the adoption of a regulation that, on its face, 
overstates the scope of the section 115 license with respect to 
interactive streams. See 37 CFR 385.11 (defining an interactive stream 
as an incidental DPD). As discussed in a subsequent portion of this 
review, the CRJs may exercise their continuing jurisdiction to redraft 
the regulation to clarify that an interactive stream that delivers a 
reproduction of a sound recording that qualifies as a DPD is, for 
purposes of the license, an incidental DPD.
    A second novel question was the subject of DiMA and RIAA's requests 
for a clarification of the statute. DiMA and RIAA, using slightly 
different language, requested a determination as to the scope of the 
license with respect to copies made to facilitate the delivery of 
digital music. See DiMA PFF at 240 (July 2, 2008); DiMA Second 
Amended Proposed Rates and Terms at 4 (July 2, 2008); RIAA PFF at 
1674-76, 1678-82 (July 2, 2008); RIAA Second Amended Proposal 
at 6 (July 2, 2008). Citing to the Register's August 19, 2008, 
Memorandum Opinion Responding to Material Questions of Law, the CRJs 
concluded that DiMA and RIAA's requests would require interpretation of 
the scope, operation and/or obligations of the section 115 license, 
which is inconsistent with the CRJs' authority. Final Determination at 
71-72, citing to Memorandum Opinion on Material Questions of Law, 
Docket No. RF 2008-1 at 10 (Aug. 8, 2008); see also, 73 FR 48396, 48399 
(August 19, 2008). The CRJs are correct in this conclusion. 
Furthermore, the CRJs are correct that such questions of scope are 
inconsistent with their authority. In making these observations, the 
CRJs appear to recognize that the participants' requests constituted a 
material question of substantive law. However, they do not appear to 
have recognized that the question was a novel one, and therefore 
required referral to the Register. Indeed, in the same Memorandum 
Opinion relied upon by the CRJs when they declined to interpret the 
scope of the license, the Register stated that ``In instances where 
particular rates are being requested for the creation of particular 
types of DPDs and there is some question whether these DPDs fall within 
the scope of the license, those questions must be resolved in the 
proceeding. When such a question has not been determined before, it is 
a novel question of law which should be referred to the Register under 
section 802(f)(1)(B).'' 73 FR at 48399.
    Ultimately, the failure to refer this question is a harmless error 
because the Register has addressed the question and has determined, on 
an interim basis, that ``server copies and intermediate reproductions 
may come within the scope of the license. The Register note[d] that a 
person seeking to operate under the section 115 license must still 
satisfy the threshold requirements of the license. But, having done so, 
that licensee's coverage may extend to phonorecords other than those 
that are actually distributed provided that they

[[Page 4540]]

are made for the purpose of making and distributing a DPD.'' Id. at 
66180.
    Despite the fact that the failure to refer this question was 
ultimately harmless, had the CRJs referred the question, the 
participants and the CRJs could have adopted regulations that more 
clearly reflect the Register's clarification of the legal issue. See 37 
CFR 201.18(a)(3); 201.19(a)(3); and 255.4. (Noting that ``a digital 
phonorecord delivery includes all phonorecords that are made for the 
purpose of making the digital phonorecord delivery.)''.

2. Erroneous Conclusion Regarding Authority Under Chapter and Section 
115.

    a. CRJs' authority to review.
    Section 801(b)(7)(A) generally directs the CRJs to adopt as a basis 
for statutory terms and rates ``an agreement concerning such matters 
reached among some or all of the participants in a proceeding at any 
time during the proceeding between participants.'' In interpreting this 
provision, the CRJs concluded that ``[o]nly if an objection is received 
by one or more of the parties are we given any discretion over the 
settlement, and then we are limited to rejecting it if we determine 
that the settlement 'does not provide a reasonable basis for setting 
statutory rates and terms.''' Final Determination at 18-20, citing 
section 801(b)(7)(A)(ii) (emphasis added). RIAA, DiMA, and the 
Copyright Owners support the CRJs' interpretation of section 
801(b)(7)(A). Views of RIAA at 6; Views of Copyright Owners at 9-10; 
and Views of DiMA at 1 (January 15, 2009). This interpretation, 
however, is in error.
    While the provisions of section 801(b)(7)(A) do limit the 
circumstances under which the CRJs are able to decline to adopt aspects 
of an agreement, it does not foreclose the CRJs from ascertaining 
whether specific provisions are contrary to law. The noted limitations 
only apply to the CRJs' ability to adopt an agreement ``as a basis for 
statutory rates and terms,'' 17 U.S.C. 801(b)(7)(A), and, in doing so, 
they promote Congress's policy to encourage parties to negotiate 
statutory rates and terms. See Views of RIAA at 6 and Views of 
Copyright Owners at 11-12 (January 15, 2009).
    The CRJs are not compelled to adopt a privately negotiated 
agreement to the extent it includes provisions that are inconsistent 
with the statutory license. Thus, while the CRJs are able to review the 
reasonableness of permissible terms and rates contained in an agreement 
only if a participant to the proceeding objects to the agreement, this 
provision does not preclude the CRJs from declining to adopt other 
portions of an agreement that would be contrary to the provisions of 
the applicable license(s) or otherwise contrary to statutory law. 
Furthermore, nothing in the statute limits the CRJs from considering 
comments filed by non-participants which argue that proposed provisions 
are contrary to statutory law.
    This conclusion is consistent with the CRJs' decision that it had 
the authority to decline to adopt language in the participants' 
agreement that stated that the rates in the agreement have no 
precedential effect and may not be introduced or relied upon in any 
governmental or judicial proceeding. 72 FR 61586. Moreover, courts have 
consistently held that agencies cannot adopt regulations that are 
contrary to law. See, e.g., Vasquez-Lopez v. Ashcroft, 343 F.3d 961, 
965 (9th Cir. 2003) (``The power of an administrative officer or board 
to administer a federal statute and to prescribe rules and regulations 
to that end is not the power to make law * * * but the power to adopt 
regulations to carry into effect the will of Congress as expressed by 
the statute. A regulation which does not do this, but operates to 
create a rule out of harmony with the statute, is a mere nullity.''), 
cited in Joint Comment of CTIA-The Wireless Association and the 
National Association of Broadcasters at 6, filed with Copyright Royalty 
Judges in response to their notice for comment on the participants 
agreement. 73 FR 57033 (Oct. 1, 2008).
    Since the purpose of this proceeding is to establish rates and 
terms of payment for a statutory license, an agreement among the 
participants may only extend to establishing rates and terms which are 
permissible under the statute. Neither the participants nor the CRJs 
may add terms or conditions that alter or expand the statutory license. 
Hence, it was legal error for the CRJs to conclude that the 
restrictions on its authority to review the reasonableness of specific 
valid terms and rates also precluded its review of the legality of the 
provisions of the agreement as a threshold matter.
    b. Register's authority to review.
    The CRJs' erroneous conclusion that it had no authority to review 
broad aspects of the participants' agreement led them to also conclude 
that the settlement does not represent a resolution by the CRJs and 
that therefore the Register's review is not part of the procedure 
applicable to the relevant rates and terms established by the 
settlement provisions of section 802(f)(1)(D). Final Determination at 
19-20. The CRJs, however, have no authority to determine whether the 
Register, in her review of the CRJs' final determination, has the 
authority to review for errors of law provisions in a settlement that 
is adopted by the CRJs. In reaching their conclusion, the CRJs argue 
that the provisions of the settlement do not constitute a finding of 
fact or resolution of law by the CRJs. However, as previously 
indicated, and despite their mistaken belief, the CRJs were not 
obligated to adopt any portion of an agreement that would be contrary 
to the provisions of the applicable license(s) or otherwise contrary to 
statutory law. By choosing to include provisions that they were able to 
reject, such provisions were freely adopted as resolutions by the CRJs.
    Furthermore, section 801(b)(7)(A) requires the CRJs to ``adopt as a 
basis for statutory terms and rates or as a basis for the distribution 
of statutory royalty payments, an agreement concerning such matters 
reached among some or all of the participants in a proceeding,'' 
(emphasis added). By ``adopting'' an agreement, the CRJs necessarily 
accept the terms of the agreement and ``resolve'' any material question 
of substantive law that the adopted agreement purports to resolve.
    c. CRJs' authority to determine rates for future activities.
    The CRJs indicate that in this proceeding they were unable to adopt 
rates for future activities without acting arbitrarily and 
capriciously. Final Determination at 60-62 (November 24, 2008). The 
Register acknowledges that the CRJs decry the empty record in the 
instant case and finds no error in their decision not to set rates for 
future activities in this instance. However, to the extent the CRJs 
believe they lack the authority to set rates for future activities, the 
Register notes that the statute does not foreclose that possibility. 
Congress contemplated that the CRJs may set rates for particular 
activities, even prior to the inception of such activities.\2\ 
Additionally, the Register observes that the CRJs have broad discretion 
in making their determinations. See RIAA v. Copyright Royalty Tribunal, 
662 F.2d 1, 8 (D.C. Cir. 1981) (stressing that ``[t]he setting of the 
royalty rate is not a routine exercise in historical cost of service 
ratemaking for a public utility''). Furthermore, the Register notes 
that Congress directed the CRJs to set royalty rates based upon broad 
policy objectives that require judgments of an inescapably uncertain 
and predictive character. See 17 U.S.C.

[[Page 4541]]

801(b)(1). For example, ``some of the statutory factors require the 
[Judges] to estimate the effect of the royalty rate on the future of 
the music industry,'' or to consider questions of ``fairness.'' RIAA, 
662 F.2d at 8.
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    \2\ ``In cases where rates and terms have not, prior to the 
inception of an activity, been established for that particular 
activity under the relevant license, * * *'' 17 U.S.C. 803(d)(2)(B).
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    d. CRJs' authority to limit scope of the license by not setting 
certain rates.
    The Register also observes that the consequence of the CRJs having 
set rates and terms for distinct categories of phonorecords, does not 
mean that the license is not available for additional activities under 
section 115. This observation is in contrast to the participants' views 
expressed in the closing arguments of the proceeding indicating that 
rights for categories of phonorecords for which no rate is set may only 
be cleared through negotiation. See Closing Argument Transcripts 7/24/
08 at 7843-7844; 7954; 7975; and 7989.
    As the Register observed in her response to the CRJs' referral of 
material questions of substantive law concerning the division of 
authority between the CRJs and the Register, ``[t]he CRJs do not have 
the authority to issue rules setting forth the scope of activities 
covered by the license.'' Final Order, Division of Authority Between 
the Copyright Royalty Judges and the Register of Copyrights under the 
Section 115 Statutory License 73 FR 48399 (Aug. 19, 2008). Section 115 
provides a license for the making and distribution of phonorecords, 
including DPDs. It does not condition coverage on whether a rate for 
the making and distribution of the phonorecords has been set. 
Consequently, failure to set a rate for any particular category of 
phonorecords cannot diminish or otherwise affect the availability of 
the license. Rather, when categories of phonorecords created in the 
course of particular ongoing activities within the scope of the license 
are not assigned a rate, the result is that there is no obligation to 
pay royalties for those particular activities during the relevant time 
period. Therefore, contrary to the conclusion of RIAA, there is no 
``gap'' in coverage for DPDs that do not qualify as permanent digital 
downloads, limited downloads or interactive streams. See Views of RIAA 
at 5 (January 15, 2009). However, future proceedings may retroactively 
apply rates to a particular activity under section 115 in cases where 
rates and terms have not, prior to the inception of that activity, been 
established for the particular activity. Such retroactive rates and 
terms shall then apply from the inception of the particular activity. 
See Infra section 3(b) regarding the final determination's treatment of 
``retroactive rates'' under 17 U.S.C. 803(d)(2)(B).
    3. Problematic provisions in the regulations promulgated in the 
final determination.
    In addressing the following regulatory provisions contained in the 
final determination, the Register acknowledges that both RIAA and 
Copyright Owners have argued that section 385.10 of the regulations 
satisfactorily addresses instances in which the rates and terms are, on 
their face, contrary to the statute. See Views of RIAA at 8 (January 
15, 2009); Views of Copyright Owners at 15 (January 15, 2009). While 
section 385.10 states that rates and terms shall be ``in accordance 
with the provisions of 17 U.S.C. 115'' and requires that a licensee 
shall ``comply with the requirements of that section,'' such a 
provision is insufficient to address regulatory language that directly 
conflicts with the statute. The following regulations either conflict 
with statutory provisions in title 17 or could be read to alter or 
expand the statutory license. Prior determinations of the Librarian of 
Congress have considered and rejected similar terms that would have 
altered or expanded the statutory licenses as contrary to law. See 
Determination of Reasonable Rates and Terms for the Digital Performance 
of Sound Recordings, 63 FR 45269 (July 8, 2002) (The Librarian 
concluded that neither the CARP nor the Librarian had the authority to 
adopt a regulation, whether as a condition of the license or not, that 
would foreclose a legal remedy for a breach of a legal obligation). 
Therefore, consistent with prior decisions specified in 803(a), and 
under the authority conferred by 802(f)(1)(D), the Register finds the 
following terms erroneous to the extent indicated herein.
    a. Interactive streams constitute DPDs.
    Section 385.11 of the regulations set forth in the final 
determination, which states that ``[an] interactive stream is an 
incidental digital phonorecord delivery under 17 U.S.C. 115(c)(3)(C) 
and (D)'' is erroneous. This articulation of what constitutes a DPD 
equates a means of transmission to the reproduction and delivery of a 
phonorecord. However, regulations cannot alter statutory terms of the 
section 115 license regarding what constitutes a DPD.
    The statutory criteria as to what constitutes a DPD are set forth 
in the notice announcing an Interim Rule in which the Office explains 
that a DPD requires a reproduction of a sound recording that must meet 
all three criteria specified in the statutory definition: (1) It must 
be delivered, (2) it must be a phonorecord, and (3) it must be 
specifically identifiable. 73 FR 66173, 66176 (Nov. 7, 2008). Moreover, 
this Copyright Office rulemaking proceeding also addressed the question 
of interactive and non-interactive streams, noting that the 
determination of what constitutes a DPD is not dictated by the 
characterization of the transmission that delivers the phonorecord as 
interactive or non-interactive. Nevertheless, the Office did 
acknowledge that ``it may be more common for interactive streams to 
result in DPDs and that it may be relatively uncommon for non-
interactive streams to do so. However, if phonorecords are delivered by 
a transmission service, then under the last sentence of 115(d) it is 
irrelevant whether the transmission that created the phonorecords is 
interactive or non-interactive.'' Id. at 66180. In other words, a 
stream--whether interactive or non-interactive--may or may not result 
in a DPD depending on whether all the aforementioned criteria are met. 
A regulation that provides categorically that ``[a]n interactive stream 
is an incidental digital phonorecord delivery under 17 U.S.C. 115 
(c)(3)(C) and (D)'', without regard to whether any of those required 
criteria have been met, articulates an erroneous conclusion of law.
    Hence, in light of the Office's analysis accompanying its adoption 
of a more particularized definition of a DPD, the proposed regulation 
which states that all interactive streams, as defined by the agreement, 
are DPDs, is overbroad because it would include interactive streams 
that do not result in the delivery of a DPD. The Office recognizes, 
however, that the regulation may not have been intended to set a rate 
for interactive streams that do not result in the delivery of a 
phonorecord and that the problem may be the result of inartful drafting 
of the regulation rather than an erroneous conclusion over what 
constitutes a DPD, an observation confirmed by RIAA. Views of RIAA at 4 
(January 15, 2009). Nevertheless, because the regulatory text can 
easily be misinterpreted as stating that all interactive streams are 
incidental DPDs, and therefore subject to the license, the ambiguity in 
the regulatory text should be clarified. In either case, the problem is 
corrected by construing the regulation as referring only to those DPDs 
made and delivered during the course of an interactive stream. Under 
the CRJs' continuing jurisdiction, the regulation may be redrafted to 
clarify that an interactive stream that delivers a reproduction of a 
sound recording that

[[Page 4542]]

qualifies as a DPD is for purposes of the license, an incidental DPD.
    b. Limited retroactive effect of rates. 
    Section 385.14(e) of the regulations set forth in the final 
determination provides, in pertinent part, that ``in the case of 
licensed activity prior to the publication date, the promotional 
royalty rate shall apply to promotional interactive streams, and to 
limited downloads offered in the context of a free trial period for a 
digital music subscription service.'' Such retroactive application of 
promotional royalty rates is erroneous to the extent that it is 
overbroad in reaching--and retroactively setting rates for--promotional 
activity where rates applicable to the activity were set for the 
previous rate period. Neither the CRJs nor the participants have the 
power to engage in retroactive rate setting other than that which is 
expressly authorized by the statute. As indicated in the Register's 
August 19, 2008 Memorandum Opinion responding to a material question of 
law, ``retroactive rulemaking is in most cases beyond the power of an 
agency'' Memorandum Opinion on Material Questions of Law, Docket No. RF 
2008-1 at 10 (August 8, 2008), Citing to Bowen v. Georgetown University 
Hospital, 488 U.S. 204 (1988). The Bowen court elaborated on 
retroactive rulemaking indicating that ``[r]etroactivity is not favored 
by the law'' and that where rules may have retroactive effect, the 
``power is conveyed by Congress in express terms.'' Bowen, 488 U.S. at 
208 (1988).
    In the case of rates and terms set by the CRJs, title 17 
establishes circumstances under which rates may be retroactively 
applied to activities under the section 115 license. Section 
803(d)(2)(B) states that ``[i]n cases where rates and terms have not, 
prior to the inception of an activity, been established for that 
particular activity under the relevant license, such rates and terms 
shall be retroactive to the inception of activity under the relevant 
license covered by such rates and terms.''
    With respect to limited downloads, the previous rate-setting 
proceeding established royalty fees that clearly applied to limited 
downloads, whether such downloads were promotional or not. See 37 CFR 
255.5 (1999) (setting rates for DPDs ``except for digital phonorecord 
deliveries where the reproduction or distribution of a phonorecord is 
incidental to the transmission which constitutes the digital 
phonorecord delivery, as specified in 17 U.S.C. 115(c)(3)(c) and 
(D)''). As the regulations adopted by the CRJs recite, ``A limited 
download is a general digital phonorecord delivery under 17 U.S.C. 
115(c)(3)(C) and (D)'' Section 385.11 (definition of ``Limited 
download,'' para. 3). Thus limited downloads--whether or not for 
promotional purposes--that took place between the effective date of the 
rates established in 1999 and the effective date of the rates under 
review here are governed by the rates set in 1999.\3\ This error is 
corrected by clarifying that such promotional royalty rates do not 
apply retroactively to limited downloads offered in the context of a 
free trial period for a digital music subscription service. Under the 
CRJs' continuing jurisdiction, the regulations may be redrafted to 
conform with this clarification.
---------------------------------------------------------------------------

    \3\ The Register finds so support for Copyright Owners' 
assertion that the previous rate for DPDs aplied only to permanent 
downloads. See Views of Copyright Owners at 17 (January 15, 2009).
---------------------------------------------------------------------------

    With respect to interactive streams, the regulations adopted by the 
CRJs characterize interactive streams as incidental DPDs (see section 
385.11 (definition of ``Interactive stream'')), and the Register 
accepts that characterization. The 1999 rate-setting proceeding did not 
set rates for incidental DPDs. Instead, the setting of rates for 
incidental DPDs was ``deferred'' for consideration until the next 
adjustment proceeding. See 37 CFR 255.6 (1999). The question thus 
arises whether, in light of the deferral of setting of rates for 
incidental DPDs, the retroactive application of the promotional royalty 
rate to promotional interactive streams would constitute a material 
error of law. The Register observes that both the meaning of the 
previous ``deferral'' of setting rates for incidental DPDs, (an 
activity whose inception appears to have occurred prior to the previous 
rate setting), as well as the statutory language, which was enacted 
after the previous proceeding, present complex issues which have not 
been fully briefed by the parties in any context. Section 803(d)(2)(B) 
could be read to authorize the retroactive setting of rates for 
incidental DPDs when no such rates had been previously set, even in 
cases where the issue could and perhaps should have been addressed in 
the previous rate-setting proceeding. On the other hand, the Register 
questions whether permitting the retroactive setting of rates under 
such circumstances is wise or consistent with the intent of Congress 
when it enacted the Copyright Royalty and Distribution Reform Act of 
2003 (which among other things, amended Chapter 8 to include section 
803(d)(2)(B). See H.R. Rep. 108-408 (2004), at 101 (remarks of co-
sponsor and subcommittee ranking member Rep. Howard Berman: ``The 
series of interrelated changes ensures that all rates and terms for 
statutory licenses will be set prospectively, not retroactively, and 
eliminate, therefore, the possibility that a time period covered by a 
statutory license will commence before the establishment of rates and 
terms.''). However, given the lack of any evidence or in-depth argument 
on these questions and the compressed period of time allotted by 
section 802(f)(1)(D) for review by the Register of the CRJs' 
determination, the Register declines to come to a conclusion regarding 
application of the promotional royalty rate to promotional interactive 
streams.
    c. Timing of payment. 
    Section 385.15 of the regulations states that ``[p]ayment for any 
accounting period for which payment otherwise would be due more than 
180 days after the publication date shall be due as otherwise provided 
under 17 U.S.C. 115 and its implementing regulations. Payment for any 
prior accounting period shall be due 180 days after the publication 
date.'' This provision erroneously alters the timing of payment already 
established in section 115. Specifically, section 115(c)(5) states that 
``[r]oyalty payments shall be made on or before the twentieth day of 
each month and shall include all royalties for the month next 
preceding;'' and it is this provision in the law that governs the 
payment schedule for use of the statutory license. While the Register 
understands the participants' reasons for adopting a term that would 
delay the first payment under the new rate schedule, there is no 
precedent for this practice, contrary to the RIAA's interpretation of a 
term adopted in a past rate setting proceeding. See Views of RIAA at 11 
(January 15, 2009).
    Prior determinations of the Librarian of Congress have considered 
and rejected as contrary to law similar terms on the basis that such 
terms would have altered or nullified provisions in the statutory 
licenses. For example, in 1998, the Librarian, upon the recommendation 
of the Register, rejected a term of payment which would have altered a 
payment schedule already established by law and delayed the first 
payment for six months. Determination of Reasonable Rates and Terms for 
the Digital Performance of Sound Recordings, 63 FR at 25410, citing 
section 114(f)(5)(B). In that proceeding, the relevant statutory 
provision required ``any royalty payments in arrears [to] be made on or 
before the twentieth day of

[[Page 4543]]

the month next succeeding the month in which the royalty fees are 
set.'' Because the proposed term would not have required payment to be 
made in accordance with this provision, the Librarian rejected the term 
as contrary to law. Similarly, in a 2002 proceeding to set rates and 
terms for the digital performance of sound recordings and the making of 
ephemeral reproductions, the Librarian accepted the Register's 
recommendation to adopt September 1, 2002, as the effective date of the 
rates and terms for the statutory license rather than use the 
publication date of the Librarian's order. The purpose in setting a 
later effective date was to delay the adoption of the new rates and 
terms for a period of time as a way to reduce the financial burden on 
licensees who had to pay royalties that had accrued since 1998, and to 
ensure that the date that had been adopted for the first payment, 
October 20, 2002, complied with the statutory provision that required 
payments in arrears to be paid ``on a date certain in the month 
following the month in which the rate is set.'' 67 FR at 45271 (July 8, 
2002). Had the rates and terms become effective on the publication 
date, this provision would have been contrary to law. Consequently, in 
both cases, the Register recommended that the Librarian adjust the 
effective date for the adopted rates and terms under his authority in 
17 U.S.C. 802(g)(2002) to align the date for the first payment adopted 
through the rate setting proceeding with the date for making the first 
payment as specified in the statutory license.
    The CRJs have the same authority to determine the date the adopted 
rates and terms take effect. 17 U.S.C. 803(d)(2)(B). This provision 
first establishes that ``[i]n [other] cases where rates and terms do 
not expire on a specified date, successor rates and terms shall take 
effect on the first day of the second month that begins after the 
publication of the determination of the Copyright Royalty Judges in the 
Federal Register.'' It then continues, ``except as otherwise provided 
in this title, or by the Copyright Royalty Judges, or as agreed by the 
participants in the proceeding that would be bound by the rates and 
terms.'' If the purpose of the regulation on timing of payments was to 
provide relief to licensees from an onerous first payment, altering the 
effective date of the license period would be one way to provide the 
licensees some relief in meeting its royalty obligation when payment 
becomes due. See, e.g., Determination of Reasonable Rates and Terms for 
the Digital Public Performance of Sound Recordings, 63 FR at 25412 (May 
8, 1998) (adjusting the effective date of the rate setting 
determination to provide licensees with time to adjust their business 
operations to meet obligation to make timely payment of arrears). The 
Register takes no position, however, on whether the effective date 
should be adjusted, noting that such a decision is within the 
discretion of the CRJs and the participants themselves.
    d. Statements of account. 
    Section 385.14(a)(4) of the regulations set forth in the final 
determination, which provides, in pertinent part, that ``[f]or the 
avoidance of doubt, however, except as provided in paragraph (a) of 
this section, statements of account under 17 U.S.C. 115 need not 
reflect interactive streams or limited downloads subject to the 
promotional royalty rate'' is erroneous. Regulations cannot alter 
statutory terms of the section 115 license regarding Statements of 
Account. Title 17 authorizes the Register to ``prescribe regulations 
under which detailed cumulative annual statements of account, certified 
by a certified public accountant, shall be filed for every compulsory 
license under this section.'' 17 U.S.C. 115(c)(5). The CRJs cannot 
alter requirements issued by the Register regarding statements of 
account. As indicated in the Register's response to the CRJs' referral 
of material questions of substantive law concerning the division of 
authority between the CRJs and the Register, ``[a]uthority to issue 
regulations regarding these statements of account is the exclusive 
domain of the Register.'' Final Order, Division of Authority Between 
the Copyright Royalty Judges and the Register of Copyrights under the 
Section 115 Statutory License 73 FR 48398, (August 19, 2008).
    Additionally, section 115(c)(5) indicates that ``[t]he regulations 
[of the Register] covering both the monthly and the annual statements 
of account shall prescribe the form, content, and manner of 
certification with respect to the number of records made and the number 
of records distributed.'' 17 U.S.C. 115(c)(5). There is no statutory 
authority for an exception to this requirement for certain types of 
``phonorecords'' or for the participants to alter this provision by 
agreement. As previously referenced, prior determinations of the 
Librarian of Congress have considered and rejected similar terms that 
altered or expanded the statutory licenses. See supra at section 3(c) 
citing 63 FR 25394, and 63 FR at 45269.
    The problem is corrected by clarifying that licensees are required 
to operate within the Register's Statements of Account and Notice of 
Intention to Use regulations, even if such regulations foreclose the 
application of certain provisions included in the CRJs' final 
determination. Any agreement among a licensee and a copyright owner to 
adopt terms that alter the statutory conditions and terms necessarily 
means that the licensee is operating under a private license rather 
than the statutory license. Harry Fox Agency, Inc. v. Mills Music, 
Inc., 543 F. Supp. 844, 851-852 (S.D.N.Y. 1982). Under the CRJs' 
continuing jurisdiction, the regulations may be redrafted to clarify 
that licensees must comply with the Register's regulations addressing 
Statements of Account.

CRJs' Continuing Jurisdiction

    The Register notes that the CRJs enjoy continuing jurisdiction to 
amend their final determination. Under section 803(c)(4), ``[t]he 
Copyright Royalty Judges may issue an amendment to a written 
determination to correct any technical or clerical errors in the 
determination or to modify the terms, but not the rates, of royalty 
payments in response to unforeseen circumstances that would frustrate 
the proper implementation of such determination. Such amendment shall 
be set forth in a written addendum to the determination that shall be 
distributed to the participants of the proceeding and shall be 
published in the Federal Register.'' This authority may be exercised to 
codify the corrections identified and made herein by the Register 
through her authority under section 802(f)(1)(D).

Conclusion

    Having reviewed the CRJs' resolution for legal error, pursuant to 
the requirements established in section 802(f)(1)(D), the Register 
issues this written decision correcting the above referenced legal 
errors not later than 60 days after the date on which the final 
determination by the CRJs was issued. This decision shall be made part 
of the record of the proceeding (Docket No. 2006-3 CRB DPRA), and the 
conclusions of substantive law involving and interpretation of title 17 
contained herein shall be binding as precedent upon the CRJs in 
subsequent proceedings.

    Dated: January 16, 2009.
Marybeth Peters,
Register of Copyrights.
[FR Doc. E9-1444 Filed 1-23-09; 8:45 am]
BILLING CODE 1410-30-P