[Federal Register Volume 78, Number 90 (Thursday, May 9, 2013)]
[Proposed Rules]
[Pages 27137-27153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-11020]
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LIBRARY OF CONGRESS
U.S. Copyright Office
37 CFR Part 201
[Docket No. 2012-5]
Verification of Statements of Account Submitted by Cable
Operators and Satellite Carriers
AGENCY: U.S. Copyright Office, Library of Congress.
ACTION: Notice of proposed rulemaking; request for comments.
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SUMMARY: On June 14, 2012, the United States Copyright Office published
a notice of proposed rulemaking and request for comments concerning a
new regulation that will allow copyright owners to audit the Statements
of Account and royalty fees that cable operators and satellite carriers
deposit with the Copyright Office for secondary transmissions of
broadcast programming made pursuant to statutory licenses. The
Copyright Office has revised the proposed regulation based on comments
that it received from copyright owners, cable operators, and satellite
carriers. The Copyright Office seeks comments on the revised proposal
before it is adopted as a final rule.
DATES: Comments on the revised proposal must be received in the Office
of the General Counsel of the Copyright Office no later than 5 p.m.
Eastern Daylight Time (EDT) on June 10, 2013. Reply comments must be
received in the Office of the General Counsel no later than 5 p.m. EDT
on June 24, 2013.
ADDRESSES: The Copyright Office strongly prefers that comments be
submitted electronically. A comment submission page is posted on the
Copyright Office Web site at www.copyright.gov/docs/soaaudit/comments/submission/. The Web site interface requires submitters to complete a
form specifying name and other required information, and to upload
comments as an attachment. To meet accessibility standards, all
comments must be uploaded in a single file in either the Portable
Document Format (PDF) that contains searchable, accessible text (not an
image); Microsoft Word; WordPerfect; Rich Text Format (RTF); or ASCII
text file format (not a scanned document). The maximum file size is 6
megabytes (MB). The name of the submitter and organization should
appear on both the form and the face of the comments. All comments will
be posted publicly on the Copyright Office Web site exactly as they are
received, along with names and organizations if provided. If electronic
submission of comments is not feasible, please contact the Copyright
Office at (202) 707-8380 for special instructions.
FOR FURTHER INFORMATION CONTACT: Erik Bertin, Attorney Advisor,
Copyright GC/I&R, P.O. Box 70400, Washington, DC 20024. Telephone:
(202) 707-8380. Telefax: (202) 707-8366.
SUPPLEMENTARY INFORMATION:
I. Background
Sections 111 and 119 of the Copyright Act (``Act''), title 17 of
the United States Code, allow cable operators and satellite carriers to
retransmit the performance or display of works embodied in a primary
transmission made by a broadcast station licensed by the Federal
Communications Commission. In order to use the statutory licenses,
cable operators and satellite carriers are required to file Statements
of Account and deposit royalty fees with the Copyright Office
(``Office'') on a semi-annual basis. The Office invests these royalties
in United States Treasury securities pending distribution of the funds
to copyright owners who are entitled to receive a share of the
royalties.
In 2010, Congress enacted the Satellite Television Extension and
Localism Act of 2010 (``STELA''), Public Law 111-175 which, inter alia,
directed the Register of Copyrights to develop a new procedure for
verifying the Statements of Account and royalty fees that cable
operators and satellite carriers deposit with the Office. Specifically,
section 119(b)(2) directed the Register to ``issue regulations to
permit interested parties to verify and audit the statements of account
and royalty fees submitted by satellite carriers under [that]
subsection.'' Similarly, section 111(d)(6) directed the Register to
``issue regulations to provide for the confidential verification by
copyright owners whose works were embodied in the secondary
transmissions of primary transmissions pursuant to [section 111] of the
information reported on the semiannual statements of account filed
under this subsection for accounting periods beginning on or after
January 1, 2010, in order that the auditor designated under
subparagraph [111(d)(6)(A)] is able to confirm the correctness of the
calculations and royalty payments reported therein.''
On June 14, 2012, the Office published a Notice of Proposed
Rulemaking and Request for Comments on a regulation that would
implement sections 111(d)(6) and 119(b)(2) of the Copyright Act. See 77
FR 35643, June 14, 2012. The proposed regulation was based on similar
regulations that the Office developed for parties that make ephemeral
recordings or transmit digital sound recordings under 17 U.S.C. 112(e)
and 114(f), respectively, or manufacture, import, and distribute
digital audio recording devices under 17 U.S.C. chapter 10. See id. at
35644. The Office also considered a Petition for Rulemaking, which
offered proposals from a group of copyright owners who are the
beneficiaries of the royalties paid under the statutory licenses
(``Copyright Owners'').\1\
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\1\ The petition was filed on behalf of Program Suppliers
(commercial entertainment programming), Joint Sports Claimants
(professional and college sports programming), Commercial Television
Claimants (local commercial television programming), Music Claimants
(musical works included in television programming), Public
Television Claimants (noncommercial television programming),
Canadian Claimants (Canadian television programming), National
Public Radio (noncommercial radio programming), Broadcaster
Claimants Group (U.S. commercial television stations), and
Devotional Claimants (religious television programming). A copy of
the petition has been posted on the Copyright Office Web site at
http://www.copyright.gov/docs/soaaudit/soa-audit-petition.pdf.
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The Office received comments on the proposed regulation from groups
representing copyright owners, cable operators,\2\ and individual
companies that retransmit broadcast programming under section 111 or
119 of the Act, namely, AT&T, Inc., DIRECTV, LLC (``DTV''), and DISH
Network L.L.C. (``DISH''). While the parties agreed on the overall
framework that the Office proposed for the verification procedure, they
strongly disagreed on a number of key issues, such as the procedures
for selecting an auditor, for expanding the scope of the audit, and for
allocating the cost of the verification procedure.
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\2\ The National Cable & Telecommunications Association
(``NCTA'') and the American Cable Association (``ACA'') filed
comments on behalf of cable operators.
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On August 24, 2012 and again on September 26, 2012, the National
Cable & Telecommunications Association (``NCTA''), the Joint Sports
Claimants, and the Program Suppliers submitted a joint motion to extend
the deadline for submitting reply comments.\3\ They
[[Page 27138]]
explained that there might be common ground among the moving parties
concerning certain aspects of the proposed regulation. If so, the
moving parties stated that they might be able to narrow the issues that
they discuss in their reply comments, which in turn, might narrow the
issues that need to be resolved in this rulemaking. The Office granted
these motions, making reply comments due by October 24, 2012. See 77 FR
55783, Sept. 11, 2012; 77 FR 60334, Oct. 3, 2012. In lieu of reply
comments, NCTA, DIRECTV, and a group representing certain copyright
owners \4\ submitted a joint proposal for revising the proposed
regulation (hereinafter the ``Joint Stakeholders' Proposal'').\5\ The
Joint Stakeholders stated that their Proposal adopts ``the general
framework'' set forth in the Notice of Proposed Rulemaking and in other
verification procedures that the Office has adopted in the past. They
also stated that their Proposal has been ``carefully tailored'' to
reflect ``the unique characteristics of the cable and satellite
compulsory licenses,'' and reflects ``significant compromises by all
parties with the objective of securing a workable set of audit
procedures consistent with STELA.'' (Joint Stakeholders Reply at 2.)
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\3\ The NCTA is a trade association that represents cable
operators. The Joint Sports Claimants represent copyright owners
that produce professional and college sports programming. The
Program Suppliers represent copyright owners that produce and/or
syndicate movies, programs, and specials that are broadcast by
television stations.
\4\ This group includes the Program Suppliers, Joint Sports
Claimants, Public Television Claimants, Canadian Claimants Group,
Devotional Claimants, National Public Radio, and Music Claimants.
The Commercial Television Claimants and the Broadcaster Claimants
Group did not join their fellow copyright owners in submitting this
proposal.
\5\ A copy of the Joint Stakeholders' Proposal has been posted
on the Copyright Office Web site at http://www.copyright.gov/docs/soaaudit/comments/reply/joint_stakeholders.pdf. It includes a
redline showing the differences between the Joint Stakeholders'
Proposal and the proposed regulation set forth in the Notice of
Proposed Rulemaking published on June 14, 2012.
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The Office also received reply comments from AT&T. Although it was
aware of the Joint Stakeholders' negotiations and the areas of
agreement among the parties, AT&T explained that it was not in a
position to endorse the Joint Stakeholders' Proposal, because it was
not given a sufficient amount of time for ``meaningful engagement''
with the group. (AT&T Reply at 1.) Therefore, AT&T urged the Office to
publish the Joint Stakeholders' Proposal ``for further comment by other
interested parties who were not parties to the agreement.'' Id.
The Office carefully reviewed all of the comments and reply
comments that were submitted in this proceeding, including the Joint
Stakeholders' Proposal.\6\ The Joint Stakeholders' Proposal addresses
most of the concerns that the parties raised in their initial comments,
and for the most part, it balances those concerns in an appropriate
manner. Therefore, the Office has incorporated most of the Joint
Stakeholders' suggestions into the proposed regulation, which is
referred to herein as the ``Revised Proposal.''
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\6\ All of the comments and reply comments have been posted on
the Copyright Office Web site at http://www.copyright.gov/docs/soaaudit/comments/index.html.
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The Office recognizes that ACA, AT&T, DISH, the Broadcaster
Claimants Group, the Commercial Television Claimants, and other
interested parties did not participate in the Joint Stakeholders'
negotiations. Because the Revised Proposal includes proposed changes
offered by the Joint Stakeholders, the Office concludes that other
interested parties should be given an opportunity to comment on the
proposed regulation before the Office adopts a final rule. The Office
also welcomes reply comments on the Revised Proposal from the Joint
Stakeholders or other interested parties. Commenters should limit their
remarks to issues raised by the Revised Proposal which were not
discussed in the initial comments, the reply comments, or this Federal
Register notice, while reply commenters should limit their remarks to
the issues or concerns presented in the follow-up comments.
II. Areas of Common Agreement Among the Parties
Generally speaking, the parties agreed with the overall framework
that the Office proposed for the audit regulation. They agreed that the
Office should create a single verification procedure applicable to
cable operators and satellite carriers alike. (See Copyright Owners at
3, 4, 8; DTV at 1-2.) They agreed that copyright owners should initiate
a verification procedure by filing a notice of intent to audit with the
Office, and that the notice must be received within three years after
the last day of the year in which the licensee filed its Statements of
Account. They agreed that the verification should be conducted by a
certified public accountant, and that a single auditor should conduct
the audit on behalf of all copyright owners (regardless of whether they
decide to join the audit or not). (See AT&T at 2, 3; DISH at 8-9.) They
agreed that satellite carriers and cable operators that own a single
system should be subject to no more than one audit per year. They
agreed that an audit involving a multiple system operator should be
limited to a sampling of the systems owned by that entity. (See NCTA at
6.) They agreed that 30 days would be a sufficient amount of time for
the auditor to consult with the statutory licensee's designee
concerning the conclusions set forth in the initial draft of the
auditor's report. They agreed that the auditor should be allowed to
deliver his or her final report to the copyright owners without
consulting with the statutory licensee if the auditor suspects that the
licensee has engaged in fraud. They also agreed that statutory
licensees should be required to retain records needed to confirm the
correctness of the calculations and royalty payments reported in a
Statement of Account for at least three and a half years after the last
day of the year in which the Statement was filed with the Office. (See
DISH at 7.)
III. Retroactivity
A. Comments
As discussed above, the Office received a Petition for Rulemaking
on January 31, 2012, which was filed on behalf of groups that represent
copyright owners (collectively ``the Petitioners''). Among other
things, the Petitioners urged the Office to establish separate
procedures for verifying Statements of Account filed under section 111
and 119, and they provided the Office with draft regulations for audits
involving cable operators and satellite carriers.
The Office did not adopt this approach in its Notice of Proposed
Rulemaking. If the Office followed the Petitioners' recommendation, the
regulation for cable operators would apply to Statements of Account for
accounting periods beginning on or after January 1, 2010 (i.e., the
semiannual accounting period that was in effect when the President
signed STELA into law on May 27, 2010), while the regulation for
satellite carriers would apply to any Statement of Account, even if the
Statement was filed before STELA was enacted. In other words, the
regulation for satellite carriers would apply retroactively, while the
regulation for cable operators would apply on a prospective basis only.
See 77 FR 35645, June 14, 2012.
DTV agreed that the Office should ``harmonize'' the procedures for
cable operators and satellite carriers, and noted that ``there are
strong policy reasons not to apply laws retroactively.'' (DTV at 2.)
DISH agreed that the regulation should not apply to Statements of
Account for accounting periods that pre-date STELA, and further
asserted that the proposed regulation should apply only to
[[Page 27139]]
Statements of Account filed on or after the date that the final rule
goes into effect. (DISH at 3.) While the Copyright Owners agreed that
the Office should adopt a uniform procedure for both cable operators
and satellite carriers, they contended that a regulation allowing for
the verification of pre-2010 Statements of Account would not constitute
a retroactive obligation. (Copyright Owners at 4.)
B. Discussion
The Revised Proposal would allow copyright owners to audit
Statements of Account filed by cable operators and satellite carriers
for accounting periods beginning on or after January 1, 2010. The
Office has concluded that this would not be a retroactive regulation,
even though it would apply to Statements for the 2010, 2011, and 2012
accounting periods.
A regulation is retroactive if it ``takes away or impairs vested
rights acquired under existing law, or creates a new obligation,
imposes a new duty, or attaches a new disability in respect to
transactions or considerations already past.'' National Mining Ass'n v.
Dep't of Labor, 292 F.3d 849, 859 (D.C. Cir. 2002). The fact that the
regulation establishes a procedure for verifying Statements of Account
filed before the date that the final rule goes into effect does not
mean it is retroactive. See Landgraf v. USI Film Prods., 511 U.S. 244,
269-70 (1994) (a law is not considered retroactive ``merely because it
is applied in `a case arising from conduct antedating the statute's
enactment''). Instead, ``the operative inquiry is `whether the new
provision attaches new legal consequences to events completed before
its enactment.'' Id.
Neither DISH nor any other party has identified any aspect of the
proposed regulation that changes the legal landscape for satellite
carriers or cable operators. The regulation creates a framework for
audits that will be conducted in the future, but it does not change the
``past legal consequences of past actions'' for a statutory licensee
who may be subject to the verification procedure. See National
Petrochemical & Refiners Ass'n v. EPA, 630 F.3d. 145, 161 (D.C. Cir.
2010). The regulation states that the auditor will review a Statement
of Account to determine whether the licensee correctly calculated,
reported, and paid the amount which was due. If the auditor discovers
an error or underpayment, the licensee would be subject to the same
legal obligations which would apply if the error had been discovered
when the Statement was filed.\7\ Moreover, cable operators and
satellite carriers that use the statutory license knew that copyright
owners would be entitled to audit Statements of Account following the
enactment of STELA, and as such, were on notice that Statements filed
on or after the effective date might be subject to this procedure.
Indeed, some of the parties who submitted comments in this proceeding
stated that they were ``intimately'' and ``directly'' involved in the
negotiations that preceded the drafting of STELA. See DTV at 1-2;
Refunds Under the Cable Statutory License, Docket No. RM-2010-3,
Comments of National Cable & Telecommunications Association at 3
(available at http://www.copyright.gov/docs/stela/comments/ncta-11-03-10.pdf).
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\7\ The cases cited by DISH are distinguishable because they
involve situations where ``an agency completely reversed the status
quo ante.'' See Nat'l Petrochemical & Refiners Ass'n, 630 F.3d at
160 (distinguishing Bowen v. Georgetown Univ. Hosp., 488 U.S. 204
(1988) and Nat'l Mining Ass'n v. Dep't of Labor, 292 F.3d 849 (D.C.
Cir. 2002)). For example, in Bowen the agency required a party to
return or forfeit money that it had received from the government. In
Marrie v. SEC, 374 F.2d 1196 (D.C. Cir. 2004), the agency changed
the legal standard needed to establish professional misconduct, and
then applied that standard to conduct that occurred before the rule
was adopted.
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IV. Initiation of an Audit
A. Comments
In the Notice of Proposed Rulemaking the Office explained that a
copyright owner could initiate an audit procedure by filing a notice
with the Office, which would be published in the Federal Register. The
copyright owner would be required to identify the Statement(s) of
Account and accounting period(s) that would be included in the audit,
and the statutory licensee that filed those Statement(s) with the
Office. In addition, the notice would have to provide contact
information for the copyright owner filing the notice, and a brief
statement establishing that it owns at least one work that was embodied
in a secondary transmission made by that licensee. A notice of intent
to audit a particular Statement of Account would be considered timely
if it is received within three years after the last day of the year in
which that Statement was filed.
Any other copyright owner that wishes to participate in the audit
would have to notify both the copyright owner that filed the notice of
intent to audit and the statutory licensee who would be subject to the
audit within 30 days after the notice was published in the Federal
Register. Copyright owners that join in the audit would be entitled to
participate in the selection of the auditor, they would be entitled to
receive a copy of the auditor's report, and they would usually be
required to pay for the auditor for his or her work in connection with
the audit.\8\ However, a copyright owner that failed to join the audit
within the time allowed would not be permitted to participate in the
selection of the auditor and would not be entitled to receive a copy of
the auditor's report. Moreover, a copyright owner that failed to join
the audit would not be permitted to conduct its own audit of the
semiannual Statement(s) of Account identified in the Federal Register
notice at a later time.
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\8\ These parties are defined in the Revised Proposal as the
``participating copyright owner(s).''
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All of the parties agreed with this approach, although the
Copyright Owners suggested that a group representing multiple copyright
owners should be permitted to file a notice of intent to audit on
behalf of the members of that group. (Copyright Owners at 4-5.)
B. Discussion
Generally speaking, the Revised Proposal follows the same approach
for initiating an audit that the Office proposed in its Notice of
Proposed Rulemaking. As the Copyright Owners suggested, the term
``copyright owners'' is defined to mean ``a person or entity that owns
the copyright in a work embodied in a secondary transmission made by a
statutory licensee'' or ``a designated agent or representative of such
person or entity.'' This will allow groups representing multiple
copyright owners to file a notice of intent to audit, provided that the
groups represent at least one party who owns a work which was embodied
in a secondary transmission made by the statutory licensee during one
or more of the accounting periods specified in the notice. It will also
allow groups representing multiple copyright owners to prepare a list
of qualified and independent auditors who may be selected to conduct
the audit, to expand the scope of the audit if the auditor discovers an
underpayment that exceeds a certain threshold, to prepare an itemized
report documenting the cost of the audit, among other activities
contemplated by the Revised Proposal.
V. Designation of the Auditor
A. Comments
In the Notice of Proposed Rulemaking, the Office suggested that the
copyright owners should be solely responsible for selecting a qualified
and independent auditor to conduct the
[[Page 27140]]
verification, and that any disputes concerning the auditor's
qualifications or independence should be resolved by the Professional
Ethics Division of the American Institute of Certified Public
Accountants (``AICPA'') or the State Board of Accountancy that licensed
the auditor while the audit is underway. Many of the parties disagreed
with this approach.
The Copyright Owners predicted that this would lead to needless
delay and expense. They stated that a statutory licensee should be
required to raise any concerns about the auditor in a prompt manner,
and that if the parties are unable to resolve their differences within
30 days, the auditor should be allowed to proceed with the
verification. (Copyright Owners at 5.) AT&T agreed that any disputes
concerning the qualifications or independence of the auditor should be
resolved before the audit begins, and further stated that if the
auditor is not qualified or independent, the statutory licensee should
not be subject to any audits until the following year. (AT&T at 4; AT&T
Reply at 2.) The NCTA stated that an auditor selected by the copyright
owners could be biased in favor of his or her clients. To address these
concerns, the NCTA suggested that both the copyright owners and the
statutory licensee should designate a certified independent accountant,
who, in turn, would select a neutral auditor to conduct the
verification procedure. (NCTA at 4-5.)
Regarding the auditor's qualifications, AT&T agreed that the audit
should be conducted by a certified public accountant who is in good
standing with the AICPA. AT&T stated that the auditor should not be
subject to any disciplinary inquiry or proceeding, that the auditor
should not be allowed to collect a contingency fee based on the results
of the audit, and that the auditor should be required to file a
certification with the Office confirming his or her qualifications and
independence before the audit begins. (AT&T at 3-4; AT&T Reply at 2.)
B. Discussion
The Revised Proposal addresses the parties' concerns regarding the
selection of the auditor. Copyright owners who wish to participate in
the audit would provide the statutory licensee with a list of three
independent and qualified auditors, along with information that would
be reasonably sufficient for the licensee to evaluate the independence
and qualifications of each individual. Specifically, the copyright
owners would provide the licensee with a copy of the auditor's
curriculum vitae, a copy of the engagement letter that would govern his
or her performance of the audit, and a list of any other audits that
the auditor has conducted under this regulation. They would also
provide a brief description of any other work that the auditor has
performed for any of the participating copyright owners within the
previous two calendar years, along with a list of the participating
copyright owners who have engaged the auditor's firm within the
previous two calendar years.
Within five (5) business days after receiving this information, the
statutory licensee would be required to select one of these auditors.
That individual would audit the licensee's Statements of Account on
behalf of all copyright owners who own a work that was embodied in a
secondary transmission made by that licensee during the accounting
period(s) subject to the audit.\9\ To ensure that the auditor maintains
his or her independence during the audit, the Revised Proposal explains
that there may be no ex parte communications between the auditor and
the participating copyright owners or their representatives until the
auditor has issued his or her final report. However, there are two
exceptions to this rule. The auditor may communicate directly with the
copyright owners if he or she has a reasonable basis to suspect that
the statutory licensee has committed fraud, or if the auditor gives the
licensee an opportunity to participate in the communication and the
licensee declines to do so.
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\9\ The Revised Proposal differs from the Joint Stakeholders'
Proposal by clarifying that the auditor would initially only be
authorized to verify the Statement(s) of Account which were listed
in the notice of intent to audit. As discussed in section VIII(B),
if the auditor discovers an underpayment that meets or exceeds a
certain threshold, the auditor would be permitted to expand the
scope of the audit to include other Statements which were not
mentioned in the initial notice.
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In response to AT&T's concerns, the Revised Proposal states that
the auditor must be a member in good standing with the AICPA and the
relevant licensing authority for the jurisdiction(s) where the auditor
practices,\10\ and it states that the auditor must be compensated with
a flat fee or based on an hourly rate, rather than a contingency
fee.\11\
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\10\ The licensing requirements for a CPA are set and enforced
by the Board of Accountancy for the jurisdiction(s) where the CPA
practices (rather than the AICPA). However, CPAs who join the AICPA
agree to abide by the Code of Professional Conduct and Bylaws (the
``Code'') that have been adopted by the organization. ``The bylaws
provide a structure for enforcement of the Code by the Institute's
Professional Ethics Division. When allegations come to the attention
of the Ethics Division regarding a violation of the Code, the
division investigates the matter, under due process procedures, and
depending upon the facts found in the investigation, may take a
confidential disciplinary action, settle the matter with suspension
or revocation of membership rights, or refer the matter to a panel
of the Trial Board Division for a hearing.'' See AICPA, FAQs--Become
a CPA, available at http://www.aicpa.org/BecomeACPA/FAQs/Pages/FAQs.aspx.
\11\ According to the AICPA, 47 states and jurisdictions allow
CPAs to accept contingency fees, except in situations where the CPA
audits or reviews a financial statement or prepares an original tax
return. See AICPA Code of Professional Conduct, Rule 302--Contingent
Fees, available at http://www.aicpa.org/research/standards/codeofconduct/pages/et_302.aspx; see also AICPA, Commissions and
Contingent Fees, available at http://www.aicpa.org/Advocacy/State/Pages/CommissionsandContingentFees.aspx
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The Office declined to adopt AT&T's suggestion that the auditor
should not be subject to ``any disciplinary inquiry or proceeding.''
(AT&T at 3, emphasis added.) It is implicit that the auditor is not
currently subject to a disciplinary inquiry or proceeding, because the
regulation requires that the auditor must be a member in good standing
with the relevant licensing authority and professional association for
certified public accountants. In any event, it seems unlikely that the
copyright owners would invite a ``peremptory challenge'' by nominating
an accountant who is currently suspended or subject to a pending
disciplinary inquiry or proceeding.\12\ Likewise, the Office does not
believe that the auditor should be required to file a certification
with the Office concerning his or her qualifications and independence,
because the Revised Proposal already directs the copyright owners to
provide the statutory licensee with information that it reasonably
needs to evaluate each auditor.
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\12\ To be clear, an auditor who has been subject to a
disciplinary inquiry or proceeding at some point in the past would
not necessarily be disqualified from conducting an audit under this
procedure.
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VI. Scope of the Audit and Time Period for Conducting an Audit
A. Comments
The Notice of Proposed Rulemaking did not specify a precise
deadline for when the audit should begin or when the audit should be
completed, because the Office expects that the issues presented in each
audit will vary depending on the number and complexity of the
Statements of Account that will be subject to review. For the same
reason, the Office did not specify the precise issues that the auditor
should consider in each audit. Instead, the Notice of Proposed
Rulemaking simply stated that the audit should be performed in
accordance with generally accepted auditing standards.
[[Page 27141]]
See 77 FR 35647, June 14, 2012. Many of the parties criticized this
approach.
In order to avoid ``needless delay and added expense,'' the
Copyright Owners contended that the statutory licensee should be given
a 30 to 90 day deadline to provide the auditor with the information he
or she needs to conduct the verification procedure. (Copyright Owners
at 6.) DISH predicted that the statutory licensee would have to
``devote certain resources to ensuring compliance with the auditor's
needs,'' and that the ``longer the auditing process is stretched out,
the greater the resource strain.'' Therefore, DISH said that the
auditor should be given a precise deadline for completing the
verification process. (DISH at 6.)
DISH also contended that the auditor should not conduct a deep and
burdensome ``inquiry into the cable or satellite carrier's business
operations or processes.'' Instead, he or she should simply confirm
that the licensee correctly identified the network and non-network
transmissions carried by that licensee during the relevant time period
and confirm that the licensee correctly multiplied the number of
subscribers who receive each transmission by the applicable royalty
rate. (DISH at 5-6.) AT&T expressed a similar concern. Citing the
Office's audit regulations for digital audio recording devices, it
asserted that the auditor should review the information that the
statutory licensee provides in its Statement of Account, but should not
consider any discrepancies that appear on the face of each Statement or
any aspect of the Statement that is reviewed by the Licensing Division,
such as the classification of stations as distant, local, permitted, or
non-permitted. AT&T also contended that statutory licensees should not
be required to provide the auditor with information concerning
individual subscribers. (AT&T at 3, 4; AT&T Reply at 4.)
Both AT&T and the NCTA stated that the audit should be conducted
during normal business hours in order to expedite the audit process and
to minimize the disruption to the statutory licensee's business. (AT&T
at 9; NCTA at 8.) In addition, AT&T contended that the statutory
licensee should be given 60 days to respond to the auditor's request
for information, and that the licensee should not be required to
respond to such requests within 75 days before the due date for a
semiannual Statement of Account ``when individuals with the most
knowledge are fully occupied with meeting filing requirements.'' (AT&T
at 9.)
B. Discussion
The Revised Proposal addresses the parties' concerns regarding the
scope and duration of the audit. The statutory licensee would be given
more than two months notice to identify and collect information that
may be relevant to the audit. Specifically, the copyright owner would
be required to serve a notice of intent to audit on the licensee that
identifies the Statements of Account that will be reviewed by the
auditor. At least 30 days would pass before other participating
copyright owners would be required to notify the licensee of their
intent to join the audit. The licensee would be given at least 5
business days to select the auditor who would conduct the verification
procedure and another 30 days thereafter to provide the auditor with a
list of the broadcast signals that the licensee retransmitted during
the accounting period(s) at issue in the audit. So as a practical
matter, the licensee would have at least 65 days to prepare before the
audit gets underway.
After the auditor has been selected, the licensee would be required
to provide the auditor and a representative of the participating
copyright owners with a certified list of the broadcast signals
retransmitted under each Statement of Account that is at issue in the
audit, including the call sign for each broadcast signal and each
multicast signal. In addition, cable systems and multiple system
operators (``MSOs'') would be required to identify the classification
of each signal on a community by community basis pursuant to Sec. Sec.
201.17(e)(9)(iv)-(v) and 201.17(h) of the regulations.
The Joint Stakeholders included similar language in their
proposal,\13\ and the Office assumes that this provision is intended to
respond to the Copyright Owners' request that statutory licensees be
given a precise deadline for providing information that the auditor
needs to conduct the verification procedure. However, the Office notes
that statutory licensees already provide this information in the
Statements of Account that they file with the Licensing Division, and
that the person signing the Statement must certify, under penalty of
law pursuant to title 18 of the U.S. Code, that this information is
true, correct, and complete. Although the Office included this
requirement in the Revised Proposal, the Office seeks comment on
whether there is any benefit in requiring licensees to provide
information that should be apparent from the face of their Statements
of Account.
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\13\ The primary difference is that the Revised Proposal would
impose this requirement on satellite carriers, cable systems, and
MSOs alike, while the provision in the Joint Stakeholders' Proposal
only applied to cable operators and MSOs.
---------------------------------------------------------------------------
The Revised Proposal would allow the statutory licensee to suspend
an audit for up to 30 days before the due date for filing a semiannual
Statement of Account,\14\ although the licensee would not be allowed to
exercise this option once the auditor has delivered the initial draft
of his or her report to the licensee.\15\ At the same time, the Revised
Proposal protects the interests of the copyright owners by requiring
the licensee to execute an agreement tolling the statute of limitations
for no more than 30 days if the copyright owners believe in good faith
that the suspension could prevent the auditor from delivering his or
her final report before the statute of limitations expires.
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\14\ In other words, satellite carriers could suspend an audit
from January 1st through January 30th and from July 1st through July
30th, while cable operators could suspend an audit from January 28th
through February 28th (in a non-leap year) and from July 31st
through August 29th.
\15\ This limitation is discussed in more detail in section
IX(B).
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The Revised Proposal differs from the Joint Stakeholders' proposal
insofar as the Joint Stakeholders would have allowed the statutory
licensee to suspend the audit for up to 60 days before the deadline for
filing a semiannual Statement of Account. Given that the copyright
owners may conduct only one audit per year, the Office believes that it
would be unduly restrictive to impose a ``blackout period'' on the
auditor for up to four months of the year.
DISH contended that the auditor should be given a precise deadline
for completing the audit, but this does not appear to be necessary. As
discussed in section VIII(B), a statutory licensee would be subject to
no more than one audit per calendar year. In other words, if the
copyright owners launched an audit on January 1, 2014 and if that audit
was still ongoing as of January 1, 2015, the copyright owners would not
be allowed to conduct another audit of that licensee until January 1,
2016. As a result, the copyright owners would have a strong incentive
to complete each audit before the end of the calendar year.
The Revised Proposal specifically states that the statutory
licensee must provide the auditor with reasonable access to the
licensee's books, records, or other information that the auditor needs
in order to conduct the audit. The Revised Proposal protects the
licensees' interests by providing that the audit must be conducted
during normal
[[Page 27142]]
business hours at a location designated by the licensee, that
consideration must be ``given to minimizing the costs and burdens
associated with the audit,'' and that the licensee is only required to
provide the auditor with information that he or she ``reasonably
requests'' (emphasis added). This should address DISH's concern that
the verification procedure might lead to a ``deep and burdensome
inquiry'' into a licensee's business operations or processes. (DISH at
5-6.) The Revised Proposal also requires the auditor to safeguard any
confidential information that he or she may receive from the licensee.
This should address AT&T's concern that cable operators might be asked
to provide the auditor with information concerning individual
subscribers.
Finally, AT&T contended that the auditor should review the
information that the licensee provided in its Statement of Account, but
should not consider any discrepancies that appear on the face of the
Statement or any aspect of the Statement that is reviewed by the
Licensing Division, such as the classification of stations as distant,
local, permitted, or non-permitted, or other discrepancies. The Revised
Proposal addresses this concern by requiring that the auditor verify
``all information reported on the Statements of Account subject to the
audit in order to confirm the correctness of calculations and royalty
payments reported therein.'' However, the auditor shall not determine
whether a cable system properly classified any broadcast signal under
Sec. Sec. 201.17(e)(9)(iv)-(v) and 201.17(h) of the regulations or
whether a satellite carrier properly determined that any subscriber or
group of subscribers is eligible to receive broadcast signals under
section 119(a) of the Act.
VII. Retention of Records
A. Comments
The Notice of Proposed Rulemaking explained that a statutory
licensee would be required to retain any records needed to confirm the
correctness of the calculations and royalty payments reported in its
Statements of Account for at least three and a half years after the
last day of the year in which the Statement was filed with the Office.
The Office also explained that a licensee who has been subject to an
audit would be required to retain those records for at least three
years after the date that the auditor delivers his or her final report
to the copyright owners who decided to participate in the audit.
Generally speaking, the parties did not object to this proposal.
The Copyright Owners opined that when a statutory licensee files an
amended Statement of Account, the deadline for maintaining records
should be calculated from the date that the amendment is filed rather
than the date of the initial Statement. (Copyright Owners at 6.) DISH
stated that if the auditor determines that the statutory licensee
correctly reported the royalties due on a particular Statement of
Account the licensee should not be required to retain its records
concerning that Statement once the auditor has delivered his or her
final report to the copyright owners. (DISH at 7-8.)
B. Discussion
In response to the Copyright Owners' concerns, the Revised Proposal
specifies that the deadline for maintaining records for an amended
Statement of Account should be calculated from the date that the
amendment was filed rather than the filing date for the initial
Statement.
The Office is concerned that the one-year retention period proposed
by the Joint Stakeholders would deprive copyright owners of the
benefits of the three-year statute of limitations and it would create
confusion for statutory licensees (with a one year retention period for
Statements of Account that have been audited, and a three year
retention period for Statements that could potentially be subject to an
audit). Therefore, the proposed regulation states that a licensee who
has been subject to an audit would be required to retain any records
needed to confirm the correctness of the calculations and royalty
payments reported in a Statement of Account for at least three years
after the date that the auditor delivers his or her final report to the
copyright owners. The Office weighed DISH's concerns, but concluded
that a licensee should be required to retain its records even if the
auditor finds no discrepancies in the Statements of Account, to ensure
that the licensee does not discard its records before the copyright
owners have had an opportunity to review the auditor's report.
VIII. Frequency of the Audit Procedure
A. Comments
In its Notice of Proposed Rulemaking, the Office suggested that a
satellite carrier or a cable operator that owns one cable system should
be subject to no more than one audit per year. By contrast, an operator
that owns more than one system would be subject to no more than three
audits per year. In order to protect the interests of multiple system
operators, the Office explained that the auditor would review a
sampling of the systems owned by each MSO. To protect the interests of
copyright owners, the Office explained that if the auditor discovers an
underpayment of 5 percent or more in a Statement of Account filed by an
MSO, the size of the sample could be expanded to include any and all of
the systems owned by that operator.
The Office explained that the Notice of Proposed Rulemaking was
merely a starting point for further discussion on these issues, and
invited comment from interested parties concerning the limit on the
total number of audits that an MSO should be required to undergo in a
single year. See 77 FR 35647, June 14, 2012. The Office invited
comments on whether an audit involving 50 percent of the systems owned
by a particular operator would be likely to produce a statistically
significant result. It also invited comments on whether a 50 percent
threshold would be unduly burdensome for MSOs and, if so, what
percentage would be appropriate. See id at 35648.
The Copyright Owners did not object to the proposed limit on the
number of audits that an MSO would be required to undergo, but
recommended that the Office define the term ``multiple system
operator'' to avoid any confusion about which systems would be covered
by this aspect of the regulation. (Copyright Owners at 7.) AT&T stated
that an MSO should be subject to no more than one audit per year and
that each audit should be limited to no more than two Statements of
Account, noting that this would be consistent with verification
procedures that the Office has adopted in the past. (AT&T at 2.) The
NCTA expressed the same view, but stated that each audit should be
limited to no more than one Statement of Account. (NCTA at 6, 7.)
The NCTA and AT&T agreed that an audit involving an MSO should be
based on a reasonable sampling of the systems owned by that entity.
(AT&T at 3; NCTA at 6.) AT&T explained that an audit involving 50
percent of its systems ``would cause substantial burden and
disruption'' and stated that the accuracy of its Statements of Account
could be determined based on a ``substantially smaller sample.'' (AT&T
at 3.) While AT&T did not propose a specific number or percentage of
systems that should be included in each audit, the NCTA stated that a
representative sample of 10 percent or less would be consistent with
audit practices and ``should be more than sufficient to determine
whether an MSO's SOAs
[[Page 27143]]
suffer from any systemic problems.'' (NCTA at 6.)
The Copyright Owners agreed that if the auditor discovers an
underpayment of 5 percent or more in an audit of an MSO, the auditor
should be allowed to expand the scope of the audit to include all of
the systems owned by that operator. (Copyright Owners at 7.) AT&T did
not object to the idea of expanding the number of systems subject to
the audit, but stated that an expanded audit should require a showing
of good cause. Specifically, AT&T stated that the amount of the
underpayment should exceed a minimum threshold and a minimum percentage
in order to trigger an expanded audit, and that discrepancies that
appear on the face of a Statement of Account or discrepancies based on
``reasonable disagreements about issues of law, construction of
regulations, or accounting procedures'' should not be included in this
calculation. In addition, AT&T stated that the Office should create a
separate procedure for resolving good faith disputes over legal,
regulatory, and accounting issues before the copyright owners are
allowed to expand the scope of an audit. (AT&T at 8, 9.)
The NCTA categorically opposed the idea of expanding the scope of
an audit involving an MSO. It asserted that there is no need to audit
more than 10 percent of the systems owned by an MSO, because a sample
of 10 percent of those systems should disclose any systemic problems in
the operator's royalty calculations. The NCTA also asserted that it
would be unreasonable to allow an ``isolated underpayment'' in a single
Statement of Account to trigger an audit of all of the systems owned by
that operator. (NCTA at 6-7.)
B. Discussion
The Revised Proposal states that statutory licensees would be
subject to no more than one audit per calendar year (regardless of the
number of cable systems that they own) and the audit of a particular
satellite carrier or cable system would be limited to no more than two
of the Statements of Account submitted by that licensee.
In response to the concerns expressed by AT&T and the NCTA, the
Revised Proposal explains that an audit involving an MSO would be
limited to a sampling of the systems owned by that entity.
Specifically, the auditor would be permitted to verify the Statements
of Account filed by no more than 10 percent of the Form 2 and 10
percent of the Form 3 systems owned by an MSO. In order to avoid any
confusion about which systems would be subject to this procedure, the
Revised Proposal explains that the term MSO means ``an entity that
owns, controls, or operates more than one cable system.''
If the Office has published a notice of intent to audit a
particular Statement of Account in the Federal Register, the Office
would not accept another notice of intent to audit that Statement. Once
the auditor has begun to audit a particular satellite carrier, a
particular cable system, or a particular MSO, copyright owners would
not be permitted to conduct another audit of that licensee until the
following calendar year.
For example, if the auditor started to review a licensee's
Statement of Account for the 2010/1 accounting period on August 1, 2013
and if the auditor delivered his or her final report the copyright
owners by December 31, 2013, the copyright owners would be allowed to
audit other Statements filed by that licensee beginning on January 1,
2014. However, if the auditor delivered his or her final report on
March 1, 2014, the licensee would not be subject to any other audits in
calendar year 2013 or 2014.
The copyright owners could lay the initial groundwork for other
audits involving this licensee at any time. For example, the copyright
owners could file a notice of intent to audit the licensee's Statement
of Account for the 2011/2 accounting period on October 1, 2013, even if
the auditor was still reviewing the licensee's Statement for the 2010/1
accounting period as of that date. Other participating copyright owners
would then be required to notify the copyright owner and the licensee
of their intent to audit the 2011/2 Statement within 30 days
thereafter.\16\ However, the participating copyright owners could not
propose a list of qualified and independent auditors to review the
2011/2 Statement until 30 days after the final report concerning the
2010/1 Statement has been delivered to the participating copyright
owners and the licensee.
---------------------------------------------------------------------------
\16\ As the Office explained in its Notice of Proposed
Rulemaking, ``if a copyright owner filed a notice of intent to audit
a particular Statement of Account or a particular statutory licensee
in calendar year 2013 and if that audit was still ongoing as of
January 1, 2014, the Office would accept a notice of intent to audit
filed in calendar year [2013 or] 2014 concerning other Statements
filed by that same licensee.'' See 77 FR 35645 n.3, June 14, 2012,.
---------------------------------------------------------------------------
In order to protect the interests of copyright owners, the Revised
Proposal provides an exception to these rules. In the event that the
auditor discovers an underpayment in his or her review of a satellite
carrier or a particular cable system, the copyright owners would be
permitted to audit all of the Statements of Account filed by that
particular cable system or satellite carrier during the previous six
accounting periods (including a cable system that is owned by an MSO).
Consistent with the Federal Rule of Civil Procedure, the copyright
owners should exclude the Statements of Account listed in the notice of
intent to audit when identifying the ``previous six'' accounting
periods that will be included in the expanded audit.\17\ See Fed. R.
Civ. P. 6(a)(1)(A). In addition, if the auditor discovers an
underpayment in his or her review of an MSO, the copyright owners would
be permitted to audit a larger sample of the cable systems owned by
that operator. Specifically, the copyright owners would be permitted to
audit 30 percent of the Form 2 and 30 percent of the Form 3 systems
owned by that operator.
---------------------------------------------------------------------------
\17\ Copyright owners may have an incentive to audit the
licensee's two most recent Statements of Account before auditing the
licensee's earlier Statements, given that an underpayment in the
most recent Statements would give the copyright owners an
opportunity to audit all of the Statements that the licensee
submitted for the previous six accounting periods.
---------------------------------------------------------------------------
Generally speaking, the expanded audit would be considered an
extension of the initial audit. However, the copyright owners would be
required to file another notice of intent to audit with the Copyright
Office, given that the expanded audit would include Statements of
Account and/or cable systems not listed in the initial notice. Doing so
would give other copyright owners an opportunity to join in the
expanded audit and it would put them on notice that a subsequent audit
of the Statements identified in the notice will not be permitted. In
addition, it would provide the statutory licensee with advance notice
of the Statements of Account and/or cable systems that would be
included within the expanded audit.\18\
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\18\ The Office did not adopt the Joint Stakeholders' Proposal,
which stated that the expanded audit could be conducted
``immediately'' without specifying a precise procedure for when and
how the expanded audit would begin.
---------------------------------------------------------------------------
The Revised Proposal explains that the expanded audit may be
conducted by the same auditor who conducted the initial audit, provided
that the copyright owners supply the licensee with information
sufficient to show that there has been no material change in the
auditor's independence and qualifications.\19\ If the copyright owners
[[Page 27144]]
prefer to use a different auditor or if the previous auditor is no
longer qualified or independent within the meaning of the regulation, a
new auditor may be selected using the procedure discussed in section
V(B) above.
---------------------------------------------------------------------------
\19\ Under the Joint Stakeholders' Proposal, the copyright
owners would be allowed to use the same auditor in another audit
involving an MSO, but they would not be allowed to use the same
auditor two years in a row. The Office fails to see the
justification for this limitation.
---------------------------------------------------------------------------
Because an expanded audit would be an extension of the initial
audit, the copyright owners could proceed with an audit of a satellite
carrier or a particular cable system at any time (including a cable
operator that is owned by an MSO). For example, if the copyright owners
audited a cable operator's Statement for the 2013/1 accounting period
in June 2014 and if the auditor discovered an underpayment on that
Statement, the copyright owners would be permitted to audit any or all
of the operator's Statements for the 2010/1 through 2012/2 accounting
periods in calendar year 2014.\20\ If the auditor delivered his or her
final report to the copyright owners by December 31, 2014, the
copyright owners would be allowed to audit other Statements filed by
that operator beginning on January 1, 2015. However, if the auditor
delivered his or her report on the 2013/1 Statement on or after January
1, 2015, then the operator would not be subject to any other audits in
calendar year 2015.
---------------------------------------------------------------------------
\20\ As discussed in section VII(B), the licensee would be
required to retain any records needed to confirm the correctness of
the calculations and royalty payments reported in these Statements
for at least three years after the last day of the year in which the
Statement were filed with the Office. Once the licensee has received
a notice of intent to audit those Statements, the licensee would be
required to retain its records for three years after the auditor
delivers his or her final report.
---------------------------------------------------------------------------
In order to protect the interests of MSOs, the Revised Proposal
provides a limited exception to this rule. As discussed above, the
copyright owners would be allowed to audit a larger sample of the cable
systems owned by an MSO if the auditor discovered an underpayment
during the initial audit. However, the expanded audit could not be
conducted until the following calendar year. For example, if the
auditor discovered an underpayment in the 2013/1 and 2013/2 Statements
of Account for one of the Form 2 and four of the Form 3 systems owned
by an MSO, the copyright owners would be permitted to audit any or all
of the Statements filed by those systems for the 2010/1 through 2012/2
accounting periods. If the auditor delivered his or her report to the
copyright owners on July 1, 2014, the copyright owners could proceed
with this expanded audit in calendar year 2014. In addition, the
copyright owners would be allowed to audit the Statements filed by 30
percent of the Form 2 and 30 percent of the Form 3 systems owned by
that operator. However, those systems could not be audited until
January 1, 2015, and the copyright owners would not be allowed to audit
any other cable systems owned by that MSO in calendar year 2015.
In all cases, the copyright owners would only be allowed to conduct
an expanded audit if the auditor discovers a ``net aggregate
underpayment'' of 5 percent or more on all of the Statements listed in
the notice of intent to audit.\21\ This addresses AT&T's concern that
the underpayment should exceed a minimum percentage in order to trigger
an expanded audit, and the NCTA's concern that an isolated underpayment
in a single Statement of Account should not trigger an audit of all of
the systems owned by an MSO.
---------------------------------------------------------------------------
\21\ The Revised Proposal differs from the Joint Stakeholders'
Proposal by clarifying that the copyright owners would be allowed to
conduct an expanded audit if the auditor discovers an underpayment
that is 5 percent or more of the amount reported on the Statements
of Account at issue in the audit, as opposed to requiring a net
aggregate underpayment of exactly 5 percent. In making this
calculation the auditor would be required to subtract the total
amount of any overpayments reflected on the Statements at issue in
the audit from any underpayments reflected on those Statements.
---------------------------------------------------------------------------
The Office assumes that the amount of underpayments and
overpayments that may be discovered in an audit may vary depending on
the size of the statutory licensee and the amount of its royalty
obligations. Therefore, the Office is not inclined to set a minimum
monetary threshold needed to trigger an expanded audit (as AT&T
recommended). Nor is the Office inclined to create a separate procedure
for resolving disagreements over legal, regulatory, or accounting
issues before an audit is expanded (as AT&T suggested). The Office
believes that the consultation between the auditor and the statutory
licensee, and the opportunity to prepare a written response to the
auditor's conclusions should provide the parties with an adequate
opportunity to air their differences concerning the auditor's
conclusions.
IX. Disputing the Facts and Conclusions Set Forth in the Auditor's
Report
A. Comments
The Notice of Proposed Rulemaking proposed that the auditor prepare
a written report setting forth his or her conclusions and deliver a
copy of that report to the statutory licensee before it is delivered to
any of the copyright owner(s) that elected to participate in the audit.
If the statutory licensee disagrees with any of the facts or
conclusions set forth in the auditor's report, the licensee's designee
should raise those issues during the initial consultation with the
auditor. If the auditor agrees that a mistake has been made, the
auditor should correct those errors before the final report is
delivered to the copyright owners. If the facts or conclusions set
forth in the auditor's report remain in dispute after the consultation
period has ended, the licensee would have the opportunity to provide
the auditor with a written response setting forth its views within two
weeks (e.g., 14 calendar days) after the date of the initial
consultation between the auditor and the licensee's representative. The
auditor would be required to include that response as an attachment to
his or her final report, which would have to be delivered to the
copyright owners and the statutory licensee within 60 days after the
date that the auditor delivered the initial draft of his or her report
to the licensee.\22\
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\22\ The Copyright Owners said that the Office should provide
``a hard deadline for issuing the final report'' (Copyright Owners
at 9), but in fact, the deadline that they recommended in their
comments is precisely the same as the deadline specified in the
Notice of Proposed Rulemaking.
---------------------------------------------------------------------------
The Office invited comment on whether the regulation should provide
a precise amount of time for the auditor to discuss his or her report
with the statutory licensee's designee, and if so, whether 30 days
would be a sufficient amount of time. AT&T stated that the licensee
should be given 45 days to review the initial report before the
consultation period begins; none of the other parties commented on this
aspect of the proposal.
The Office also invited comment on whether 14 days would be a
sufficient amount of time for the statutory licensee to prepare a
written response to the auditor's report, and whether 60 days would be
a sufficient amount of time for the auditor to prepare his or her final
report for the copyright owners. ACA stated that a 14 day deadline
would ``increase administrative burdens'' for smaller cable operators,
and that they should be given ``flexibility to respond within a
reasonable amount of time.'' (ACA at 8.) AT&T agreed that 14 days would
be ``wholly inadequate'' and that a statutory licensee should be given
60 days to prepare a written response to the auditor's report. AT&T
also contended that a licensee should be allowed to extend the response
period for another 30 days if the 60-day period falls within 75 days
before the due date for submitting a semiannual Statement of Account.
(AT&T at 9-10.) The NCTA expressed the same view, stating that the 14
day deadline for preparing a written response to the auditor and the 60
day deadline for completing the final
[[Page 27145]]
report would be ``unreasonably short.'' (NCTA at 9.)
B. Discussion
The Notice of Proposed Rulemaking and the Revised Proposal follow
the same approach for disputing the facts and conclusions set forth in
the auditor's report. The only difference is that the Revised Proposal
would require the auditor to deliver his or her final report to the
copyright owners within 5 business days after the statutory licensee's
deadline for delivering its written response to that report.
AT&T stated that the statutory licensee should be given 45 days to
review the initial draft of the auditor's report before the
consultation period begins, and AT&T, the ACA, and the NCTA predicted
that cable operators would need more than 14 days to prepare a written
response to that report. However, none of the parties offered any
evidence to support these claims, and the Office continues to believe
that 44 days (i.e., 30 days for the consultation period plus another 14
days to prepare a written response) is a reasonable amount of time for
the licensee to review and respond to the auditor's report.
Under the Joint Stakeholders' proposal, the auditor would be
required to send his or her report to both the participating copyright
owners and the licensee even if the auditor has reason to suspect that
the licensee has committed fraud and that disclosing his or her
conclusions to the licensee would prejudice further investigation of
that fraud. The Office is concerned that sending the report to both
parties may defeat the purpose of withholding the auditor's suspicions
from the licensee. Therefore, the Revised Proposal states that the
auditor may send a copy of his or her report to the copyright owners in
this situation without providing a complete copy to the licensee.
However, the Office is also concerned that the licensee would be denied
the opportunity to consult with the auditor and to remedy any errors or
disputed facts or conclusions set forth in the auditor's report, as
required by section 111(6)(C) of the Act. Therefore, the Revised
Proposal would allow the auditor to deliver an abridged version of the
report to the licensee that contains all of the facts and conclusions
set forth in his or her report to the copyright owners except for the
auditor's ultimate conclusion that the licensee has committed fraud.
The Revised Proposal also differs from the Joint Stakeholder'
proposal for suspending the audit in the period prior to the deadline
for filing semiannual Statements of Account. As discussed above, the
Revised Proposal would allow the licensee to suspend the audit for up
to 30 days before the deadline for filing its semiannual Statement of
Account, but the licensee would not be allowed to exercise this option
once the auditor has delivered the initial draft of his or her report
to the licensee. DISH predicted that a licensee may need to devote
``certain resources'' in order to respond to the auditor's
``inquiries'' (DISH at 6), but neither DISH nor any other party offered
any evidence to suggest that the time needed to consult with the
auditor or to prepare a written response to the auditor's report would
prevent a licensee from filing its semiannual Statement of Account in a
timely manner. Nor is the Office aware of such problems in the audit
procedures for statements of account filed under the section 112 and
114 licenses or under chapter 10.
X. Correcting Errors and Curing Underpayments Identified in the
Auditor's Report
A. Comments
The Notice of Proposed Rulemaking explained that if the auditor
concludes that the information in a Statement of Account is incorrect
or incomplete, that the calculation of the royalty fee was incorrect,
or that the statutory licensee failed to deposit the royalties owed
with the Office, the licensee may correct those errors by filing an
amended Statement of Account and/or by submitting supplemental royalty
payments to the Office. To do so, the licensee should follow the
procedures set forth in 37 CFR 201.11(h)(1) and 201.17(m)(3), including
the obligation to pay interest on any underpayment that may be due and
the requisite amendment fee. The Office invited comment on whether
statutory licensees should be given a deadline for correcting errors in
their Statements of Account and for making supplemental royalty
payments, and if so, whether 30 days would be a sufficient amount of
time.
The Copyright Owners contended that if an independent auditor
determines that a statutory licensee failed to pay the correct amount
of royalties, the licensee should be required to file an amended
Statement of Account and to correct the underpayment within 30 days
after the auditor delivers his or her final report. Otherwise, the
licensee would have a ``perverse incentive'' to ignore the auditor's
conclusions ``until either the statute of limitation runs or a
copyright owner drafts an infringement complaint.'' (Copyright Owners
at 8-9.) In the NCTA's view, the statutory license should be allowed to
amend its Statement of Account and to make any supplemental royalty
payments after the consultation period has ended but before the auditor
has delivered his or her final report to the copyright owners. (NCTA at
10.) AT&T contended that the licensee should be given an opportunity to
cure any alleged underpayments within 60 days after the consultation
period has ended. In addition, AT&T said that ``[t]he regulation should
make clear that such remediation and cure does not constitute [the]
licensee's admission that the prior reports and payments were wrong.''
(AT&T at 9-10.)
While the Notice of Proposed Rulemaking gave statutory licensees an
opportunity to correct any underpayments in their Statements of Account
at any time, it did not allow licensees to request a refund from the
Office in the event that the auditor discovered an overpayment. In
DTV's view, a licensee should be allowed to request a refund in this
situation, or in the alternative, to deduct the overpayment from a
future Statement of Account. (DTV at 2-3.) The NCTA agreed that cable
operators should be allowed to request refunds for any overpayments
discovered during the course of an audit. (NCTA at 14-15.)
B. Discussion
Generally speaking, the Notice of Proposed Rulemaking and the
Revised Proposal give the statutory licensee the opportunity to correct
any errors or underpayments reported in a Statement of Account. The
primary difference is that the Revised Proposal would give the licensee
a precise deadline for exercising this option. It states that the
licensee may file an amended Statement of Account and may submit
supplemental royalty fees within 60 days after the auditor delivers his
or her final report to the copyright owners and the statutory licensee
or within 90 days after that date in the case of an audit involving an
MSO. In addition, the Revised Proposal would allow the licensee to
request a refund from the Office if the auditor discovered an
overpayment on any of the Statements of Account at issue in the audit.
The Office will issue a refund under its current regulations if a
request to amend a Statement of Account is received within 30 to 60
days after the last day of the accounting period for that Statement or
within 30 to 60 days after the overpayment was received in the
[[Page 27146]]
Office,\23\ whichever is longer, or if the Office discovers a
legitimate overpayment in its examination of an initial Statement or
amended Statement. See 37 CFR 201.11(h)(1); 201.11(h)(3)(i)-(vi);
201.17(m)(3)(i)-(vi). STELA directed the Office to establish a
mechanism for correcting ``any underpayment identified'' in the
auditor's report, but it did not mention overpayments or refunds. See
section 111(d)(6)(C)(ii). Nevertheless, the Office does have the
authority to prescribe regulations concerning the Statements of Account
that cable operators and satellite carriers file with the Office, 17
U.S.C. 111(d)(1); 119(b)(1), and the Office agrees that a regulation
authorizing refunds for overpayments discovered in the course of a
verification procedure would be consistent with ``the administration of
the functions and duties made the responsibility of the Register''
under title 17 of the U.S. Code. 17 U.S.C. 702.
---------------------------------------------------------------------------
\23\ The deadline for satellite carriers is 30 days, while the
deadline for cable operators is 60 days.
---------------------------------------------------------------------------
Under the Revised Proposal the statutory licensee may request a
refund for an overpayment that is discovered during an audit by
following the procedures set forth in Sec. Sec. 201.17(m)(3) or
201.11(h)(3) of the regulations. The refund request must be received in
the Office within 30 days after the auditor has delivered his or her
final report to the licensee. The Joint Stakeholders' proposal would
have given the licensee 60 days to request a refund, but the Office
concluded that 30 days would be more appropriate, given that the amount
of the overpayment and the basis for the refund request would be
apparent from the auditor's report.
When the Office receives a notice of intent to audit a particular
Statement of Account and until the conclusion of that audit, the Office
will retain sufficient royalties to ensure that funds are available in
the event that the licensee subsequently requests a refund. The Office
does not need a copy of the auditor's final report, but it would be
helpful to know when the audit has been completed. Therefore, the
Revised Proposal directs a representative of the participating
copyright owners to notify the Office when the auditor has delivered
his or her final report and to state whether the auditor discovered an
overpayment on any of the Statements at issue in the audit. If the
auditor did not discover any overpayments, the royalties will be made
available for distribution to the copyright owners at the appropriate
time.
XI. Cost of the Audit Procedure
A. Comments
The Notice of Proposed Rulemaking explained that the copyright
owner(s) who selected the auditor would be expected to pay the auditor
for his or her work in connection with the audit, unless the auditor
were to determine that there was an underpayment of 5 percent or more
reported in any Statement of Account that is subject to the audit. If
so, the statutory licensee would be expected to pay the auditor's fee.
If the auditor's determination is subsequently rejected by a court,
then the copyright owners would have to reimburse the statutory
licensee for the cost of the auditor's services. The Office invited
comment on whether the regulation should include a cost-shifting
provision, and if so, whether the percentage of underpayment needed to
trigger this provision should be more or less than 5 percent. See 77 FR
35649, June 14, 2012.
This proved to be the most controversial aspect of the proposed
regulation. The Copyright Owners supported the proposal, noting that it
would be consistent with the verification procedures that the Office
has issued for other statutory licensees. (Copyright Owners at 9-10.)
AT&T, DISH, ACA, and the NCTA strongly opposed the idea.\24\
---------------------------------------------------------------------------
\24\ DTV took no position on this issue.
---------------------------------------------------------------------------
AT&T contended that the Office does not have the legal authority to
shift the costs of the audit from the copyright owners to the statutory
licensee. AT&T stated that ``the absence of any provision relating to
cost-shifting . . . confirms that Congress did not intend for the
Register to authorize cost-shifting,'' and the fact that the statute
indicates ``that the auditor is working on behalf of copyright owners''
suggests that the cost of the audit should be paid by the copyright
owners. (AT&T at 5-6.) AT&T also suggested that the cost-shifting
provision ``would implicate due process and delegation concerns,''
because it ``effectively grants an interested private party the
authority to regulate `private persons whose interests may be and often
are adverse.' '' AT&T contended that this represents `` `an intolerable
and unconstitutional interference with personal liberty and private
property,' '' that it is `` `clearly arbitrary,' '' and that it
constitutes `` `a denial of rights safeguarded by the due process
clause of the Fifth Amendment.' '' (AT&T at 7, quoting Carter v. Coal
Co., 298 U.S. 238 (1936)).
AT&T, the ACA, the NCTA, and DISH contended that cost-shifting
would be unfair to the statutory licensee. They predicted that
statutory licensees would expend substantial resources in responding to
the audit, they noted that licensees would not be able to recover any
of their costs from the copyright owners, nor would licensees receive
any financial benefit from the verification procedure that might offset
these costs. By contrast, the copyright owners could decline to
participate in the audit if they do not wish to pay for the auditor's
services, and if they decide to join the audit they could split the
cost of the audit amongst themselves. (ACA at 3; DISH at 9; NCTA at
13.)
ACA worried that a 5 percent underpayment threshold could result in
a relatively small underpayment giving rise ``to an audit bill several
orders of magnitude larger.'' (ACA at 1, 3.) AT&T and DISH predicted
that this would encourage the auditor to look for ``discrepancies even
where they do not exist'' and ``to raise as many issues as possible,
whatever their merit.'' (AT&T at 6; DISH at 9.) AT&T also predicted
that a cost-shifting provision would discourage licensees from
correcting the underpayments reported on their Statements of Account,
because a supplementary payment could be viewed as an admission that
the auditor's calculations are correct. (AT&T at 6.) In order to avoid
this result, AT&T urged the Office to create a separate ``process for
resolving disputes or for determining how much a system operator has
underpaid.'' (AT&T at 7.)
Although they strongly opposed the Office's cost-shifting proposal,
the ACA, the NCTA, and AT&T offered several suggestions for improving
the cost-shifting provision. ACA stated that the underpayment threshold
should be set significantly higher than 5 percent, that the
underpayment should surpass a minimum dollar amount in order to trigger
a cost-shifting, and that the Office should provide additional relief
for small cable operators. (ACA at 1, 3, 4.) AT&T and the NCTA
expressed a similar view. AT&T stated that the cost of the audit should
only be shifted if the auditor discovers an underpayment of $10,000 or
more. (AT&T at 7-8.) In addition, AT&T and the NCTA agreed that the
cost of the audit should only be shifted if the auditor finds an
underpayment of 10 percent or more, noting that a 10 percent threshold
would be consistent with the trigger that the Office has adopted in its
other audit regulations. (AT&T at 7-8; AT&T Reply at 3; NCTA at 13.)
In determining whether the minimum threshold has been met, both
AT&T and the NCTA said that the auditor should consider the total
amount of royalties
[[Page 27147]]
reported by all of the cable systems and reflected on all of the
Statements of Account that are at issue in the audit. The NCTA stated
that the auditor should consider both overpayments and underpayments in
making this calculation. However, AT&T stated that the auditor should
not consider ``underpayments attributable to reasonable disagreements
on issues of law, constructions of regulations, or accounting
procedures'' or other issues ``about which reasonable minds may
differ.'' (AT&T at 7-8; NCTA at 13.)
Both AT&T and the NCTA stated that the costs of the audit must be
reasonable, and that in no event, should the licensee be required to
pay for costs that exceed the amount of the underpayment. (AT&T Reply
at 3; NCTA at 13, 14.) They stated that the statutory licensee should
not be required to pay for an audit unless a court determines that the
licensee failed to report the correct amount of royalties, noting that
requiring a final judicial determination would be consistent with the
cost-shifting procedures set forth in the Office's other audit
regulations. (AT&T at 7-8; AT&T Reply at 3; NCTA at 14.) In addition,
AT&T stated that if the auditor discovers an overpayment of 10 percent
or more, the copyright owners should be required to reimburse the
licensee for the costs that it incurred in responding to the audit.
AT&T contended that this would discourage copyright owners from abusing
the verification procedure. (AT&T at 7-8.)
As discussed above, the Notice of Proposed Rulemaking would allow
copyright owners to expand the scope of the audit to include other
systems owned by an MSO if the auditor discovers an underpayment in an
audit of its systems. (AT&T at 7.) AT&T stated that the statutory
licensee should not be required to pay for the cost of an expanded
audit based solely on the fact that the auditor discovered an
underpayment in the initial audit. (AT&T at 8.)
B. Discussion
1. The Office Has the Authority To Include a Cost-Shifting Provision in
Its Audit Regulations
Section 702 of the Act states that ``The Register of Copyrights is
authorized to establish regulations not inconsistent with law for the
administration of the functions and duties made the responsibility of
the Register under this title.'' 17 U.S.C. 702. This includes the
authority to prescribe regulations concerning the Statements of Account
that cable operators and satellite carriers file with the Office, and
the authority to prescribe regulations concerning the verification of
those Statements. See 17 U.S.C. 111(d)(1); 111(d)(6); 119(b)(1),
119(b)(2). The Office has concluded that a regulation authorizing cost-
shifting for underpayments discovered in the course of a verification
procedure would be consistent with ``the administration of the
functions and duties made the responsibility of the Register'' under
title 17 of the U.S. Code. 17 U.S.C. 702. Moreover, the Office is not
aware of any provision in sections 111(d)(6), 119(b)(2), or elsewhere
in the Act that precludes the Office from adopting regulations that
allocate the cost of a verification procedure among the participants.
While there is no legislative history for STELA, the legislative
history for a prior iteration of the legislation lends some additional
support for the Office's conclusion.\25\ Sections 102(f)(4) and
104(c)(6) of the earlier bill directed the Register to issue
regulations to allow copyright owners to verify the Statements of
Account and royalty fees that cable operators and satellite carriers
deposit with the Office. Like sections 111(d)(6) and 119(b)(2) of the
current statute, the earlier bill did not indicate whether the
regulations should include a cost-shifting provision or whether those
costs should be paid by the copyright owners or by the statutory
licensee, or both. See Satellite Home Viewer Reauthorization Act of
2009, H.R. 3570, 111th Cong. Sec. Sec. 102(f)(4), 104(c)(6)
(2009).\26\ However, the House Report for the earlier bill stated that
``[t]he rules adopted by the Office shall include procedures allocating
responsibility for the cost of audits consistent with such procedures
in other audit provisions in its rules.'' See H.R. Rep. No. 111-319, at
10 (2009).
---------------------------------------------------------------------------
\25\ See Defense Logistics Agency v. Federal Labor Relations
Authority, 754 F.2d 1003, 1008 (DC Cir. 1985) (noting that a House
Committee report on an earlier version of a statutory provision
provided ``some support'' for the agency's interpretation of the
provision which was subsequently enacted by Congress); Crooker v.
Bureau of Alcohol, Tobacco & Firearms, 670 F.2d 1051, 1074 n.59 (DC
Cir. 1981) (noting that ``[t]o the extent that the legislative
history of earlier bills is useful,'' it tended to support the
court's interpretation of the legislation that Congress subsequently
enacted).
\26\ The bill was passed by the House on December 3, 2009. The
bill was read twice in the Senate and referred to the Committee on
the Judiciary.
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The House was aware that the Office has established verification
procedures in the past and that the Office has included a cost-shifting
provision in those regulations.\27\ The fact that the House directed
the Office to ``include procedures allocating responsibility for the
costs of audits''--despite the fact that the earlier bill did not
explicitly mention this issue--indicates that the House expected the
Office to include a cost-shifting provision in this regulation
consistent with its long-standing practice of allocating costs among
stakeholders on a reasonable basis. While the House Report tends to
support the conclusion that the Office has the authority to create a
cost-shifting procedure, the Office recognizes that the value of the
House Committee's remarks is limited, given that Congress made
significant changes to the provision concerning the verification
procedure for cable operators before it was enacted in STELA (although
the provision concerning the verification procedure for satellite
carriers remained unchanged).\28\
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\27\ As the Office stated in the Notice of Proposed Rulemaking,
the Office included a cost-shifting provision in its regulations
concerning the audit of Statements of Account and royalty payments
made under section 112, section 114, and chapter 10. See 77 FR
35649, June 14, 2012.
\28\ See Defense Logistics Agency, 754 F.2d at 1008 (explaining
that it would be ``unwise to place great weight'' on the legislative
history for a prior version of a bill where the legislation ``was
altered significantly before adoption'').
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AT&T contended that the cost-shifting provision would be
unconstitutional, because it would impose ``costs on the system
operator based on the judgment of a private party'' and it would allow
the auditor to be ``prosecutor, judge, and jury'' if there is a dispute
concerning the auditor's calculations.\29\ (AT&T at 7.) AT&T did not
contend that it would be a violation of due process or the delegation
doctrine to allow an auditor to verify the information provided in a
Statement of Account or to use the auditor's determination as the
appropriate baseline for curing underpayments, requesting refunds, or
expanding the scope of the audit to include other Statements filed by
the statutory licensee. Nor does AT&T explain why the cost-shifting
provision
[[Page 27148]]
would be unconstitutional, while these other aspects of the regulation
would not.
---------------------------------------------------------------------------
\29\ In support of this argument AT&T cited two cases from the
Great Depression, which are clearly distinguishable. In Schechter
Poultry Corp. v. United States, 295 U.S. 495 (1935) the Supreme
Court held the National Industrial Recovery Act of 1933 to be
unconstitutional, because it allowed poultry producers--rather than
the government--to establish ``codes of fair competition'' for the
poultry industry. Likewise, in Carter v. Coal Co., 298 U.S. 238
(1936), the Court held the Bituminous Coal Conservation Act of 1935
to be unconstitutional, because it stated that if the companies that
produce more than two-thirds of the nation's annual production of
coal negotiated a labor agreement with more than half of their
workers, then the minimum wages and maximum work hours specified in
those contracts would be binding upon other coal mining companies.
Unlike the laws at issue in these cases, STELA authorizes an auditor
to confirm the correctness of the calculations and royalty payments
reported on a particular Statement of Account, but the auditor's
determination would not be binding upon any other statutory licensee
or any other Statements that are not included within that audit.
---------------------------------------------------------------------------
In any event, the cost-shifting provision is not a violation of due
process, because inter alia, the statutory licensee would be given an
opportunity to meet and confer with the auditor report, to identify
errors or mistakes in the initial draft of the auditor's report, and to
prepare a written response to the auditor's conclusions before he or
she delivers the final report to the copyright owners. If the licensee
disagrees with the auditor's conclusion, the licensee could ask a court
of competent jurisdiction to review that decision, and if the court
agrees that the underpayment did not meet the threshold set forth in
the proposed regulation, the copyright owners would be required to
reimburse the licensee for the amount that it contributed to the cost
of the audit. Likewise, the proposed regulation is not a violation of
the delegation doctrine, because STELA expressly directs the Office--
not the private industry--to develop a procedure for the verification
of Statements of Account and royalty payments (although the Office has
received valuable input on the proposed regulation from the Joint
Stakeholders and other interested parties). See Sunshine Anthracite
Coal Co. v. Adkins, 310 U.S. 381, 398 (1940) (``Since law-making is not
entrusted to the industry, this statutory scheme is unquestionably
valid.'').
AT&T, the ACA, and DISH predicted that the proposed regulation
would be unduly burdensome for the statutory licensee. The Office
weighed these concerns, but believes that they have been adequately
addressed in the Revised Proposal. The Office also notes that cost-
shifting provisions are commonly used in private agreements that
provide a contractual right to audit another party's books or records,
and the Office assumes that agreements negotiated by members of the
copyright, cable, and satellite industries are no exception.
AT&T, the ACA, and DISH contended that statutory licensees should
not be required to pay for the costs of an audit, because they would
incur significant costs in responding to an audit. They also contended
that licensees would not be able to recover any of their costs from the
copyright owners (even if the auditor discovered an overpayment), nor
would they receive any financial benefit from the verification
procedure that could be used to offset their costs.
The cable and satellite industries receive a substantial benefit
from the statutory licensing system, insofar as it provides a mechanism
for licensing the public performance and display of broadcast content
without having to negotiate with the owners of that content. Moreover,
the Congressional Budget Office estimated that the cost of responding
to an audit ``would be minimal,'' because the auditor would be
verifying information that ``is already collected and maintained by
satellite and cable carriers'' as a condition for using the statutory
license. See H.R. Rep. No. 111-319, at 20 (2009). While the cost of
complying with the verification procedure may be a new obligation, this
is simply a cost of doing business under the statutory licensing
system, much like the obligation to pay royalties and the recordkeeping
and reporting requirements.
2. The Revised Proposal
AT&T, the ACA, and the NCTA offered several suggestions for
improving the cost-shifting procedure, and most of those suggestions
have been included in the Revised Proposal. If the auditor discovers a
net aggregate underpayment \30\ of more than 10 percent on the
Statements of Account at issue in the audit, then the statutory
licensee would be required to reimburse the copyright owners for the
cost of the audit. If the licensee prepared a written response to the
auditor's report and if the methodology set forth in that response
indicates that there was a net aggregate underpayment between 5 percent
and 10 percent of the amount reported on the Statements of Account,
then the cost of the audit would be split evenly between the copyright
owners and the licensee. However, if the net aggregate underpayment is
less than 5 percent or if the auditor discovers an overpayment rather
than an underpayment, then the participating copyright owner(s) would
be required to pay for the auditor's services.
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\30\ This term is defined and discussed in section VIII(B)
above.
---------------------------------------------------------------------------
The Office did not adopt the methodology proposed by the Joint
Stakeholders, because it may impose an unfair burden on small cable
operators. Specifically, the Joint Stakeholders would require the
licensee to pay for half the cost of the audit if the auditor
discovered a net aggregate underpayment of 10 percent or less--even if
the underpayment was as low as .001 percent of the amount reported on
the Statements of Account. In other words, the licensee could
potentially be required to pay a portion of the auditor's costs
whenever there is an underpayment, regardless of the amount of that
underpayment.
In determining whether the minimum threshold has been met, the
auditor would consider the total amount of royalties reported on all of
the Statements at issue in the audit, including any overpayments or
underpayments. This addresses the ACA's and the NCTA's concern that
audit costs might be shifted to the statutory licensee based on a minor
discrepancy on a single Statement of Account. If the auditor discovers
a net aggregate underpayment in an audit of an MSO, then as discussed
above, the copyright owners would be allowed to expand the scope of the
audit to include other Statements filed by the systems at issue in that
audit and/or other systems owned by that MSO. Although the expanded
audit would be considered an extension of the initial audit, the
licensee would not be required to pay for the cost of the expanded
audit unless the auditor discovered a net aggregate underpayment on the
Statements at issue in the expanded audit (even if the same auditor
conducted both the initial audit and the expanded audit).
Consistent with AT&T's and the NCTA's recommendation, the statutory
licensee would not be required to pay for any portion of the auditor's
costs that exceed the amount of the net aggregate underpayment reported
on its Statements of Account. This would appear to address the ACA's
request for special relief for small cable operators (although the cap
on audit costs would apply to large and small statutory licensees
alike). For example, if the auditor discovered net aggregate
underpayment of $3,000 and if that amount was more than 10 percent of
the amount reported on all of the Statements of Account at issue in the
audit, then the licensee would be given an opportunity to amend its
Statements of Account and to deposit $3,000 (plus any applicable
interest on that amount) with the Office to cover the deficiency in its
initial filings. If the auditor charged $2,500 for his or her work on
the audit, the licensee would be required to pay another $2,500 to a
representative of the participating copyright owners to cover the cost
of the audit. However, if the auditor charged $3,300 for his or her
services, then licensee would be required to pay the copyright owners
no more than $3,000 for the cost of the audit, and the participating
copyright owners would be expected to pay the auditor $300 to cover the
remaining amount.
The Office is not inclined to create a separate procedure for
resolving disagreements over legal, regulatory, or accounting issues
before the cost-shifting provision would be triggered (as
[[Page 27149]]
AT&T suggested). The Revised Proposal already protects statutory
licensees by giving them an opportunity to meet and confer with the
auditor, to identify errors or discrepancies in the initial draft of
the auditor's report, and to prepare a written response to the
auditor's conclusions before the auditor delivers his or her final
report to the copyright owners. At the same time, it protects the
interests of the copyright owners by giving the statutory licensee a
precise deadline for reimbursing the participating copyright owners for
the licensee's share of the audit costs.
The Joint Stakeholders' proposal would require the auditor to
provide the participating copyright owners and the licensee with an
itemized statement by the 15th of each month specifying the costs
incurred by the auditor in the preceding month. The Office agrees that
the participating copyright owners should provide the licensee with an
itemized statement at the conclusion of the audit specifying the total
costs incurred by the auditor. However, requiring the auditor to
provide monthly statements could be used as an excuse for harassing the
auditor and interfering with his or her conduct of the audit. The
participating copyright owners could agree to provide the licensee with
copies of the auditor's billing statements in the auditor's engagement
letter or in a side agreement with the licensee, but the Office is not
inclined to require this type of micro-management in the regulation.
As discussed above, the amount of underpayments and overpayments
that may be discovered in an audit may vary depending on the size of
the statutory licensee, the amount of its royalty obligations, and the
accuracy of its accounting procedures. Therefore, the Office is not
inclined to specify a minimum dollar amount that would be needed to
shift costs from the copyright owners to the statutory licensee (as
AT&T and the ACA suggested).
AT&T and DISH worried that the cost-shifting provision would
encourage the auditor to look for discrepancies even where they do not
exist. This does not appear to be a valid concern, because the auditor
would not be entitled to collect a contingency fee based on the results
of the audit. Instead, the auditor would be paid a flat fee or an
hourly rate regardless of whether he or she discovers an underpayment
or an overpayment on the Statements of Account. Moreover, the
requirement that the auditor be a qualified and an independent
certified public accountant subject to the Code of Professional Conduct
of the American Institute of Certified Public Accountants should
diminish significantly any concerns that the auditor would perform
unnecessary procedures beyond those needed to conduct an accurate and
thorough audit.
AT&T contended that the copyright owners should be required to
reimburse the licensee for the costs that it incurred in responding to
the audit if the auditor discovers an overpayment on a Statement of
Account. The Office is not inclined to accept this proposal, because as
discussed above, the Congressional Budget Office has estimated that the
cost of responding to an audit request would be minimal. Moreover, the
Revised Proposal contains a number of provisions that should deter
copyright owners from abusing the verification procedure, such as the
limit on the number of audits that may be conducted per year, the limit
on the topics that the auditor may review, and the fact that the
copyright owners would be required to pay for the entire cost of the
audit if the auditor discovers that the licensee overpaid rather than
underpaid.
AT&T also predicted that the cost-shifting provision would
discourage the licensee from curing its underpayment, because making a
supplemental payment could be viewed as a concession that the licensee
failed to report the correct amount on its Statement of Account. That
is a non sequitur. The Revised Proposal states that if the auditor
discovers an underpayment on a Statement of Account, the licensee
``may'' cure that underpayment by submitting additional royalty
payments, although the licensee is not required to do so.\31\ Thus, the
fact that the licensee may be required to reimburse the copyright
owners for the cost of the audit would not appear to be an admission of
liability, particularly if the licensee prepares a written response
expressing its disagreement with the auditor's conclusions and declines
to amend its Statement of Account or submit any supplemental payments
within the time allowed.
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\31\ Both the Notice of Proposed Rulemaking and the Joint
Stakeholders' proposal took this same approach.
---------------------------------------------------------------------------
Finally, AT&T stated that the licensee should not be required to
pay for the cost of the audit unless a court determines that the
licensee failed to report the correct amount on its Statement of
Account.\32\ The Office believes that the Revised Proposal strikes a
more appropriate balance between the interests of the participating
copyright owners and the statutory licensees. If the auditor determines
that the licensee failed to pay and report the correct amount on its
Statements of Account and if the underpayment was more than 10 percent
of the total amount reported on those Statements, then the licensee
would be required to pay for the cost of the audit. If the licensee
disagrees with that assessment, the licensee could seek a declaratory
judgment of non-infringement and an order directing the copyright
owners to reimburse the licensee for the cost of the audit. Conversely,
if the auditor determines that the licensee failed to pay the correct
amount and if the licensee fails to deposit any additional royalties
with the Office within the time allowed, the copyright owners could
file an infringement action seeking damages and an injunction. In other
words, both parties would need to take legal action at the conclusion
of the audit if the other party disagrees with the auditor's
conclusions, and the prevailing party in that dispute would be
reimbursed under the Revised Proposal, regardless of whether the case
is filed by the copyright owners or the licensee.
---------------------------------------------------------------------------
\32\ The Office's regulation on digital audio recording devices
is the only procedure that specifically requires a ``judicial
determination'' in order to shift costs from the copyright owners to
the statutory licensee. See 37 CFR 201.30(i). The regulation on
ephemeral recordings and the digital transmission of sound
recordings states that the cost of the audit should be paid by the
licensee if an independent auditor concludes that there was an
underpayment of 5 percent or more. See 37 CFR. 260.5(f); 260.6(f).
The rest of the regulations state that the costs should be shifted
if it is ``finally determined that there was an underpayment,''
without specifying whether the determination should be made by the
auditor or in a judicial proceeding. See 37 CFR 261.6(g); 261.7(g);
262.6(g); 262.7(g).
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XII. Confidentiality
A. Comments
The Notice of Proposed Rulemaking explained that the auditor should
be permitted to review confidential information in the course of the
verification procedure, and that the auditor should be permitted to
share that information with his or her employees, agents, consultants,
and independent contractors, provided that they are not employees,
officers, or agents of a copyright owner, and provided that those
individuals enter into an appropriate confidentiality agreement
governing their use of that material. See 77 FR 35650, June 14, 2012.
AT&T and the NCTA contended that these restrictions are
insufficient. Specifically, the NCTA stated that if the auditor
includes any supporting documentation in his or her final report to the
copyright owners, that information should be presented in a separate
appendix and it should be redacted to protect any confidential
[[Page 27150]]
information contained therein. (NCTA at 11-12.) AT&T contended that the
auditor should be required to enter into a confidentiality agreement
with the statutory licensee, and that an auditor who breaches his or
her obligations under that agreement should be subject to monetary
damages and injunctive relief and should be barred from conducting any
additional audits for at least three years. AT&T agreed that the
copyright owners should not be given access to any confidential
information, but it contended that this prohibition should also apply
to the copyright owners' affiliates as well as the employees, officers,
and agents of any other statutory licensee that retransmits broadcast
programming under sections 111 or 119. (AT&T at 10.) The Copyright
Owners generally agreed that any party that is owned or controlled by
another statutory licensee should not be permitted to review
confidential information that may be produced during the course of an
audit. (Copyright Owners at 10.)
B. Discussion
The Revised Proposal explains that access to confidential
information should be limited to the auditor who conducts the
verification procedure and a discrete class of persons who are listed
in paragraph (m)(2)(ii) of the regulation. Specifically, the auditor
would be allowed to share confidential information with his or her
employees, agents, consultants, and independent contractors who need
access to the information in order to perform their duties in
connection with the audit. In addition, the auditor would be allowed to
share confidential information with outside counsel for the
participating copyright owners (including any third party consultants
retained by outside counsel). Neither the auditor nor the auditor's
employees, agents, consultants, and independent contractors could be
employees, officers, or agents of a copyright owner for any purpose
other than the audit, and any other person who receives confidential
information during the course of an audit would have to implement
procedures to safeguard that information.
If the auditor includes any supporting documentation in his or her
final report to the copyright owners, the auditor would have to redact
any confidential information contained therein, because the auditor is
never allowed to share confidential information with the copyright
owners. However, the auditor could provide an unredacted copy of the
report to outside counsel for the participating copyright owners.
Likewise, the auditor would not be allowed to share confidential
information with the copyright owners' affiliates or with the
employees, officers, and agents of any other statutory licensee,
because those parties are not expressly mentioned in the class of
persons who may be given access to confidential information under
paragraph (m)(2) of the Revised Proposal.
While outside counsel and the auditor's employees, agents,
consultants, and independent contractors would be required to enter
into an appropriate confidentiality agreement governing the use of the
confidential information, the auditor would not be subject to the same
requirement (as AT&T suggested). The Office does not believe that this
is necessary given that the rules of professional conduct for certified
public accountants already prohibit the disclosure of confidential
information.
XIII. Conclusion
The Office seeks comment from the public on the subjects discussed
above related to the implementation of the audit provisions adopted by
Congress with the passage of the Satellite Television Extension and
Localism Act of 2010.
List of Subjects in 37 CFR Part 201
Copyright, General Provisions.
Proposed Regulation
In consideration of the foregoing, the Copyright Office proposes to
amend part 201 of 37 CFR, Chapter II, as follows:
PART 201--GENERAL PROVISIONS [AMENDED]
0
1. The authority citation for this part reads as follows:
Authority: 17 U.S.C. 702, 17 U.S.C. 111(d)(6), and 17 U.S.C.
119(b)(2).
0
2. Add Sec. 201.16 to read as follows:
Sec. 201.16 Verification of a Statement of Account and royalty fee
payments for secondary transmissions made by cable systems and
satellite carriers.
(a) General. This section prescribes general rules pertaining to
the verification of a Statement of Account and royalty fees filed with
the Copyright Office pursuant to sections 111(d)(1) and 119(b)(1) of
title 17 of the United States Code, as amended by Public Law 111-175.
(b) Definitions.
(1) The term cable system has the meaning set forth in Sec.
201.17(b)(2) of this part.
(2) MSO means an entity that owns, controls, or operates more than
one cable system.
(3) Copyright owner means any person or entity that owns the
copyright in a work embodied in a secondary transmission made by a
statutory licensee that filed a Statement of Account with the Copyright
Office for an accounting period beginning on or after January 1, 2010,
or a designated agent or representative of such person or entity.
(4) Generally accepted auditing standards (GAAS) means the auditing
standards promulgated by the American Institute of Certified Public
Accountants (AICPA).
(5) Net aggregate underpayment means the aggregate amount of
underpayments found by the auditor less the aggregate amount of any
overpayments found by the auditor, as measured against the total amount
of royalties reflected on the Statements of Account examined by the
auditor.
(6) Participating copyright owner means a copyright owner that has
filed a notice of intent to audit a particular Statement of Account
pursuant to paragraph (c) of this section and any other copyright owner
that has given notice of its intent to participate in such audit
pursuant to paragraph (d) of this section.
(7) The term satellite carrier has the meaning set forth in section
119(d)(6) of title 17 of the United States Code.
(8) The term secondary transmission has the meaning set forth in
section 111(f)(2) of title 17 of the United States Code, as amended by
Public Law 111-175.
(9) Statement of Account or Statement means a semiannual Statement
of Account filed with the Copyright Office under section 111(d)(1) or
119(b)(1) of title 17 of the United States Code, as amended by Public
Law 111-175, or an amended Statement of Account filed with the Office
pursuant to Sec. Sec. 201.11(h) or 201.17(m) of this part.
(10) Statutory licensee or licensee means a cable system or
satellite carrier that filed a Statement of Account with the Office
under section 111(d)(1) or 119(b)(1) of title 17 of the United States
Code, as amended by Public Law 111-175.
(c) Notice of intent to audit. Any copyright owner that intends to
audit a Statement of Account for an accounting period beginning on or
after January 1, 2010 must notify the Register of Copyrights no later
than three years after the last day of the year in which the Statement
was filed with the Office. The notice of intent to audit may be filed
by a copyright owner or a
[[Page 27151]]
designated agent that represents a group or multiple groups of
copyright owners. The notice shall identify the statutory licensee that
filed the Statement(s) with the Copyright Office, the Statement(s) and
accounting period(s) that will be subject to the audit, and the party
that filed the notice, including its name, address, telephone number,
facsimile number, and email address, if any. In addition, the notice
shall include a statement that the party owns, or represents one or
more copyright owners who own, a work that was embodied in a secondary
transmission made by the statutory licensee during one or more of the
accounting period(s) specified in the Statement(s) of Account that will
be subject to the audit. The notice of intent to audit shall be served
on the statutory licensee on the same day that the notice is filed with
the Copyright Office. Within 30 days after the notice has been received
in the Office, the Office will publish a notice in the Federal Register
announcing the receipt of the notice of intent to audit.
(d) Participation by other copyright owners. Within 30 days after a
notice of intent to audit a Statement of Account is published in the
Federal Register pursuant to paragraph (c) of this section, any other
copyright owner who owns a work that was embodied in a secondary
transmission made by that statutory licensee during an accounting
period covered by the Statement(s) of Account referenced in the Federal
Register notice and who wishes to participate in the audit of such
Statement(s) must give written notice of such participation to the
statutory licensee and to the party that filed the notice of intent to
audit. The notice given pursuant to this paragraph may be filed by a
copyright owner or a designated agent that represents a group or
multiple groups of copyright owners, and it shall include all of the
information specified in paragraph (c) of this section.
(e) Selection of the auditor and communications with auditor during
the course of the audit. (1) The participating copyright owner(s) shall
provide to the statutory licensee a list of three independent and
qualified auditors, along with information reasonably sufficient for
the statutory licensee to evaluate the proposed auditors' independence
and qualifications including:
(i) The auditor's curriculum vitae and a list of audits that the
auditor has conducted pursuant to section 111(d)(6) or 119(b)(2) of
title 17 of the United States Code;
(ii) A list and, subject to any confidentiality or other legal
restrictions, a brief description of any other work the auditor has
performed for any of the participating copyright owners during the
prior two calendar years;
(iii) A list identifying the participating copyright owners for
whom the auditor's firm has been engaged during the prior two calendar
years; and,
(iv) A copy of the engagement letter that would govern the
auditor's performance of the audit and that provides for the auditor to
be compensated on a non-contingent flat fee or hourly basis that does
not take into account the results of the audit.
(2) The statutory licensee shall select one of the proposed
auditors within five business days of receiving the list of auditors
from the participating copyright owners. That auditor shall conduct the
audit on behalf of all copyright owners who own a work that was
embodied in a secondary transmission made by the statutory licensee
during the accounting period(s) specified in the Statement(s) of
Account identified in the notice of intent to audit.
(3) The auditor shall be qualified and independent as defined in
this section. An auditor shall be considered qualified and independent
if:
(i) He or she is a certified public accountant and a member in good
standing with the AICPA and the licensing authority for the
jurisdiction(s) where the auditor is licensed to practice;
(ii) He or she is not, for any purpose other than the audit, an
officer, employee, or agent of any participating copyright owner;
(iii) He or she is independent as that term is used in the Code of
Professional Conduct of the AICPA, including the Principles, Rules, and
Interpretations of such Code applicable generally to attest
engagements; and
(iv) He or she is independent as that term is used in the
Statements on Auditing Standards promulgated by the Auditing Standards
Board of the AICPA and Interpretations thereof issued by the Auditing
Standards Division of the AICPA.
(4) Following the selection of the auditor and until the
distribution of the auditor's report to the participating copyright
owner(s) pursuant to paragraph (h) of this section, there may be no ex
parte communications regarding the audit between the selected auditor
and the participating copyright owner(s) or their representatives
provided, however, that the auditor may engage in such ex parte
communications where either:
(i) The auditor has a reasonable basis to suspect fraud and that
participation by the statutory licensee in communications regarding the
suspected fraud would, in the reasonable opinion of the auditor,
prejudice the investigation of such suspected fraud; or
(ii) The auditor provides the licensee with a reasonable
opportunity to participate in communications with the participating
copyright owner(s) or their representatives and the licensee declines
to do so.
(5) Following the selection of the auditor and until 30 days after
the distribution of the auditor's report to the participating copyright
owner(s) and the statutory licensee pursuant to paragraph (h) of this
section, the participating copyright owners may not propose a list of
auditors to conduct an audit involving any other Statement of Account
filed by the licensee.
(f) Scope of the audit. The auditor shall have exclusive authority
to verify all of the information reported on the Statements of Account
subject to the audit in order to confirm the correctness of the
calculations and royalty payments reported therein; provided, however,
that the auditor shall not determine whether any cable system properly
classified any broadcast signal as required by Sec. 201.17(e)(9)(iv)
and (v) and (h) of this part or whether a satellite carrier properly
determined that any subscriber or group of subscribers is eligible to
receive any broadcast signals under section 119(a) of title 17 of the
United States Code, as amended by Public Law 111-175. The auditor may
verify the carriage of the broadcast signals on each Statement of
Account after reviewing the certified list of broadcast signals
provided by the statutory licensee pursuant to paragraph (g)(1) of this
section. The audit shall be performed in accordance with GAAS and with
consideration given to minimizing the costs and burdens associated with
the audit.
(g) Obligations of the Statutory Licensee. (1) Within 30 days of
the auditor's selection by the statutory licensee pursuant to paragraph
(e)(2) of this section, the licensee shall provide the auditor and a
representative of the participating copyright owner(s) with a certified
list of all broadcast signals retransmitted pursuant to the statutory
license in each community covered by each of the Statements of Account
subject to the audit, including the call sign for each broadcast signal
and each multicast signal. In the case of an audit involving a cable
system or MSO, the list must include the classification of each signal
on a community by community basis pursuant to
[[Page 27152]]
Sec. 201.17(e)(9)(iv) and (v) and (h) of this chapter.
(2) The statutory licensee shall provide the auditor with
reasonable access to the licensee's books and records and any other
information that, consistent with GAAS, the auditor needs in order to
conduct his or her audit, and the statutory licensee shall provide the
auditor with any information the auditor reasonably requests promptly
after receiving such a request.
(3) The audit will be conducted during regular business hours at a
location designated by the statutory licensee. If the auditor and
statutory licensee agree, the audit may be conducted in whole or in
part by means of electronic communication.
(4) The statutory licensee may suspend the audit within 30 days
before the semi-annual due dates for filing Statements of Account by
providing prompt written notice to the participating copyright owner(s)
and the auditor; provided, however, that audit may be suspended for no
more than 30 days, the licensee may not exercise this option if the
auditor has delivered his or her report to the statutory licensee
pursuant to paragraph (h)(1) of this section, and if the participating
copyright owner(s) notify the licensee within 10 days of receiving the
notice of suspension of their good faith belief that suspension of the
audit could prevent the auditor from delivering his or her final report
to the participating copyright owner(s) before the statute of
limitations expires on any claims under the Copyright Act related to a
Statement of Account covered by that audit, the statutory licensee may
not suspend the audit unless it first executes a tolling agreement to
extend the statute of limitations by a period of time equal to the
period of time during which the audit would be suspended.
(h) Audit report. (1) Upon completion of the audit, the auditor
shall prepare a written report setting forth his or her findings and
conclusions. Prior to delivering the report to any participating
copyright owner, the auditor shall deliver a copy of that report to the
statutory licensee and consult with a designee of the licensee
regarding the findings and conclusions set forth in the report for a
period not to exceed 30 days. However, if the auditor has a reasonable
basis to suspect fraud and that disclosure would, in the reasonable
opinion of the auditor, prejudice investigation of such suspected
fraud, the auditor may deliver a copy of the report to the
participating copyright owner(s) and an abridged copy to the licensee
that omits the auditor's allegation that the licensee has committed
fraud.
(2) If, upon consulting with the licensee, the auditor agrees that
there are errors in the report, the auditor shall correct those errors
before delivering the report to the participating copyright owner(s).
If the statutory licensee disagrees with any of the findings or
conclusions set forth in the report, the licensee may provide the
auditor with a written explanation of its good faith objections within
14 days after the last day of the consultation period.
(3) Within five business days following the last date on which the
statutory licensee may provide the auditor with a written response to
the report pursuant to paragraph (h)(2) of this section, and subject to
the confidentiality provisions set forth in paragraph (m) of this
section, the auditor shall deliver a final report to the participating
copyright owner(s) and to the statutory licensee, along with a copy of
the statutory licensee's written response (if any). A representative of
the participating copyright owners shall promptly notify the Office
that the audit has been completed and shall state whether the auditor
discovered an overpayment on any of the Statements of Account at issue
in the audit.
(i) Corrections, supplemental payments, and refund. (1) Where the
final auditor's report concludes that any of the information reported
on a Statement of Account is incorrect or incomplete, that the
calculation of the royalty fee payable for a particular accounting
period was incorrect, or that the amount deposited in the Copyright
Office for that period was too low, a statutory licensee may, within 60
days of the delivery of the final report to the participating copyright
owners and the statutory licensee, or within 90 days of the delivery of
such report in the case of an audit of an MSO, cure such incorrect or
incomplete information or underpayment by filing an amendment to the
Statement of Account and by depositing supplemental royalty fee
payments utilizing the procedures set forth in Sec. 201.11(h) or Sec.
201.17(m) of this chapter.
(2) Notwithstanding Sec. Sec. 201.17(m)(3)(i) and 201.11(h)(3)(i)
of this chapter, where the final report reveals an overpayment by the
statutory licensee for a particular Statement of Account, the licensee
may request a refund of such overpayments within 30 days of the
delivery of the final report to the participating copyright owners and
the licensee by utilizing the procedures set forth in Sec.
201.11(h)(3) or Sec. 201.17(m)(3) of this chapter.
(j) Costs of the audit. (1) Except as provided in this paragraph,
the participating copyright owner(s) shall pay for the full costs of
the auditor. If the auditor concludes that there was a net aggregate
underpayment of more than 10 percent on the Statements of Account at
issue in an audit or an expanded audit, the statutory licensee shall
pay the auditor's costs associated with that audit. If the statutory
licensee provides the auditor with a written explanation of its good
faith objections to the auditor's report pursuant to paragraph (h)(2)
of this section and the net aggregate underpayment made by the
statutory licensee on the basis of that explanation is not more than 10
percent and not less than 5 percent, the costs of the auditor shall be
split evenly between the statutory licensee and the participating
copyright owner(s); provided, however, that if a court, in a final
judgment (i.e., after all appeals have been exhausted) concludes there
was a net aggregate underpayment exceeding 10 percent, the statutory
licensee shall, subject to paragraph (j)(3) of this section, reimburse
the participating copyright owner(s), within 60 days of that final
judgment, for any costs of the auditor that the participating copyright
owners have paid.
(2) If a statutory licensee is responsible for any portion of the
costs of the auditor, a representative of the participating copyright
owner(s) will provide the statutory licensee with an itemized
accounting of the auditor's total costs and the statutory licensee
shall reimburse such representative for the appropriate share of those
costs within 30 days of the statutory licensee's payment of
supplemental royalties (if applicable) or within 90 days of the
delivery to the participating copyright owners and the statutory
licensee of the final report, whichever is later. Notwithstanding the
foregoing, if a court, in a final judgment (i.e., after all appeals
have been exhausted) concludes that the statutory licensee's net
aggregate underpayment, if any, was 10 percent or less, the
participating copyright owner(s) shall reimburse the licensee, within
60 days of the final judgment, for any costs of the auditor that the
licensee has paid.
(3) No portion of the auditor's costs that exceed the amount of the
net aggregate underpayment may be recovered from the statutory
licensee.
(k) Frequency of verification. (1) Except as provided in paragraph
(k)(3) of this section, no cable system, MSO, or satellite carrier
shall be subject to more than one audit per calendar year and the audit
of a particular cable
[[Page 27153]]
system or satellite carrier shall include no more than two of the
Statements of Account from the previous six accounting periods
submitted by that cable system or satellite carrier.
(2) Once a notice of intent to audit a Statement of Account has
been received by the Office, a notice of intent to audit that same
Statement will not be accepted for publication in the Federal Register.
(3) If the final auditor's report concludes that there has been a
net aggregate underpayment of five percent or more on the audited
Statements of Account of a particular cable system or satellite
carrier, the participating copyright owners may audit all of the
Statements of Account filed by that particular cable system or
satellite carrier during the previous six accounting periods by
complying with the procedures set forth in paragraphs (c) and (d) of
this section. The expanded audit may be conducted by the same auditor
that performed the initial audit, provided that the participating
copyright owner(s) provide the statutory licensee with updated
information reasonably sufficient to allow the licensee to determine
that there has been no material change in the auditor's independence
and qualifications. In the alternative, the expanded audit may be
conducted by an auditor selected by the licensee pursuant to the
procedures set forth in paragraph (e) of this section.
(4) An audit of an MSO shall be limited to a sample of no more than
10 percent of the MSO's Form 3 cable systems and no more than 10
percent of the MSO's Form 2 systems, except that if the auditor
concludes that there was a net aggregate underpayment of five percent
or more on the Statements of Account at issue in an audit:
(i) The number of Statements of Account of a particular cable
system subject to audit in a calendar year may be expanded in
accordance with paragraph (k)(3) of this section; and
(ii) The sample of cable systems that may be audited in a calendar
year may be expanded in the following calendar year to include a sample
of 30 percent of the MSO's Form 3 cable systems and 30 percent of the
MSO's Form 2 cable systems.
(l) Retention of records. For each Statement of Account that a
statutory licensee files with the Copyright Office for accounting
periods beginning on or after January 1, 2010, the statutory licensee
shall maintain all records necessary to confirm the correctness of the
calculations and royalty payments reported in each Statement for at
least three and one-half years after the last day of the year in which
that Statement or an amendment of that Statement was filed with the
Office and, in the event that such Statement or amendment is the
subject of an audit conducted pursuant to this section, for three years
after the auditor delivers the final report to the participating
copyright owner(s) and the statutory licensee.
(m) Confidentiality. (1) For purposes of this section, confidential
information shall include any non-public financial or business
information pertaining to a Statement of Account that has been
subjected to an audit under section 111(d)(6) or 119(b)(2) of title 17
of the United States Code, as amended by Public Law 111-175.
(2) Access to confidential information under this section shall be
limited to:
(i) The auditor; and
(ii) Subject to executing a reasonable confidentiality agreement,
outside counsel for the participating copyright owners and any third
party consultants retained by outside counsel, and any employees,
agents, consultants, or independent contractors of the auditor who are
not employees, officers, or agents of a participating copyright owner
for any purpose other than the audit, who are engaged in the audit of a
Statement of Account or activities directly related hereto, and who
require access to the confidential information for the purpose of
performing such duties during the ordinary course of their employment;
(3) The auditor and any person identified in paragraph (m)(2)(ii)
of this section shall implement procedures to safeguard all
confidential information received from any third party in connection
with an audit, using a reasonable standard of care, but no less than
the same degree of security used to protect confidential financial and
business information or similarly sensitive information belonging to
the auditor or such person.
Dated: May 2, 2013.
Maria A. Pallante,
Register of Copyrights.
[FR Doc. 2013-11020 Filed 5-8-13; 8:45 am]
BILLING CODE 1410-30-P