[Federal Register Volume 79, Number 80 (Friday, April 25, 2014)]
[Rules and Regulations]
[Pages 23102-23139]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-08664]
[[Page 23101]]
Vol. 79
Friday,
No. 80
April 25, 2014
Part III
Library of Congress
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Copyright Royalty Board
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37 CFR Part 380
Determination of Royalty Rates for Digital Performance Right in Sound
Recordings and Ephemeral Recordings; Final Rule
Federal Register / Vol. 79 , No. 80 / Friday, April 25, 2014 / Rules
and Regulations
[[Page 23102]]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 380
[Docket No. 2009-1 CRB Webcasting III]
Determination of Royalty Rates for Digital Performance Right in
Sound Recordings and Ephemeral Recordings
AGENCY: Copyright Royalty Board, Library of Congress.
ACTION: Final rule and order.
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SUMMARY: The Copyright Royalty Judges announce their final
determination of the rates and terms for two statutory licenses,
permitting certain digital performances of sound recordings and the
making of ephemeral recordings, for the period beginning on January 1,
2011, and ending on December 31, 2015.
DATES: Effective Date: April 25, 2014.
Applicability Dates: These rates and terms are applicable to the
period January 1, 2011, through December 31, 2015.
FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or
Gina Giuffreda, Attorney Advisor. Telephone: (202) 707-7658. Email:
[email protected].
SUPPLEMENTARY INFORMATION: On July 6, 2012, the United States Court of
Appeals for the District of Columbia Circuit (DC Circuit) remanded this
matter for determination. The Copyright Royalty Judges (Judges)
determine that the royalty rates payable under 17 U.S.C. 114(f) for the
public performance by webcasters of digital sound recordings for the
period 2011 through 2015 shall be as follows. For commercial webcasters
subject to the agreement between the National Association of
Broadcasters and SoundExchange, as stipulated in the agreement. For all
other commercial webcasters:
------------------------------------------------------------------------
Rate per-
Year performance
\1\
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2011.................................................... $0.0019
2012.................................................... 0.0021
2013.................................................... 0.0021
2014.................................................... 0.0023
2015.................................................... 0.0023
------------------------------------------------------------------------
The Judges determine that section 114 public performance rates for
noncommercial webcasters shall be as follows. For noncommercial
educational webcasters, as agreed by and between College Broadcasters,
Inc. and SoundExchange in the agreement approved by the Judges in this
proceeding. For other noncommercial webcasters, the rate shall be $500
per station or channel, including side channels, up to a maximum usage
of 159,140 Aggregate Tuning Hours \2\ (ATH) per month. Commercial usage
rates apply to usage in excess of 159,140 hours per month.
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\1\ This rate is applicable from first performance, but subject
to recoupment credit for the agreed minimum fee of $500 per year for
each station or channel.
\2\ ``Aggregate Tuning Hours'' is defined in SoundExchange's
rate proposal as using the same definition employed during the 2006-
2010 rate period and codified at 37 CFR 380.2 (2010). It is a
measure of the duration of all programming transmitted by licensee,
less the actual running time of any sound recordings that are
licensed directly or which do not require a license under the Act.
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All parties in interest in this proceeding agreed that royalties
payable for the license granted under 17 U.S.C. 112(e) should be
bundled with the section 114 royalties and deemed to be 5% of the
bundled remittances. The Judges adopt this agreement for the period
2011 through 2015.
Following are the bases of the Judges' determination.
I. Introduction
A. Subject of the Proceeding
B. Procedural Posture
C. Statutory Background
D. The Record
II. Rates Under the Section 112 Ephemeral License
III. Rate Structure Under the Section 114 Performance License
IV. Rates for Commercial Webcasters
A. The National Association of Broadcasters/SoundExchange
Agreement
B. All Other Commercial Webcasters
1. The Live365 Rate Proposal
2. The SoundExchange Rate Proposal
3. The ``Affordability'' of the Proposed Interactive Benchmark
Rates
4. Judges' Conclusions Regarding the Commercial Webcasters Rates
V. Rates for Noncommercial Webcasters
A. Noncommercial Educational Webcasters
B. Other Noncommercial Webcasters
1. Rate Proposals of the Participants
2. Evaluation of the Rate Proposals and Determination of Rates
VI. Terms
A. Uncontested Terms
1. Collective
2. Stipulated Terms and Technical and Conforming Changes
3. Electronic Signature on Statement of Account
B. Contested Terms for Commercial Webcasters
1. Terms Proposed by Live365
2. Terms Proposed by SoundExchange
C. Contested Terms for Noncommercial Webcasters
VII. Determination and Order
I. Introduction
A. Subject of the Proceeding
This Determination results from a rate proceeding convened under
section 803(b) of the Copyright Act (Act), 17 U.S.C. 803(b). On January
5, 2009, the Copyright Royalty Judges (Judges) announced commencement
of the captioned proceeding. See, 74 FR 318 (Jan. 5, 2009). The purpose
of the proceeding was to determine royalty rates and terms for the
public performance of digital sound recordings by eligible
nonsubscription transmission services or new subscription services, as
defined in section 114 of the Act.\3\ This proceeding includes
determination of rates and terms relating to the making of ephemeral
copies under section 112 of the Act in furtherance of the digital
public performances. The rates and terms the Judges determine in this
proceeding apply to the period of January 1, 2011, through December 31,
2015. See 17 U.S.C. 804(b)(3)(A).
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\3\ Including as amended by the Digital Millennium Copyright Act
(DMCA), Public Law 105-304, 112 Stat. 2860, 2887 (Oct. 27, 1998).
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B. Procedural Posture
In response to the Judges' published notice of commencement, forty
entities filed Petitions to Participate. The participants followed the
statutory procedures for rates and terms determinations, which include
a voluntary negotiation period. In addition, Congress provided expanded
opportunities for settlement by passing the Webcaster Settlement Acts
of 2008 and 2009 (WSA).\4\ Most participants negotiated agreements
relating to rates and terms prior to the hearing.\5\
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\4\ Public Law 110-435, 122 Stat. 4974 (Oct. 16, 2008); Public
Law 111-36, 123 Stat. 1926 (June 30, 2009). The Webcaster Settlement
Acts of 2008 and 2009 authorized webcasters to negotiate rates and
terms for the section 112 and 114 licenses to be effective during
the then current rate term in lieu of the adjudicated rates for that
term, and to extend through the rate term at issue in this
proceeding. The WSAs also gave parties the option to exclude those
negotiated terms from evidence in a proceeding before the Judges
notwithstanding the provisions of sections 112(e)(4) and
114(f)(2)(B), which permit the Judges to consider evidence of
voluntarily negotiated licenses in determining statutory rates and
terms.
\5\ The participants reached eight settlements in all,
accounting for approximately 95% of the royalties paid to
SoundExchange in 2008 and 2009. The Copyright Office published
notices of settlements as follows: 74 FR 9293 (Mar. 3, 2009) (three
agreements); 74 FR 34796 (July 17, 2009) (one agreement); and 74 FR
40614 (Aug. 12, 2009) (four agreements).
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When the Judges convened the hearing to determine rates and terms
applicable to the non-settling participants, the parties remaining
were: SoundExchange, Inc. (SoundExchange),
[[Page 23103]]
College Broadcasters, Inc. (CBI),\6\ the Intercollegiate Broadcasting
System, Inc. (IBS), Live365, Inc. (Live365), RealNetworks, Inc., and
Royalty Logic, LLC. The Judges heard evidence for seven days in April
2010 in the direct case and three days in July 2010 in the rebuttal
case. On May 5, 2010, the Judges heard oral argument relating to the
settlement and resulting regulatory language proposed jointly by
SoundExchange and CBI. The Judges heard closing arguments of counsel on
July 30, 2010.
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\6\ In August 2009, under the auspices of the WSA of 2009, CBI
and SoundExchange reached a settlement between them (CBI/
SoundExchange Agreement) covering rates and terms for certain
college broadcasters and noncommercial educational webcasters. The
Copyright Office published notice of this settlement on August 12,
2009. See 74 FR 40616 (Aug. 12, 2009). CBI and SoundExchange then
filed a joint motion for approval of their settlement and adoption
of its terms as the applicable regulations for all noncommercial
educational webcasters. The Judges published proposed regulations
based upon the CBI/SoundExchange agreed rates and terms. See 75 FR
16377 (Apr. 1, 2010). The Judges received multiple comments in favor
of the proposed regulations and an objection from IBS. The Judges,
therefore, heard oral argument of counsel in May 2010, and published
the Final Rule relating to the CBI/SoundExchange Agreement and the
NAB/SoundExchange Agreement. See 76 FR 13026 (Mar. 9, 2011).
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Following presentation of written and testimonial evidence, legal
briefing, and argument of counsel, the Judges published their Final
Determination in this matter on March 9, 2011. See 76 FR 13026 (Mar. 9,
2011). IBS filed a timely appeal to the United States Court of Appeals
for the DC Circuit. IBS asserted on appeal that the $500 minimum fee
and the attendant recordkeeping and reporting requirements established
for noncommercial webcasters is excessive and burdensome for small
college broadcasters. IBS further challenged the Constitutionality of
the statutory construct granting the DC Circuit the power not just to
affirm, reverse, or remand appeals from the CRB, but also to remediate
CRB determinations--an ability IBS challenged as a non-judicial
function and unconstitutional under Article III of the Constitution.
IBS likewise challenged the constitutionality of the Judges under the
Appointments Clause of the United States Constitution. U.S. Const.,
art. II, sec. 2, cl.2.\7\
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\7\ IBS argued that the Judges were principal officers of the
United States government and, as such, must be appointed by the
President with the advice and consent of the United States Senate.
IBS also opined that the Librarian is not an agency head authorized
to appoint inferior officers of the government, notwithstanding that
the Librarian is appointed by the President and confirmed by the
Senate.
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SoundExchange and CBI intervened in the appeal. Both intervenors
filed briefs in support of the Judges' determination. SoundExchange
controverted the constitutional challenges asserted by IBS. CBI sought
to assure the validity of its agreement with SoundExchange regardless
of the resolution of the constitutional issues.
On July 6, 2012, the DC Circuit ruled that the Judges were acting
as principal officers of the United States government in violation of
the Appointments Clause of the Constitution. Intercollegiate
Broadcasting Sys., Inc. v. Copyright Royalty Board, 684 F.3d 1332, 1342
(D.C. Cir. 2012), cert. denied, 133 S. Ct. 2735 (2013).\8\ To cure the
violation of the Appointments Clause, the DC Circuit excised that
portion of the Act that limited the Librarian's ability to remove
Judges. Having determined that the Judges were not validly appointed at
the time they issued the challenged determination, the DC Circuit
``vacate[d] and remand[ed] the determination,'' without addressing any
substantive issue on appeal, so that a constitutionally appointed panel
of Judges could render a new determination. Id. at 1334, 1342.
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\8\ To remedy the violation of the Appointments Clause, the
Librarian appointed the incumbent panel as at-will employees. The
Librarian appointed the current panel of Judges while the IBS appeal
was pending; consequently, the panel of Judges making the
determination on remand is not the same as the panel that made the
first determination.
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Following the Supreme Court's denial of IBS's petition for a writ
of certiorari, the Judges requested proposals from the participants on
the conduct of proceedings on remand. Order for Further Briefing (July
26, 2013). SoundExchange essentially argued for a summary reissuance of
the Judges' original determination and CBI argued for summary adoption
of its settlement with SoundExchange. IBS urged the Judges to reopen
the proceeding to allow additional written and oral testimony and new
briefing. IBS argued in the alternative that the Judges permit each
participant to submit new briefs.
The substantive issues on appeal were (i) the $500 minimum fee for
noncommercial educational webcasters and (ii) terms proposed by IBS
relating to ``small'' and ``very small'' noncommercial webcasters. The
language of the DC Circuit's remand, however, was not limited to any
specific portion of the determination. Rather, the DC Circuit
``vacate[d] and remand[ed] the determination.'' Id. at 1342 (emphasis
added). The Judges interpret the Court's remand order as directing the
Judges to review the entire record and to issue a new determination on
all issues included therein, not just the $500 minimum fee that was the
subject of the appeal.
The Judges have considered both the language of the remand order
and proposals from the participants regarding remand procedure. While
the DC Circuit's remand instructions compel the Judges to consider anew
all issues in the original determination, the Judges decline to reopen
the proceeding and accept additional evidence or argument. Each party
had ample opportunity to present its case.\9\ The Judges have concluded
that this matter shall be determined based upon a de novo review of the
substantial record that the parties developed during the proceeding
leading to the first determination.
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\9\ The Judges' consideration of this issue is discussed in
detail in Notice of Intention to Conduct Paper Proceeding on Remand
and Solicitation of Comments from the Parties (Sept. 17, 2013).
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Upon completion of their de novo review of the existing record, the
Judges issued their initial Determination After Remand for Royalty
Rates and Terms for 2011-2015, Docket No. 2009-1 CRB Webcasting III
(Jan. 9, 2014) (Initial Determination). Pursuant to 17 U.S.C. 803(c)(2)
and 37 CFR Part 353, IBS filed a motion for rehearing. After reviewing
the motion, the Judges denied the motion for rehearing. Order Denying
Motion for Rehearing, Docket No. 2009-1 CRB Webcasting III (Feb. 4,
2014). As explained in the February 4, 2014 Order, the Judges
determined that IBS had failed to show that any part of the Initial
Determination was erroneous, i.e., IBS's arguments did not satisfy the
``exceptional case'' standard necessary to warrant a rehearing. More
particularly, the motion failed to establish: (1) An intervening change
in controlling law, (2) the availability of new evidence, or (3) a need
to correct a clear error or prevent manifest injustice. Id.
C. Statutory Background
Transmission of a sound recording constitutes a public performance
of that work. Owners of copyright in sound recordings are not accorded
an exclusive, general public performance right with regard to those
recordings. See 17 U.S.C. 106(4). Owners of copyright in ``musical
works,'' \10\ have an exclusive right of public performance of those
works; owners of copyright in ``sound recordings'' \11\ do not. As a
[[Page 23104]]
consequence, U.S. copyright law permits many public performances of
sound recordings--including radio broadcasts--to take place without the
authorization of, or compensation to, sound recording copyright owners
(e.g., performers and record labels).
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\10\ A ``musical work'' is a musical composition, together with
any accompanying words, that has been fixed in any tangible medium
of expression. See 17 U.S.C. 102(a)(2).
\11\ `` `Sound recordings' are works that result from the
fixation of a series of musical, spoken, or other sounds, but not
including the sounds accompanying a motion picture or other
audiovisual work, regardless of the nature of the material objects,
such as disks, tapes, or other phonorecords, in which they are
embodied.'' 17 U.S.C. 101.
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In 1995, Congress enacted the Digital Performance Right in Sound
Recordings Act (DPRA),\12\ which created and granted to sound recording
copyright owners a new exclusive right to perform a sound recording
publicly by means of a digital audio transmission. 17 U.S.C. 106(6).
The new right was, however, subject to a number of important
limitations, including the grant to subscription digital audio
transmission services (including satellite digital audio radio
services) of a statutory license that permitted them to use sound
recordings without the agreement of the copyright owner. 17 U.S.C.
114(d)(2), (f) (1997) (amended 1998).
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\12\ Public Law 104-39, 109 Stat. 336 (Nov. 1, 1995).
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Technology proceeded apace and, within a few short years, digital
transmissions of sound recordings over the Internet were prevalent and
available from both subscription and nonsubscription services. Congress
did not specifically contemplate these ``webcaster'' services when it
drafted the DPRA. Consequently, Congress expanded the statutory license
in section 114 to cover ``eligible nonsubscription transmissions,''
i.e., webcasting, when it enacted the Digital Millennium Copyright Act
of 1998, Public. Law 105-304, 112 Stat. 2860 (Oct. 28, 1998),
To ensure that recording artists and record companies will be
protected as new technologies affect the ways in which their
creative works are used; and . . . to create fair and efficient
licensing mechanisms that address the complex issues facing
copyright owners and copyright users as a result of the rapid growth
of digital audio services. . . .
H.R. Rep. No. 105-796, at 79-80 (1998).
In addition, in recognition of the fact that webcasters must make
temporary copies of sound recordings in order to facilitate the
transmission process, Congress created a compulsory licensing scheme
for so-called ``ephemeral'' recordings. See id. at 89-90. Licensees are
limited to no more than one ephemeral recording (unless the terms of
the license permit more) for use in the broadcasting or transmission of
the copied work. 17 U.S.C. 112(e). The ephemeral recording must be
transitory in nature, unless the licensee retains it solely for
archival purposes. See 17 U.S.C. 112(a).
In the Copyright Royalty and Distribution Reform Act of 2004,\13\
Congress created the role of Copyright Royalty Judge and authorized the
Judges, inter alia, to determine and set rates and terms for the
licensing and use of copyrighted works in several contexts, e.g., cable
television transmission, satellite radio broadcast, and, the medium
relevant to this proceeding, webcasting. Congress retained the prior
statutory standards and made them applicable to the Judges for
determining rates and terms for both the ephemeral and the public
performance licenses. For webcasting rates under either license, the
``Judges shall establish rates and terms that most clearly represent
the rates and terms that would have been negotiated in the marketplace
between a willing buyer and a willing seller.'' 17 U.S.C. 114(f)(2)(B).
The quoted language is substantially identical to the statutory
language regarding ephemeral recordings. See 17 U.S.C. 112(e)(4).
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\13\ Public Law 108-419, 118 Stat. 2341 (Nov. 30, 2004).
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To ascertain rates that represent this hypothetical market under
both statutory sections, the Judges shall consider ``economic,
competitive, and programming information presented by the parties. . .
.'' Id. The Judges are not limited with regard to the evidence they may
consider (other than the limitations in the WSAs on the use of
agreements reached under those statutes). The Judges' determination
relating to both licenses should also account for whether the use at
issue might substitute for, promote, or otherwise affect the copyright
owners' stream of revenues. The Judges must also consider, again for
both licenses, the relative contributions of the owners and licensees
in making the licensed work available to the public. Id. Except as
directed by the WSAs, the Judges may consider rates and terms
negotiated in voluntary licensing agreements for comparable
transmission services. Id.
D. The Record
SoundExchange, Live365, IBS, and CBI presented evidence in this
proceeding.\14\ CBI only presented evidence to support adoption of its
settlement with SoundExchange for noncommercial educational webcasting.
SoundExchange and Live365 presented evidence relating to commercial
webcasters. SoundExchange presented evidence relating to noncommercial
webcasting; IBS presented evidence for small noncommercial webcasters.
The Judges received written and live testimony from 15 witnesses \15\
and admitted 60 documentary exhibits into evidence.
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\14\ After filing Written Direct Statements, RealNetworks, Inc.
withdrew from the proceedings, and Royalty Logic, LLC, did not
participate further.
\15\ The Judges also considered designated written testimony.
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The record on which the Judges base this determination after remand
is the existing record, including written and oral legal argument of
counsel, and transcripts of the entire determination proceeding.\16\
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\16\ The original panel of judges heard approximately ten days
of testimony and legal argument in aggregate, resulting in
approximately 2,600 pages of transcripts.
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II. Rates Under the Section 112 Ephemeral License
Between the direct and rebuttal phases of this proceeding,
SoundExchange and Live365 presented settlements of (i) the minimum fee
and royalty rates for the section 112 license and (ii) the minimum fee
for the section 114 license applicable to the commercial webcasters not
encompassed by the NAB/SoundExchange Agreement. These two settlements
were included in one stipulation. The terms of the settlement are the
same as the agreement reached and included as a final rule following
the prior webcasting rate determination, following remand. See Digital
Performance Right in Sound Recordings and Ephemeral Recordings (Final
rule), 75 FR 6097 (Feb. 8, 2010).
The minimum fee for commercial webcasters is an annual,
nonrefundable fee of $500 for each individual channel and each
individual station (including any side channel), subject to an annual
cap of $50,000. The royalty rate for the section 112 license is bundled
with the fee for the section 114 license. There is one additional term
in the stipulation that was not included in the prior determination.
The royalty rate for the section 112 license is deemed to be 5% of the
bundled royalties. No party objected to the stipulation. SoundExchange
presented unopposed evidence to support the minimum fee for commercial
webcasters and the bundled royalty rates. See SoundExchange Proposed
Findings of Fact (SX PFF) at ]] 459-468, 472. These agreed provisions
are supported by the parties and the evidence.
There is no disagreement between SoundExchange and IBS as to the
rates for the section 112 license for noncommercial webcasters. As it
did for commercial webcasters, SoundExchange
[[Page 23105]]
proposed a bundled rate approach for both the section 112 and section
114 rights, allocating 5% of the entire bundled royalty as the section
112 royalty. SX PFF at ] 671. IBS endorsed the proposal. Amplification
of IBS' Restated Rate Proposal, at 2. The testimony offered by
SoundExchange supported this proposal and the Judges adopt it. See,
e.g., Ford WDT at 9-12, 14-15; 4/20/10 Tr. at 434 (Ford); 4/22/10 Tr.
at 729-31 (McCrady); Post-Hearing Responses to Judges' Questions by
Michael D. Pelcovits, at 5 (May 21, 2010).
The issues remaining for the Judges' determination are (i) rates
and terms for commercial webcasters' section 114 licenses and (ii) the
rates and terms--specifically, the minimum fee--for noncommercial
webcasters' section 114 licenses.
III. Rate Structure Under the Section 114 Performance License
The Copyright Act clearly establishes the willing buyer/willing
seller standard for the royalty rates at issue in this proceeding. See
17 U.S.C. 114(f)(2)(B). To establish the level of such rates, the
Judges must first determine the structure of those rates, i.e., the
metric or metrics that willing buyers and sellers likely would have
negotiated in the marketplace.
SoundExchange and Live365 proposed that royalties for the section
114 license be computed pursuant to a per-performance usage structure.
SoundExchange acknowledged, however, that ``[t]he metrics by which most
services pay'' are the ``percentage-of-revenue'' metric or the ``per-
subscriber'' metric--both of which are not fixed rates,'' but rather
are rates that increase the monetary payment ``as subscribers and
revenue increase.'' SX Reply PFF ] 74. However, neither SoundExchange
nor Live365 proposed an alternative to the per-performance rate
structure.
SoundExchange's industry witness noted the ubiquity of rate
structures based on revenues or subscribership. More particularly, W.
Tucker McCrady, Associate Counsel, Digital Legal Affairs at Warner
Music Group acknowledged that ``[i]n the U.S., WMG does not have a
single agreement with an audio streaming service where the payment
amount is based solely on a per-play rate, as is the case with the
statutory license.'' See McCrady WDT at 10. As Mr. McCrady further
explained, the per-play royalty fee is typically combined with a
percentage-of-revenue royalty fee, so that a per-play floor is seen as
sort of a minimum protection for the value of the music,'' whereas,
beyond that minimum, ``a revenue share . . . allows us to share in the
upside . . . .'' 4/22/10 Tr. at 658 (McCrady) (emphasis added).
Live365 introduced as an exhibit in this proceeding the prior
written direct testimony of Dr. Pelcovits in the previous webcasting
proceeding, Digital Performance Right in Sound Recordings and Ephemeral
Recordings, Final rule and order, 72 FR 24084, 24090 (May 1, 2007),
aff'd in relevant part sub nom. Intercollegiate Broad. Sys. v.
Copyright Royalty Bd., 574 F.3d 748 (D.C. Cir. 2009)(Web II), in which
he testified:
Through the percentage-of-revenue, the record companies
ensure that they will receive a share of royalties in the benchmark
interactive market that properly compensates them for their valuable
copyrighted material,
The business justification for the percentage-of-revenue
structure is so compelling it should be adopted as the rate structure
for the statutory license,
Removing the percentage-of-revenue element would unravel
the complex set of factors that affected the negotiations, and
undoubtedly would change the underlying rates, and
There is a good argument that the percentage-of-revenue
rate applied in the interactive market should simply be adopted for the
noninteractive market.
Live365 Tr. Ex. 5, at 28-30.
The parties to the instant proceeding declined to propose rates
based explicitly upon the revenues of webcasters, apparently because
they had concluded that the Judges would reject revenue-based
rates.\17\ The parties thus submitted no evidence as to any alternative
rate structure premised explicitly on the percentage-of-revenue
realized by webcasters.
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\17\ For example, SoundExchange expressly noted that in Web II
both the webcasters and SoundExchange ``proposed rate structures
that included revenue-based elements and usage-based elements [but
t]he Judges . . . concluded that a per-performance usage fee
structure was more appropriate for commercial webcasters, and
rejected revenue-based proposals.'' SX PFF ] 36 (quoting Web II, 72
FR at 24089). Likewise, Dr. Pelcovits indicated that his choice of a
rate structure was constrained by the fact that the Judges in Web II
had ``rejected alternatives such as fees calculated as a percentage
of the buyer's revenue. . . .'' Pelcovits WDT at 6. The Judges note,
however, that the rejection of percentage-of-revenue rate structures
in Web II was based on the evidentiary record in that proceeding and
that Web II explicitly did not establish a per se rejection of such
rate structures. Web II, 72 FR at 24090 (``[The] evidence in the
record weighs in favor of a per-performance usage fee structure. . .
.This does not mean that some revenue-based metric could not be
successfully developed. . . .'').
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Given the limitations of the record developed by the parties, the
Judges defer to the parties' decision to eschew advocacy for such
percentage-of-revenue based fees in this proceeding. 17 U.S.C.
114(f)(2)(B) (``In determining . . . rates and terms the Copyright
Royalty Judges shall base their decision on . . . information presented
by the parties . . . .''). Accordingly, the Judges consider the
relative merits of the competing per-performance rates proposed by the
two contending parties.
The Judges recognize, however, that as a practical and strategic
matter, participants in these proceedings carefully consider prior rate
proceedings as roadmaps to ascertain the structure of the rates they
propose. Mindful of that fact, the Judges wish to emphasize that by
deferring to the present parties' decision to propose only a per-
performance rate structure, the Judges do not per se reject future
consideration of rate structures predicated upon other measurements,
such as a percentage of revenue realized by webcasters.\18\
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\18\ Of course, the Judges' adoption of any rate structure in a
future proceeding would depend upon the evidence and arguments the
participants present, including arguments addressing concerns raised
by the Judges in earlier proceedings. See, e.g., Web II, 72 FR at
24089-90. The Judges' possible future consideration of a percentage-
of-revenue rate structure in a section 114(f)(2)(B) proceeding for
noninteractive webcasting does not suggest that such a structure or
the resulting rates should necessarily be related in any manner to
the structure or level of rates set (pursuant to section 801(b)(1)
for preexisting services identified in section 114(f)(2)(B)).
Determination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings and Ephemeral Recordings, Final rule
and order, 67 FR 45240, 45244 (July 8, 2002)(Web I). Additionally,
although rates might be set pursuant to the same structure under
both statutory provisions, there is no reason why the level of rates
would necessarily be the same.
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IV. Rates for Commercial Webcasters
A. The National Association of Broadcasters/SoundExchange Agreement
Section 801(b)(7)(A) of the Act allows for the adoption of rates
and terms negotiated by ``some or all of the participants in a
proceeding at any time during the proceeding,'' provided they are
submitted to the Copyright Royalty Judges for approval. The Judges must
adopt the settlement after affording all interested parties an
opportunity to comment, unless a participant in the proceeding objects
to it and the Judges determine that the settlement does not provide a
reasonable basis for setting rates and terms.
On June 1, 2009, the National Association of Broadcasters (NAB) and
SoundExchange filed a settlement of all issues between them in this
proceeding, including proposed rates and terms (NAB/SoundExchange
Agreement). Their settlement was one of several WSA agreements that the
Copyright
[[Page 23106]]
Office published in the Federal Register. NAB and SoundExchange filed
their WSA agreement in the instant proceeding and requested that the
Judges adopt the agreed rates and terms for some services of commercial
broadcasters for the period 2011 through 2015. The settlement applies
to statutory webcasting activities of commercial terrestrial
broadcasters, including digital simulcasts of analog broadcasts and
separate digital programming. The settlement includes per-performance
royalty rates, a minimum fee, and reporting requirements.
The Judges published the settlement (with minor modifications \19\)
as proposed regulations in the Federal Register on April 1, 2010, and
provided interested parties an opportunity to comment and object by
April 22, 2010. 75 FR 16377 (Apr. 1, 2010) (publishing NAB/
SoundExchange and CBI/SoundExchange Agreements). The Judges received no
comments or objections; therefore, the provisions of section
801(b)(7)(A)(ii) (permitting the Judges to decline to adopt the
settlement as a basis for statutory rates and terms) are inapplicable.
In the absence of an objection from a party that would be bound by the
proposed rates and terms, the Judges adopt the rates and terms in the
settlement for certain digital transmissions of commercial broadcasters
for the period of 2011-2015. 17 U.S.C. 801(b)(7)(A).
---------------------------------------------------------------------------
\19\ Exercising the right granted in the WSAs, SoundExchange and
NAB provided in their agreement that, unlike the rates and terms
they set for the section 114 licenses, the rates and terms they set
for the ephemeral recording license could not be used as evidence
and would not serve as precedent in any contested rate
determination. The Judges, deeming such language inappropriate to
the purposes of the regulations, declined to include it in the
published regulations. For the same reason, the Judges declined to
accept language in the agreement regarding SoundExchange's
acceptance of a broadcaster's election to be a ``Small Broadcaster''
or the broadcaster's reservation of rights. The Judges also declined
on the same basis to include some of the language of the CBI
agreement.
---------------------------------------------------------------------------
B. All Other Commercial Webcasters
Only two participants--SoundExchange and Live365--presented
evidence relating to public performance royalty rates for commercial
webcasters.
SoundExchange proposed that the section 114 royalty rates for
noninteractive webcasting be established by applying two categories of
benchmarks:
Agreements between SoundExchange and: (a) The NAB; and (b)
Sirius XM Satellite Radio (Sirius XM), both of which established per-
performance royalty rates for the same noninteractive webcaster rights
that are at issue in this proceeding; and
Rates established in a different but purportedly analogous
market--the market for interactive webcasting of digital sound
recordings--adjusted to render them probative of the rates for
noninteractive webcasting.
Relying on these proposed benchmarks, SoundExchange proposed the
following royalty rate schedule:
------------------------------------------------------------------------
Rate per-
Year performance
------------------------------------------------------------------------
2011.................................................... $0.0021
2012.................................................... 0.0023
2013.................................................... 0.0025
2014.................................................... 0.0027
2015.................................................... 0.0029
------------------------------------------------------------------------
SX PFF ] 11.
Live365 proposed that commercial webcasters pay $0.0009 per
performance throughout the entire period 2011-2015. Live365 PFF ] 170.
In addition, Live365 sought a 20% discount on its proposed per-
performance rate for ``Internet radio aggregators,'' such as itself, to
account for the alleged value to copyright owners of their provision of
certain specified ``aggregation services.'' Live365 PFF ] 193.
Live365's proposed rate is not premised upon any benchmarks. Its
economic expert, Dr. Mark Fratrik, stated that he was ``not aware of
comparable, voluntary license agreements that would serve as an
appropriate benchmark for an industry-wide rate.'' Fratrik Corrected
and Amended WDT at 7 [hereinafter, Fratrik WDT].\20\
---------------------------------------------------------------------------
\20\ Throughout this determination, the Judges will employ
abbreviations that they have used in past determinations, e.g.,
``WDT'' for the last version of the witness's Written Direct
Testimony; ``WRT'' for Written Rebuttal Testimony; ``Tr.'' for
hearing transcripts; ``PFF'' for Proposed Findings of Fact, etc.
---------------------------------------------------------------------------
Rather, Live365 proposed a unique model by which:
Revenues are estimated for a supposedly ``representative''
webcaster;
All costs--except for the royalty fees to be determined--
are estimated for a ``representative'' webcaster; and
Royalty fees are established, on a per-performance basis,
at a level which assures the ``representative'' webcaster a 20%
operating margin, i.e., a 20% profit.
1. The Live365 Rate Proposal
As discussed above, Live365 proposed a single constant rate of
$0.0009 for each year of the 2011-2015 rate period. This proposed rate
was supported by Dr. Fratrik's written and oral testimony.
With regard to the fundamentals of the hypothetical market, Dr.
Fratrik first assumed, correctly, that the ``underlying product''
consisted of ``blanket licenses for each record company which allows
use of that record company's complete repertoire of sound recordings.''
Fratrik WDT at 8. Next, he properly assumed that the rates must be
those that would be negotiated between a willing buyer and a willing
seller. Fratrik WDT at 4.
With regard to the market participants, Dr. Fratrik properly
identified the hypothetical ``willing buyers'' to be the webcasting
services that operated under the statutory license.'' Id. at 8. He also
properly identified the ``hypothetical willing sellers'' as the several
record companies. Id.
To determine the statutory rate, Dr. Fratrik attempted to determine
the appropriate license rate based upon an examination of the ``revenue
and cost structure of a mature webcaster--in this case, Live365.'' Id.
at 4.
For assumed revenues, Dr. Fratrik utilized in his model ``publicly
available industry data on webcasting revenues.'' Id. These revenue
figures were not historical data, but rather ``estimates of revenues
recognizing the changing marketplace.'' Id. at 10. More particularly,
Dr. Fratrik relied upon ``[p]ublicly available industry reports from
Accustream and ZenithOptimedia [to] serve as lower and upper bounds,
respectively, on advertising revenue measurements for the past
period.'' Id. at 16. Although webcaster revenue came from two sources,
subscriptions and advertising, the only data available to Dr. Fratrik,
and the only data he used, were advertising revenues. Id. at 16-17.
For assumed costs, Dr. Fratrik utilized the ``operating costs''
from Live365. Id. at 5. Given the mechanics of his model, the costs he
included were ``all of the operating costs except for the royalty rates
to be paid to the copyright owners.'' Id. (emphasis added). The royalty
cost is omitted because it is the ``unknown'' that Dr. Fratrik's
analysis is designed to determine. Dr. Fratrik chose to utilize the
costs incurred by Live365 because, in his opinion, ``Live365 is a
representative webcaster with respect to its operating costs . . . and
will serve as a good conservative proxy for the industry as it is a
mature operator.'' Id. at 16.
With regard to the difference between revenues and costs, i.e.,
profits, Dr. Fratrik assumed that ``a Commercial webcaster is entitled
to a reasonable profit margin.'' Id. at 17 (emphasis added).
Accordingly, Dr. Fratrik
[[Page 23107]]
attempted to identify a ``fair operating margin (measured as a
percentage of revenues)'' for a hypothetical webcaster. Id. at 5. Dr.
Fratrik's proposal fails to create a royalty rate framework that can
satisfy the statutory criteria viz., rates that would have been
negotiated in the marketplace between a willing buyer and a willing
seller; the Judges cannot adopt it.
a. Dr. Fratrik's Misapplication of a Public Utility-Style Rate-Setting
Process in the Present ``Willing Buyer/Willing Seller'' Statutory
Context
Dr. Fratrik's methodology mimics the methodology by which
government agencies or commissions set rates for public utilities or
other regulated natural monopolies. There is no basis in the Act or in
economic theory to support the use of this paradigm to establish
royalty rates for the licensing of sound recordings by noninteractive
webcasters.
A fundamental defect in this reasoning is Dr. Fratrik's requirement
that the statutory royalty rate must provide for a fixed ``profit
margin'' for webcasters. See 4/27/10 Tr. at 1138 (Fratrik) (``I believe
the 20 percent rate is what they would strive to get and have to
get.'') (emphasis added). Dr. Fratrik does not provide any evidentiary
support for the assumption that the record companies, i.e., the willing
sellers in the hypothetical marketplace, would accept (or be compelled
to accept) a royalty rate simply because it allowed buyers to realize a
predetermined level of revenue as profits. Further, Dr. Fratrik does
not provide any evidentiary support for his assumption that the buyers,
i.e., the webcasters, would require a royalty rate low enough to
maintain a predetermined 20% profit margin or otherwise be driven out
of the marketplace. See 4/27/10 Tr. at 1166-67 (Fratrik) (Dr. Fratrik
unaware of any webcasters earning 20% operating margin).
Not only does Dr. Fratrik's methodology lack evidentiary support,
it has embedded within it a perverse incentive structure. Dr. Fratrik's
methodology would cause the royalty rates to be a function not only of
the revenues of the webcasters, but also a function of: (i) The other
(non-royalty) operating costs incurred by the webcasters; and (ii) the
guaranteed profit (20% according to Dr. Fratrik) after inclusion of the
(to be determined) royalty costs. This fundamental flaw in Dr.
Fratrik's methodology can be demonstrated algebraically as follows:
Dr. Fratrik's requirement of a 20% operating profit for webcasters
can be expressed as:
TOTAL PROFIT = TOTAL REVENUE (TR) - TOTAL COST (TC) = 0.2(TR)
Dr. Fratrik dichotomizes costs into royalty costs (i.e., the
unknown to be determined) and all other operating costs, which can
be expressed as:
TC = Royalty Costs (rc) + All Other Operating Costs (oc)
So,
TR - rc - c = 0.2(TR)
Subtracting 0.2(TR) from both sides of the equation results in
the following:
0.8(TR) - rc--oc = 0
Adding rc to both sides of the equation results in the
following:
0.8(TR) - oc = rc
For presentation purposes, the above equation can be set forth
in reverse as:
rc = 0.8(TR) - oc
This presentation makes plain that in Dr. Fratrik's model the
royalty rate would be a function of: (i) The revenues of the webcaster
(TR); and (ii) all other webcaster costs (oc). Egregiously, the
relationship between the royalty rate and all other costs incurred by
the webcaster (oc) would be inverse, i.e., as all other costs (oc)
increased, the section 114 royalty rate would decrease.
Thus, a webcaster would have no incentive to minimize or otherwise
reduce all other operating costs, because higher operating costs would
result in a lower royalty paid to owners/compulsory licensors of sound
recordings. Such a result would be perverse: The royalty revenue
realized by the owners/licensors would be subject to the cost-
minimization successes or failures of the webcasters under a formula by
which the latter had no incentive to minimize costs.\21\
---------------------------------------------------------------------------
\21\ If webcasters operating under Dr. Fratrik's methodology did
minimize or otherwise reduce all other operating costs, then, in
order to prevent an increase in their pre-established profit margin,
the royalty rate would need to increase. However, given that the Act
requires these rates to be fixed for five years, the webcaster could
reduce or minimize all other operating costs and simply pocket the
profit, increasing their profit percentage above the level set by
the Judges.
---------------------------------------------------------------------------
As previously noted, Dr. Fratrik's methodology mimics the setting
of public utility rates for natural monopolies. In that setting, the
``unknown'' variable is the rate to be charged to the end-user, which,
when multiplied by the number of units of the service sold, establishes
the revenue received by the seller. What can be ``known'' (i.e.,
determined via such public utility-style hearings) are: (i) The
reasonable costs incurred by the utility; and (ii) the fair rate of
return to which the utility is deemed entitled by consideration of
appropriate marketplace returns on capital. See generally Charles F.
Phillips, Jr., The Regulation of Public Utilities: Theory and Practice
169 (2d ed. 1988).
In the present proceeding, the ``unknown'' is different, but the
proposed methodology is similar. What is ``unknown'' is one element of
total costs, i.e., the royalty fee. The revenues received by the sale
to the end-users (i.e., the provision of the listening experience to
consumers) is known (or estimated), whether as a function of
advertising revenues, subscriptions, or both. Here, as in classic rate
regulation, the percentage to be realized as a rate of return (profit)
likewise is known or discovered (as Dr. Fratrik purported to have
``discovered'' the 20% return by his examination of the assertedly
analogous terrestrial radio marketplace).
The foregoing analysis crystalizes a fundamental problem in Dr.
Fratrik's analysis: Rate-setting proceedings under section 114 of the
Act are not the same as public utility rate proceedings. The Act
instructs the Judges to use the willing buyer/willing seller construct,
assuming no statutory license. The Judges are not to identify the
buyers' reasonable other (non-royalty) costs and decide upon a level of
return (normal profit) sufficient to attract capital to the buyers.
Moreover, Dr. Fratrik's methodology attempts to graft a public
utility style rate--designed to regulate a natural monopoly--onto a
rate-setting scheme in which he properly acknowledges the existence of
a multitude of buyers, whose costs are critical to his analysis. Public
utility-style rate-setting procedures are designed to consider the
costs and potential returns to a monopoly seller, not the costs or
potential returns of numerous buyers.
Not only does Dr. Fratrik's methodology improperly apply the public
utility style rate-setting process, it ignores and thus exacerbates a
particularly thorny issue in such rate regulation. Regulators of
natural monopolies such as public utilities must ascertain the actual
operating costs of the monopolist, and disallow inappropriate costs
from entering the ``rate base.'' This undertaking is very difficult.
See generally Richard Posner, Economic Analysis of Law 367 (6th ed.
2003) (``The regulatory agency's success in monitoring the regulated
firm's costs will inevitably be uneven.''); Paul Krugman & Robin Wells,
Microeconomics 374 (2d ed. 2009) (``[R]egulated monopolies . . . tend
to exaggerate costs to regulators . . . .'').
Here, Dr. Fratrik relies upon only Live365's particular cost data,
rather
[[Page 23108]]
than any industry-wide cost data, without providing any evidence that
Live365's cost structure is representative of the industry. SX PFF ]]
312-322. Further, there is no breakdown by Dr. Fratrik of those other
operating costs incurred by Live365 that would ensure that his de facto
rate base includes only appropriate categories of costs incurred at
minimally efficient levels.
To the extent Live365 is not sufficiently representative of all
webcasters (or representative at all of other webcasters), Dr.
Fratrik's methodology would yield an inaccurate royalty rate. On a more
general level, to the extent the cost structure of any given webcaster
is not representative of the industry writ large, Dr. Fratrik's
methodology is hopelessly impractical. To utilize rate-of-return style
regulation in a competitive industry such as webcasting would require
information regarding the cost structures of thousands of buyers of
sound recordings.
This defect in Dr. Fratrik's methodology was made plain during his
cross-examination. For example, Dr. Fratrik admitted that if other
royalties (such as for musical works paid by Live365 to Performing
Rights Organizations) were to increase, then, ceteris paribus, under
his methodology the royalties paid to SoundExchange for sound
recordings would decrease. 4/27/10 Tr. at 1127 (Fratrik). This
relationship, as Dr. Fratrik also admitted, existed with regard to all
costs (other than sound recording performance royalties) incurred by a
webcaster. Pursuant to his methodology, for example, a webcaster's
staff wages, payments to advertising agencies, and payment to bandwidth
suppliers could all depress the sound recording royalty. Id. at 1125
(Fratrik). Thus, Dr. Fratrik was compelled during cross-examination to
conclude:
Q: Okay. So basically the way you modeled this out, if anybody
else who supplies an input to Live [365] raises their price, the
result is going to be your suggested royalty rate goes down, right?
A: Assuming all the other factors remain constant.
Id. at 1127-28.
The Judges conclude that two glaring and fatal defects in Dr.
Fratrik's methodology are: (i) Its ill-conceived attempt to utilize the
public utility style ratemaking construct in this ``willing buyer/
willing seller'' context; and (ii) its reliance upon an inverse
relationship between the sound recording royalty rate and all other
operating costs incurred by webcasters.\22\ Thus, while (in the
interest of completeness) the following section discusses details of
the methodology proposed by Dr. Fratrik, the Judges' rejection of his
overall rate structure alone constitutes a sufficient basis to reject
Live365's proposed rate.
---------------------------------------------------------------------------
\22\ The Judges distinguish Dr. Fratrik's methodology from a
structure that would be based upon the percentage-of -revenue
realized by a webcaster, without regard to the webcaster's other
costs. If Dr. Fratrik's methodology had simply made the royalty rate
a function of webcaster revenue, the methodology would have relied
upon a positive (i.e., direct) relationship--as revenues received by
webcasters increased, royalty rates would also increase. Such a
methodology would constitute a percentage-of-revenue royalty rate,
which (as noted supra) was rejected on evidentiary bases in
Determination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings and Ephemeral Recordings, Final rule
and order, 67 FR 45240 (July 8, 2002)(Web I) and Web II, yet (as
also noted supra) was not foreclosed by either of those decisions as
a potential future basis for determining rates in a section 114
proceeding.
---------------------------------------------------------------------------
b. The Specific Elements of Dr. Fratrik's Model and His Proposed Rates
As summarized below, even assuming, arguendo, that the Live365
model had been acceptable in theory to the Judges, the inputs in that
model--costs, revenues and profit margin--failed to establish a
credible ``marketplace'' rate under the ``willing buyer/willing
seller'' standard.
(1) Costs
Dr. Fratrik assumed that Live365's cost structure would serve as a
good conservative proxy for the industry as it is a mature operator.
Fratrik WDT at 16. This assumption is unsupported by the evidence,
which revealed an array of existing webcasting services and business
models. SX PFF at ] 323.
Moreover, it would be unreasonable for the Judges to conclude, as
Live365 urged, that these many disparate business models might be
experiencing essentially the same unit costs. Indeed, Dr. Fratrik
conceded that even Live365 has two separate business lines,
``broadcasting'' services \23\ and webcasting and, further, that
Live365 also acts as an aggregator with respect to webcasting. Dr.
Fratrik offered no example of a comparable participant in the industry
that is structured in this manner. Further, Dr. Fratrik failed in his
attempt to adjust Live365's costs to isolate only webcasting
operations, because he failed to address the synergistic nature of
Live365's various lines of business. SX PFF at ]] 355, 357, 358.
---------------------------------------------------------------------------
\23\ Live365 refers to the services it provides to webcasters as
``broadcasting'' services, in an Orwellian (and unsuccessful)
attempt to distinguish its principal webcasting business from its
ancillary webcasting support services.
---------------------------------------------------------------------------
(2) Revenues
The revenue side of Dr. Fratrik's analysis suffers from infirmities
as well. Most importantly, Dr. Fratrik admitted that the advertising
revenue estimates (from ZenithOptimedia and Accustream) upon which he
relied were ``challenging'' because many webcasters do not report their
revenues publicly. 4/27/10 Tr. at 1220 (Fratrik). The limitations of
these databases diminished the credibility of the analyses that
depended upon them.
That analysis is apparently based only on Dr. Fratrik's analysis of
revenues using the data Dr. Fratrik found to constitute his ``upper
bound,'' derived from ZenithOptimedia data. In an attempt to avoid the
acknowledged problems with these data, Dr. Fratrik attempted to mix and
match his several revenue data sources. To further muddy the
statistical waters and compromise his analysis, Dr. Fratrik added to
the ``upper bound'' and ``lower bound'' of his combined data sets a
third separate source--Live365's own subscription revenue data. This
further admixture only underscores the lack of rigor and persuasiveness
in the Live365 analysis.\24\
---------------------------------------------------------------------------
\24\ Dr. Fratrik's analysis also makes certain assertions
regarding future growth--or lack of future growth--in the webcasting
industry. The Judges note that predictions by witnesses as to future
industry growth are highly speculative--economists are not oracles
and ergodicity should not be assumed--past growth (or decline) is
not necessarily indicative of future trends. See generally John
Maynard Keynes, The General Theory of Employment, Interest and Money
97 (1936) (``Our knowledge of the factors which will govern the
yield of an investment some years hence is usually very slight and
often negligible. . . . If we speak frankly, we have to admit that
our basis of knowledge for estimating . . . amounts to little and
sometimes to nothing . . . even five years hence.) (emphasis added).
The instant dispute makes the point well because the economy was in
recession in all of 2008 and economic activity overall remained
depressed throughout 2009, causing a reduction in the revenues
received by many businesses throughout the United States and the
world. That decline does not necessarily foretell a trend in a
particular industry, including the markets for interactive and
noninteractive sound recording licenses.
---------------------------------------------------------------------------
(3) Profit Margin
Dr. Fratrik has not provided adequate support for the assumption of
a 20% operating margin for webcasters in his analysis. That operating
profit margin was not put forward as either a historical profit margin
(or a forecasted profit margin) for webcasters. Indeed, Dr. Fratrik
conceded that he had no ``evidence that actual webcasters'' would
require a 20% operating margin, and that he was not aware of any
[[Page 23109]]
webcaster currently earning a 20% margin. 4/27/10 Tr. at 1166-67
(Fratrik).
Rather, Dr. Fratrik's 20% figure was derived from the profit
margins reported by the over-the-air (a/k/a terrestrial) radio
broadcasting industry. SX PFF at ]] 328, 330. However, the record of
evidence in this proceeding does not support the notion that profit
margins for webcasters are likely to be similar to the more capital
intensive terrestrial radio industry. SX PFF at ]] 332-335. In fact,
Dr. Fratrik admitted that the terrestrial radio industry requires much
higher capital costs than webcasting, and that the barriers to entry
are higher for terrestrial radio than for webcasting. 4/27/10 Tr. at
1168-72 (Fratrik); see also SoundExchange rebuttal testimony of Dr.
Janusz Ordover, WRT at 3 (``Dr. Fratrik's selection of a minimum
expected margin of 20% is based on margins earned by terrestrial radio
broadcasters, who operate in a market with higher fixed capital and
other costs and therefore do not provide a useful benchmark from which
to determine a reasonable operating margin.'').
In fact, when choosing the 20% figure, Dr. Fratrik did not even
look at the returns earned by any other digital business, which are
lower than 5%. 4/27/10 Tr. at 1173-74 (Fratrik). Likewise, if Dr.
Fratrik had considered the operating margins of record companies, he
would have had to reconcile the fact that they too had operating
margins of approximately 5% or less. 4/27/10 Tr. at 1175-76 (Fratrik).
c. Live365's Proposed Aggregator Discount
Live365 seeks a further 20% discount applicable to the commercial
webcasting per-performance rate for certain ``qualified webcast
aggregation services'' that operate a network of at least 100
independently operated ``aggregated webcasters'' that individually
``stream less than 100,000 ATH per month of royalty-bearing
performances.'' Rate Proposal For Live365, Inc., Appendix A, Proposed
Regulations at Sec. 380.2 and Sec. 380.3(a)(2). This ``discount''
proposal may be more properly understood as a proposed term rather than
an additional rate proposal. It is conditional; that is, it is
applicable only to the extent that certain defined conditions are met
(e.g., minimum number of 100 aggregated webcasters and each individual
aggregated webcaster streaming less than 100,000 ATH per month). It
proposes to establish a mechanism whereby a group of commercial
webcasters under certain qualifying conditions may utilize a ``webcast
aggregation service'' to aggregate their monitoring and reporting
functions. Rate Proposal for Live365, Inc., Appendix A, Proposed
Regulations at Sec. 380.2(m). Monitoring and reporting are compliance-
related functions that are currently required of all individual
webcaster licensees.
The Judges discern no theory and no evidence that would support an
adoption of the so-called ``aggregator discount'' as a separate rate or
as a separate term. Live365 submitted the testimony of Mr. Floater in
support of the ``aggregator discount.'' He testified that the asserted
benefits of an aggregation service flow to the individual webcasters
who contract to use that service. As Mr. Floater asserted, the
aggregator offers ``a streaming architecture that can aggregate tens of
thousands of individual webcasters'' and provides individual webcasters
with ``broadcast tools and services [that] contain costs. . . .''
Floater Corrected WDT at 11-14. Dr. Fratrik provided further testimony
regarding these aggregation services, noting that they consisted of
collecting and compiling ``all of the necessary documentation of the
copyrighted works that are streamed and the number of total listening
levels for each of these copyrighted works.'' Fratrik WDT at 38.
The Judges construe these ``aggregator services'' as benefits that
individual webcasters receive pursuant to their contracts with an
aggregator--such as Live365. Apparently, through certain economies of
scale or otherwise, Live365 can provide these services at a lower cost
per webcaster than the cost each webcaster would incur if it assumed
the duties individually. That is a real economic benefit to the
individual webcasters. In turn, Live365 can realize a profit from the
fees it charges webcasters for these aggregation services, after
Live365 incurs the costs of providing the aggregation services. Thus,
the webcasters are enriched by the difference between the higher cost
of providing these services individually and the contract rate they pay
to Live365, and Live365 is enriched by the difference between the fee
it charges the individual webcasters and the cost of providing the
aggregation services.
Thus, the economic benefits of these aggregation transactions have
already been accounted for in the private market through these
contracts. Accordingly, the benefits and burdens of the services have
already been addressed privately, and it would constitute a double-
counting if the Judges were to reduce the rate paid by aggregators and
received by the copyright owners.
Live365 contended that the discount is appropriate because
copyright owners receive a benefit from the aggregation of these
services. However, the copyright owners are not parties to the
aggregation contracts between Live365 (or any aggregator) and the
webcasters. To the extent there are external benefits arising from
those agreements that inure to copyright owners, they are no different
than any form of benefits that inure to third parties from the
contractual arrangements of other parties. The Judges cannot compel
such third parties to incur a cost in exchange for such unsolicited
benefits.
This point relates to yet another basis to deny to Live365 a
reduced royalty rate in exchange for its provision of aggregation
services. Under the Act, royalty payments unambiguously are to be
established and paid for ``public performances of sound recordings. . .
.'' 17 U.S.C. 114(f)(2)(A). The aggregation services provided by
Live365 are not themselves ``public performances of sound recordings,''
but rather are services that are complementary to the provision of
``public performances of sound recordings.'' Live365 is improperly
attempting to characterize a distinct complementary service as an
essential element of utility bundled into the ``public performance of
sound recordings.'' The complementary--as opposed to bundled--nature of
the service is underscored by the separate fee received by Live365 from
the webcasters who voluntarily choose to utilize that service.
Further, since these aggregation services are not themselves
``public performances of sound recordings,'' the rationale for the
statutory license is not triggered. The rationale for the statutory
license is to cure the perceived market failure that may arise if
multiple webcasters were required to negotiate for individual licenses
for a multitude of recordings from the various copyright owners. That
rationale does not present itself with respect to the aggregation
services--and certainly, Live365 has not presented any evidence to that
effect. Alternately stated, if an aggregator desired to internalize the
benefit its services provided to the record companies, the aggregator
could attempt to enter into voluntary contracts with the record
companies. There is no market failure or other issue that would
preclude or impede such negotiations and contracts. Of course, since
Live365 indicated that copyright owners already receive these benefits
as a concomitant to the services provided to the webcasters, there is
no incentive for a copyright owner to pay for those benefits. (That is
the economic nature of a positive externality.)
In sum, Live365 has asked the Judges to provide aggregators with
[[Page 23110]]
remuneration from the copyright owners that is both unavailable under
the statute and that Live365 was unable to procure in the private
marketplace. The Judges decline to do so.
d. Conclusions Regarding the Live365 Proposal Based on Dr. Fratrik's
Model
For the foregoing reasons, the Judges decline to utilize Live365's
proposed rate structure or rates to set the rates for the 2011-2015
rate period or establish a zone of reasonableness within which to set
the rates.
Live365 contends that the rates for the 2011-2015 term should be
set at a level below the 2010 rates to reflect certain factors
identified in section 114(f)(2)(B)(i) and (ii) of the Act.\25\ However,
as a general principle, espoused in both Web II and Web I, and absent
evidence to the contrary, these statutory considerations are deemed to
have been addressed implicitly within the participant's proposed rate
structure. See Web II, 72 FR at 24095; Web I, 67 FR at 45244. Live365
proffered no evidence to support another conclusion.
---------------------------------------------------------------------------
\25\ These factors are: (i) The promotional or substitution
effects of the use of webcasting services by the public on the sales
of phonorecords or other effects of the use of webcasting that may
interfere with or enhance the sound recording copyright owner's
other streams of revenue from its sound recordings; and (ii) the
relative contributions made by the copyright owner and the
webcasting service with respect to creativity, technology, capital
investment, cost, and risk in bringing the copyrighted work and the
service to the public.
---------------------------------------------------------------------------
In the present case, given the Judges' rejection of the Live365
rate structure and proposed rates, they have no basis to depart from
this general principle. Moreover, Live365 provides only a qualitative
argument for its proposed downward adjustments, rather than a
quantitative basis for a reduction below the 2010 rates. Further, even
if qualitative arguments were sufficient in this regard, Live365 has
not established such a basis for a decrease in webcaster royalty rates.
2. The SoundExchange Rate Proposal
a. Zone of Reasonableness
SoundExchange sought to demonstrate that its proposed rates were
within a zone of reasonableness delineated by its economic expert
witness, Dr. Michael Pelcovits. He constructed his zone of
reasonableness based upon the following assumptions:
The rates are intended to be those that would have been
negotiated in the marketplace between a willing buyer and a willing
seller;
The rates are intended to replicate those that would have
been negotiated in a hypothetical marketplace;
The hypothetical marketplace is one in which no statutory
license exists;
The buyers in this hypothetical marketplace are the
statutory webcasting services;
The sellers in this hypothetical marketplace are record
companies;
The products sold consist of a blanket license for each
record company's complete repertoire of sound recordings;
A per-performance usage fee structure was adopted, rather
than a fee structure based upon a percentage of the buyer's revenue, a
per-subscriber fee or a flat fee.\26\
---------------------------------------------------------------------------
\26\ Dr. Pelcovits did not opine that a percentage-of-revenue-
based fee or any other type of fee structure was economically
improper. Rather, he indicated that he believed the ``per-
performance approach'' constituted ``precedent'' established in Web
II, and therefore he did ``not attempt to independently examine the
merits of different rate structures.'' Pelcovits WDT at 6. As noted
supra, however, Web II did not create such a precedent, but rather
noted that the parties' failure of proofs regarding a proposed
percentage-of-revenue fee structure ``does not mean that some
revenue-based metric could not be successfully developed'' for use
in a future proceeding under section 114. Web II, 72 FR at 24090.
Nonetheless, even though he was mistaken in that regard, Dr.
Pelcovits relied on that belief as to precedent by declining to
consider a percent-of-revenue rate structure, or any other rate
structure. Thus, the Judges can consider only his per-performance
rate structure, and contrast it with Dr. Fratrik's methodology.
---------------------------------------------------------------------------
The Judges conclude that these general assumptions by Dr. Pelcovits
are appropriate when determining the zone of reasonableness within
which the statutory rates may be set.
b. Benchmark Analysis
Dr. Pelcovits utilized a ``benchmark'' approach, i.e., an attempt
to establish rates by comparing, and as appropriate adjusting, rates
set forth in other agreements that he concluded were sufficiently
comparable. Dr. Pelcovits's overall benchmark approach to establishing
a rate structure is consistent with both Web I and Web II. Further, the
Act itself authorizes the Judges to utilize a benchmark analysis: ``In
establishing such rates and terms, the Copyright Royalty Judges may
consider the rates and terms for comparable types of digital audio
transmission services and comparable circumstances under voluntary
license agreements described in subparagraph (A).'' 17 U.S.C.
114(f)(2)(B).
The Judges, therefore, agree that it is appropriate to rely on
benchmarks to establish rates in this section 114 proceeding.\27\
---------------------------------------------------------------------------
\27\ The appropriateness of the benchmark method of analysis was
called into question by Live365 through the rebuttal expert economic
testimony of Dr. Michael Salinger, who described the benchmark
approach as a ``shortcut,'' used ``because it is convenient, not
because it is correct.'' Salinger WRT at 12-13.
---------------------------------------------------------------------------
Dr. Pelcovits identified the following two categories of
benchmarks:
The then-contemporaneous license fees for statutory
webcasting services that had been negotiated in two separate
agreements under the WSA between SoundExchange and two groups of
broadcasters: terrestrial (over-the-air) broadcasters represented by
the NAB and Sirius XM;
The then-contemporaneous license fees that had been
negotiated between buyers and sellers in the market for interactive,
on-demand digital audio transmissions.
Pelcovits WDT at 2.
The WSA Agreements relied upon by Dr. Pelcovits are such voluntary
agreements. Thus, the Judges may rely upon those agreements as
benchmarks, assuming the Judges find them to be sufficiently
comparable, perhaps after any appropriate adjustments.
The agreements between buyers and sellers in the interactive market
are not expressly identified under the Act as agreements upon which the
Judges may rely as benchmarks in a proceeding under section 114.
However, nothing in the Act suggests that it would be improper for the
Judges to consider those agreements as potential evidentiary
benchmarks, or as some other form of probative evidence. In this
regard, the Act clearly does not constrain the Judges from considering
any economic evidence (apart from non-precedential WSA agreements) that
they conclude would be probative of the rate that would be established
between willing buyers and willing sellers in the hypothetical
marketplace--regardless of whether that evidence relates to a market
other than the market for licenses of sound recordings by
webcasters.\28\
---------------------------------------------------------------------------
\28\ A wide array of potentially comparable markets can and
should be considered by the Judges, including those with comparable
economic characteristics. For example, a market in which copies of
goods can be reproduced at zero marginal cost may provide relevant
economic evidence (even if it is not a market for sound recordings),
whereas, for example, a market for ancillary reporting services that
benefits buyers and sellers of sound recording licenses (such as
Live365's aggregator services discussed infra) may be economically
quite distinct even though it relates to the same parties and
licenses.
---------------------------------------------------------------------------
Thus, the Judges conclude that it was proper for Dr. Pelcovits to
use benchmark analyses in attempting to establish the zone of
reasonableness for rates in this proceeding.\29\
---------------------------------------------------------------------------
\29\ Dr. Pelcovits's use of benchmarks in principle, discussed
in this section, is a separate issue from the issues of whether the
particular benchmarks he applied were appropriate, whether his
adjustments to those benchmarks were correct or whether other
adjustments may be required.
---------------------------------------------------------------------------
[[Page 23111]]
(1) SoundExchange's First Proposed Benchmark: The WSA Agreements
The first benchmark category relied upon by Dr. Pelcovits is
comprised of two multi-year agreements that had recently been entered
into between SoundExchange and two entities: (i) The NAB, covering
webcasting by over-the-air (terrestrial) radio stations; and (ii)
Sirius XM, covering webcasting of the music channels broadcast on
satellite radio. Each of these agreements was entered into in 2009
pursuant to the WSA and each established royalty rates for the period
2011 through 2015. Together, these two agreements cover webcasters that
paid more than 50% of the webcasting royalties received by
SoundExchange in 2008. Pelcovits WDT at 14.
Both the NAB and Sirius XM agreements set royalty rates on a per-
performance basis. The rates established by those agreements for the
license term under consideration by the Judges are set forth below.
------------------------------------------------------------------------
NAB Sirius XM
Year Agreement Agreement
------------------------------------------------------------------------
2011............................................ $0.0017 $0.0018
2012............................................ $0.0020 $0.0020
2013............................................ $0.0022 $0.0021
2014............................................ $0.0023 $0.0022
2015............................................ $0.0025 $0.0024
------------------------------------------------------------------------
Id. Dr. Pelcovits found these agreements to be ``useful to understand
the bargaining range over which buyers and sellers would negotiate in
the hypothetical market for statutory webcasting.'' Id. at 15.
The Judges agree for the following reasons:
The rights being sold were precisely the rights at
issue in this proceeding;
The buyers (with the broadcasters represented as a
group by the NAB) share characteristics with the buyers in the
hypothetical market at issue in this case, but are not identical in
all respects;
The sellers are the same copyright owners whose
copyrights are at issue in this case, albeit represented by
SoundExchange;
The copyrights will be used for statutory webcasting
services; and
The agreements were contemporaneous with the time at
which the hearing in this proceeding was conducted.
The Judges find that additional reasons support the use of the WSA
Agreements as benchmarks in this proceeding.
First, no later than September 2009, ``404 entities had opted into
the NAB Agreement on behalf of several thousand individual stations.''
Kessler WDT at 21. Of those broadcasters, approximately 100 were start-
ups, reporting their first instance of webcasting after the execution
of the NAB Agreement. Ordover WRT at 18. Thus, the rates contained in
the NAB Agreement clearly were acceptable to a large number of
webcasters.
Second, in similar fashion, as of September 2009, several
commercial webcasters opted into the Sirius XM Agreement. See Live365
Trial Ex. 25 at 18. The fact that these webcasters, who did not
participate in the negotiations, nonetheless adopted the terms of the
agreement is evidence that the negotiated rates and terms were
reasonable and acceptable to the webcasters.
Third, it is noteworthy that the webcasters who have entered into
the NAB Agreement are almost entirely dependent on advertising rather
than subscription revenue. 4/20/10 Tr. at 283 (Pelcovits). This fact
tends to address the concern raised by Dr. Michael Salinger, the
economic expert testifying on rebuttal for Live365, that Dr.
Pelcovits's interactive services benchmark analysis had failed to
consider webcasters that were dependent primarily on advertising
revenue.
Live365 raised a number of criticisms that it argued diminished the
value of these WSA Agreements as benchmarks. The Judges address here
each of Live365's questions.
(a) Were the rates in the WSA agreements increased in exchange for the
revised lower rates for 2009 and 2010 that were agreed to by the
parties to the WSA agreements?
Live365 alleged that the 2011-2015 rates in the WSA agreements are
higher than they otherwise would be because SoundExchange acquiesced to
a lowering of the already existing 2009 and 2010 statutory rates for
the NAB and Sirius XM. Dr. Salinger surmised that SoundExchange must
have bargained for some form of quid pro quo in the 2011-2015 rate
structure in exchange for a reduction in the rates already established
for 2009 and 2010. Salinger WRT at ]] 55-56. Live365 presented no
evidence of such a bargain, however.
On the other hand, Dr. Pelcovits opined that SoundExchange's
reduction of the 2009 and 2010 rates, as permitted under the WSAs, was
analogous to a ``signing bonus''--offered to induce the NAB and Sirius
XM to settle early. That assertion, too, raised a factual question
rather than an issue that required expert economic testimony.
SoundExchange likewise did not proffer testimony or any other evidence
to identify the benefit that SoundExchange received by reducing the
statutory 2009 and 2010 webcasting rates.
Neither Dr. Salinger nor Dr. Pelcovits proffered any empirical
evidence to support their respective hypotheses as to the relationship,
vel non, between the reduction in the 2009-2010 rates and the rates for
2011-2015 in the WSA agreements. Neither did the respective parties
proffer testimony from their other witnesses that would shed light upon
the negotiating strategies of the parties as they related to this
issue.
In the absence of such factual or economic evidence, the Judges
cannot reach any conclusion regarding the relationship between the
reduction of the 2009 and 2010 webcasting rates and establishment of
the voluntary rates for 2011-2015 in the WSA agreements. Accordingly,
the reduction in the 2009 and 2010 rates charged by SoundExchange to
the NAB and Sirius XM cannot serve to diminish the value of the rates
in the WSA Agreements as benchmarks in this proceeding.
(b) Does the grant by the four major record companies to the NAB of a
waiver of the ``Sound Recording Performance Complement'' rules diminish
the probative value of the NAB agreement as a benchmark?
Live365 asserts that the waiver by the four major record companies
\30\ of the ``sound recording performance complement'' for the benefit
of the NAB in its WSA Agreement undermines the value of those rates as
benchmarks. It is correct that, contemporaneous with entering into its
WSA Agreement with SoundExchange, the NAB negotiated ``performance
complement waivers'' with each of the major record companies. Pelcovits
WDT at 20 n.21. These waivers allowed the NAB broadcasters to simulcast
their broadcasts on the Internet even though the number of plays by an
artist or from an album might exceed the allowable levels under section
114(j)(13) of the Act.\31\ Live365, through its economic expert, Dr.
Fratrik, opined that the waiver of the ``performance complement''
provided additional value to the NAB broadcasters, a value that must be
bundled implicitly into the purported benchmark per-performance rates
contained in the NAB/SoundExchange Agreement. Dr. Fratrik opined that
if the terrestrial broadcasters
[[Page 23112]]
covered by the NAB/SoundExchange Agreement had been bound by the
``performance complement,'' they would have been required to modify
their webcasts, as opposed to simply simulcasting their terrestrial
broadcasts. Fratrik WDT at 43-44.
---------------------------------------------------------------------------
\30\ As of the date of this Determination on remand, there are
three major record labels, following the merger of EMI and Sony.
\31\ In their role as terrestrial broadcasters, the NAB
broadcasters were not bound by the ``performance complement,'' but
in their role as webcasters they would have been subject to the
restriction without the waiver.
---------------------------------------------------------------------------
However, neither Dr. Fratrik nor any other witness provided any
empirical evidence to indicate the extent, if any, of any additional
value realized by the NAB broadcasters in exchange for the waiver of
the performance complement rules. Thus, the Judges are asked, in
effect, to unbundle the per-performance rates in the NAB/SoundExchange
Agreement, without any evidence as to the value of this ``stick''
within that bundle, i.e., the waiver of the performance complement
rules.
SoundExchange disputed the assertion that the waiver of the
performance complement rules should reduce the efficacy of the NAB
agreement as a benchmark. Even so, Dr. Pelcovits does admit the
existence of some value in the waiver of the performance complement
rules:
The performance complement waivers are uniquely valuable to
broadcasters, whose over-the-air programming is not subject to a
sound recording copyright and therefore not subject to the
performance complement. The waiver allows these broadcasters to re-
transmit their terrestrial signal without having to alter the
programming that they created primarily for a use not subject to the
performance complement.
Pelcovits WDT at 20 n.21 (emphasis added).
Dr. Pelcovits notes though that ``[t]he market value of the waiver
appears to be very small, since Sirius XM, with no such waiver, agreed
to rates that are virtually identical over the life of the contract.''
Id. Dr. Pelcovits is correct. The differences between the per-
performance rates in the NAB/SoundExchange Agreement and the Sirius XM/
SoundExchange Agreement for the 2011-2015 rate period are illustrated
on the following table.
------------------------------------------------------------------------
Sirius XM
Year NAB Rate rate Difference
------------------------------------------------------------------------
2011.................................. $0.0017 $0.0018 -$0.0001
2012.................................. 0.0020 0.0020 0.0000
2013.................................. 0.0022 0.0021 +0.0001
2014.................................. 0.0023 0.0022 +0.0001
2015.................................. 0.0025 0.0024 +0.0001
------------------------------------------------------------------------
Thus, the average annual difference in the per-performance rates
between the two agreements is $0.00004. Accordingly, the Judges
conclude that the waiver of the performance complement rule has no
discernible impact on the value of the WSA Agreements as benchmarks.
(c) Does it matter if the terrestrial broadcasters covered by the NAB/
SoundExchange Agreement were able to pay a higher rate because their
webcasting costs are lower than the costs of pure webcasters?
Dr. Fratrik opined that the terrestrial commercial radio
broadcasters have a vastly different cost structure than pure play
webcasters, which allows them to pay higher royalty rates for sound
recordings. Specifically, Dr. Fratrik noted:
Terrestrial radio broadcasters who simulcast on the web
their over-the-air transmissions have already incurred the necessary
programming costs.\32\
---------------------------------------------------------------------------
\32\ The webcasters on whose behalf NAB negotiated a deal with
SoundExchange are predominantly simulcasters, i.e., entities that
offer terrestrial broadcasts of their programming and simultaneously
transmit that same programming on the Internet. Ordover WRT ] 51.
---------------------------------------------------------------------------
Terrestrial commercial radio stations can promote their
Web site on their own broadcast stations, reducing their advertising
costs.\33\
---------------------------------------------------------------------------
\33\ This point seems to confuse economic cost with out-of-
pocket cost. If a broadcaster foregoes paid advertising from a third
party in order to air an advertisement for its own webcasts, that
broadcaster has incurred an opportunity cost equal to the
advertising revenue that the third party would have paid.
---------------------------------------------------------------------------
Terrestrial radio broadcasters can use the sunk cost of
a pre-existing sales force to sell online advertising.
Terrestrial radio broadcasters have audiences more
concentrated in the same geographic area than pure webcasters, thus
allowing the former to realize more revenue selling advertising to
local advertisers.
Fratrik WDT at 41-42. Consequently, Dr. Fratrik concluded ``terrestrial
broadcasters are more willing to pay higher royalty fees for webcasting
as they are able to generate greater profits from that industry.'' Id.
at 42.
Live365 has not quantified or otherwise estimated the monetary
value of these differences. Thus, even if this argument had substantive
merit, the Judges could not make any specific adjustment of the rates
in the NAB/SoundExchange Agreement to reflect these theoretical cost
advantages.
More importantly, however, the recitation of these advantages
inuring to the benefit of the NAB simulcasters is simply another way of
stating that their business models afford them the synergy to expand
horizontally across the landscape of differentiated sound recording
sub-markets by paying a higher per-performance fee than webcasters with
a more costly and less synergistic business model.\34\ As noted in Web
I, the Act does not provide for a consideration of ``the financial
health of any particular service'' when establishing rates. 67 FR at
45254.
---------------------------------------------------------------------------
\34\ SoundExchange's rebuttal economic witness, Dr. Janusz
Ordover, makes an important point in his critique of Dr. Fratrik's
cost differential argument--one that relates to the rate structure
analysis undertaken earlier in this Determination. Specifically, Dr.
Ordover opines that SoundExchange would not offer pure webcasters a
lower rate in light of their higher cost structures unless
SoundExchange could ``price discriminate at the level of license.''
Ordover WRT at 15. In this context, Dr. Ordover then identifies the
pros and cons of marginal cost pricing, as well as the impact of
such price discrimination upon the subscription rates of the
ultimate consumers, the returns to licensors, and the shifting of
revenues between and among different webcasters. Id. at 14-16. These
are the types of issues that would need to be addressed and
supported by empirical analyses in a proceeding in which a party had
proposed a rate premised on a form of price discrimination, such as
a percentage-of-revenue based fee.
---------------------------------------------------------------------------
(d) Did the WSA agreements have the design, intent, and effect of
raising the input costs of smaller webcasters?
Live365, through Dr. Salinger, opined that the parties to the WSA
agreements set rates above market rates for 2011-2015 because they had
strategically intended to use those rates as benchmarks, and thereby
raise the costs of their rivals, i.e., all other webcasters. Salinger
WRT at 23. As Dr. Salinger notes, those parties had the power to
influence the impact of those contractual rates, because they could
elect--as they ultimately did--to permit these agreements and rates to
be made available as potential precedents. Id. at 24.
This argument is theoretically plausible, as noted in the articles
cited by Dr. Salinger. Id. at 24 (citing Steven Salop and David
Scheffman, Raising Rivals' Costs, 73 Am. Econ. Rev. 267-71 (1983);
Thomas Krattenmaker and Steven Salop, Anticompetitive Exclusion:
Raising Rivals' Costs to Achieve Power over Price, 96 Yale L.J. 209
(1986)). However, Live365 has not provided any empirical or other
evidence that would tend to prove the existence of such strategic
coordination or conduct in this proceeding.
In the absence of any such evidence, the Judges cannot simply
assume a multi-party conspiracy among SoundExchange, the NAB, and
Sirius XM to increase the rates charged to the NAB and Sirius XM, in
the hope that the Judges would utilize those WSA rates to establish the
statutory rates. Although the Judges acknowledge that, generally,
explicit or tacit collusion may exist among participants in
concentrated industries, that general proposition cannot serve as the
basis for an ultimate finding of specific tri-partite collusion, absent
an adequate factual record.
[[Page 23113]]
(e) Were the rates in the WSA agreements inflated to reflect litigation
cost savings by the NAB and Sirius XM?
Live365 asserted that the rates in the WSA Agreements are higher
than market rates because they reflect the litigation cost saved by the
NAB and Sirius XM of foregoing a rate proceeding and its attendant
expenses. Live365 PFF ]] 322-326. Further, Live365 asserted that this
litigation cost/opportunity cost saving only affected the settling
webcasters, not SoundExchange, because the latter would be incurring
litigation costs regardless, since other webcasters (such as Live365)
remained as contesting parties at the time of settlement. Live365 PFF ]
283.
SoundExchange disputed these assertions on several grounds.
First, SoundExchange asserted that the principal reason for the WSA
Agreements was that the parties had ``a high degree of confidence that
the Judges would establish rates consistent with the willing buyer/
willing seller construct . . . .'' SX PFF ] 282. Dr. Ordover explained
that, consequently ``neither party likely would be willing to incur
litigation costs in the event of a disagreement . . . .'' Ordover WRT
at 16. This is certainly one explanation to counter Live365's
assumption that the NAB and Sirius XM paid a rate premium to avoid
litigation costs. The Judges recognize that rational parties will
attempt to predict the determination of any tribunal, and that they
will tend to settle if their respective predictions are sufficiently
proximate.\35\
---------------------------------------------------------------------------
\35\ However, SoundExchange overstates the logic of this point.
The mere fact that two adversarial parties reach a settlement
premised upon their mutual prediction of the Judges' future
determination does not mean that they have correctly predicted (with
``a high degree of confidence'' no less) that the rate the parties
settled upon would be the same as the rates the Judges ultimately
would have established. It is a sufficient inducement for the
parties to settle if they agree on their prediction, not that their
prediction be correct. It would be hopelessly circular if the Judges
were to put their imprimatur on rates negotiated in a settlement
merely on the assumption that the parties were able to predict how
the Judges would apply the statutory standards. Such an argument
would essentially require the Judges to abdicate their
responsibilities and defer to the settling parties, whose self-
declared rational expectations as to the Judges' future
determination would be deemed both prescient and dispositive.
---------------------------------------------------------------------------
Second, SoundExchange asserted that it too had an incentive to
avoid litigation costs, and that such an incentive offset the potential
impact of any similar incentive on the settling webcasters with regard
to the rates contained in the WSA Agreements. Ordover WRT at 5, 16-17;
8/2/10 Tr. at 351 (Ordover) (threat of litigation ``works on both
sides''). However, Live365 is correct in its claim that SoundExchange
still would have been required to participate in a rate proceeding
against other contesting webcasters. Nonetheless, SoundExchange did
avoid the potential impact of arguments that would have been made by
the NAB and Sirius XM that might have resulted in lower rates. Instead,
SoundExchange was required ultimately to contest the claims of only one
webcaster, Live365.
In any event, neither party presented evidence to the Judges
regarding how to quantify the relative opportunity costs saved by
SoundExchange and/or the settling webcasters. For all these reasons,
the Judges cannot adjust the marketplace rates to reflect any such
impact arising out of the litigation costs allegedly avoided by the WSA
Agreements.\36\
---------------------------------------------------------------------------
\36\ Two ancillary points were made by the respective parties
with regard to the alleged impact of litigation costs: Live365
asserted that the settling webcasters did not have the same capacity
to absorb litigation costs as SoundExchange, but there was no
evidence that indicated such a disparity existed or, even if it did,
how it affected the rates upon which the parties settled. Fratrik
WDT at 43; Ordover WRT at 17. SoundExchange argued that the settling
parties had additional options beyond settle or litigate--they could
either elect not to participate in the rate proceeding or decide not
to webcast. SX PFF ] 284. Both of those supposed ``options'' seem
extreme.
---------------------------------------------------------------------------
(f) Are the rates in the WSA agreements reflective of SoundExchange's
monopoly power?
Live365 asserted that the rates in the WSA Agreements reflect the
monopoly power of the single seller in those two contracts, i.e.,
SoundExchange. Live365 PFF ] 286. As Live365 correctly notes, in the
``hypothetical market'' that the Judges are statutorily required to
consider, the hypothetical sellers are the several record companies
rather than a single monopolist. Web II, 72 FR at 24087, Web I, 67 FR
at 45244.
Dr. Salinger, Live365's economic rebuttal witness, testified that
it is ``a very general principle of economics'' that the presence of a
monopolist ``poses a risk of increased prices.'' Salinger WRT at 26.
SoundExchange's rebuttal economic witness, Dr. Ordover, concurred,
acknowledging that SoundExchange ``may [have] additional bargaining
power'' because of its status as the single seller. Ordover WRT at 22.
The power that these two economists acknowledged was the well-
understood market power of a (single price) monopolist to set a price
at a level higher than would be set in a perfectly competitive market,
while also restricting the quantity sold to the level at which marginal
revenue equals marginal cost. See, e.g., Krugman & Wells, supra, at
367; Edwin Mansfield & Gary Yohoe, Microeconomics 364-65 (11th ed.
2004).
It is not at all apparent, however, that the market power of
SoundExchange to command a high rate would be appreciably greater (if
at all) than the power of the major record companies, who owned
approximately 85% of supply (the sound recordings) and therefore
comprise an oligopoly. 4/20/10 Tr. at 299 (Pelcovits). As stated by Dr.
Pelcovits:
[N]egotiation of the WSA Agreements by SoundExchange does not
significantly alter the market power equation. Each record company
has a unique catalog of sound recordings that are highly valued (or
even necessary inputs) to any webcasting service. The individual
record companies, as a consequence, have a degree of market power.
Pelcovits WDT at 17 (emphasis added). Dr. Pelcovits's testimony is
consonant with contemporary economic understanding that oligopoly
pricing behavior can mimic monopoly pricing decisions.
Economists once believed that oligopoly pricing may have been
essentially indeterminate. More modern game theory analyses recognize,
however, the strong potential for tacit collusion among long-standing
oligopolists (such as the major record companies), after repeated ``tit
for tat'' pricing maneuvers, that will cause oligopolistic pricing to
approach monopoly pricing:
[W]hen oligopolists expect to compete with each other over an
extended period of time, each individual firm will often conclude
that it is in its own best interest to be helpful to the other firms
in the industry. So it will restrict its output in a way that raises
the profits of the other firms, expecting them to return the favor.
. . . [T]hey manage to act as if they had . . . an agreement. When
this happens, we say that firms engage in tacit collusion.
Krugman & Wells, supra, at 401; see Hal Varian, Intermediate Economics:
A Modern Approach 531 (8th ed. 2010) (``The threat implicit in tit for
tat may allow the firms to maintain high prices.''). Such tacit
collusion can lead to pricing by oligopolists at the monopoly level.
See, e.g., L. Kaplow, On the Meaning of Horizontal Agreements in
Competition Law, 99 Cal. L. Rev. 683, 811 (2011) (``oligopoly pricing
is akin to monopoly pricing.'').
Thus, consistent with Dr. Pelcovits's testimony, theoretically
there could be no important difference between the bargaining power of
the four major record companies and SoundExchange. However, as
discussed infra, the evidence in this proceeding does not
[[Page 23114]]
indicate that the rates in the WSA Agreements were so high as to enable
SoundExchange to extract monopoly rents from webcasters.\37\
---------------------------------------------------------------------------
\37\ An oligopolistic marketplace rate that did approximate the
monopoly rate could be inconsistent with the rate standard set forth
in 17 U.S.C. 114(f)(2)(B), as that standard has been construed by
the D.C. Circuit and the Librarian of Congress. The D.C. Circuit has
held that this statutory section does not oblige the Judges to set
rates by assuming a market that achieves ``metaphysical perfection
and competitiveness.'' Intercollegiate Broadcast System, Inc. v.
Copyright Royalty Board, 574 F.3d 748, 757 (D.C. Cir. 2009). Rather,
as the Librarian of Congress held in Web I, the ``willing seller/
willing buyer'' standard calls for rates that would have been set in
a ``competitive marketplace.'' 67 FR at 45244-45 (emphasis added).
See also Web II, 67 FR at 24091-93 (explaining that Web I required
an ``effectively competitive market'' rather than a ``perfectly
competitive market.'' (emphasis added)). Between the extremes of a
market with ``metaphysically perfect competition'' and a monopoly
(or collusive oligopoly) market devoid of competition there exists
``[in] the real world . . . a mind-boggling array of different
markets,'' Krugman & Wells, supra, at 356, all of which possess
varying characteristics of a ``competitive marketplace.'' As
explained in the text, infra, in this proceeding the evidence
demonstrates that sufficient competitive factors existed to permit
the WSA Agreements to serve as useful benchmarks, and does not
demonstrate that the rates in the WSA Agreements approximated
monopoly rates.
---------------------------------------------------------------------------
(i) The NAB's Countervailing Market Power
As Dr. Ordover noted, the NAB, which negotiated on behalf of a
group of broadcasters, enjoyed a degree of bargaining power on the
buyers' side during its negotiations with SoundExchange. Ordover WRT at
23; see also 7/28/10 Tr. at 129-30 (Salinger) (acknowledging balance of
power in this context). This power arose from the fact that, at the
time of the WSA Agreement negotiations, the NAB broadcasters had
accounted for over 50% of the royalty payments to SoundExchange in the
immediately preceding calendar year. Ordover WRT at 23; Live365 Trial
Ex. 25. As Dr. Ordover testified, ``[s]uch added market power on the
buyer side tends to mitigate, if not fully offset, additional leverage
that SoundExchange might bring to the negotiations.'' Ordover WRT at
23; Web II, 72 FR at 24091 (``[T]he question of competition is not
confined to an examination of the seller's side of the market alone.
Rather, it is concerned with whether market prices can be unduly
influenced by sellers' power or buyers' power in the market.'')
(ii) The Availability of a Rate Setting Proceeding
The monopoly power of SoundExchange was compromised by the fact
that the NAB or any webcasters negotiating with SoundExchange could
have chosen instead to be subject to the rates to be set by the Judges.
Ordover WRT at 23. Dr. Ordover explained that ``[a]t some point, buyers
such as the NAB members would simply elect to seek rates established by
the Judges--which would be free of any potential cartel effects--rather
than voluntarily agree to pay above-market rates.'' Ordover WRT at 23;
see Salinger WRT at 27 (buyers can resort to the court if the
collective seeks to charge more than each individual member could
charge).
(iii) The Evidence Did Not Demonstrate That the Individual Record
Companies Necessarily Would Have Negotiated a Lower Rate Than
SoundExchange
As Dr. Ordover explained, the nature of the market indicated that
SoundExchange might have been in a position to negotiate rates that
were actually lower than the rates the record companies would have
negotiated individually. More particularly, the existence, vel non, of
SoundExchange's power to set higher prices ``depends partially on the
assumption one makes about whether a webcaster requires access to the
repertoire of all four major record companies in order to operate an
economically viable business, or only to a subset.'' Ordover WRT at 23-
24.
As Dr. Ordover further explained, if the repertoires of all four
major record companies were each required by webcasters (i.e., if the
repertoires were necessary complements) and webcasters were required to
negotiate with each record company individually, then each record
company would have an incentive to charge a monopoly price to maximize
its profits without concern for the impact on the market writ large.
That is, while these higher prices would constitute profits for the
record company receiving them, they would constitute higher monopoly
costs (incurred four times--paid by webcasters to each of the four
record companies). The webcasters would pass on the higher costs to
listeners, thus reducing the quantity of sound recordings made
available to end users. Ordover WRT at 25-26.
By contrast, SoundExchange, as a collective, would internalize the
impact of the complementary nature of the repertoires on industry
revenue and thus seek to maximize that overall revenue. This would
result in lower overall rates compared to the situation in which the
individual record companies negotiated separately. Ordover WRT at 27.
Of course, this argument would be valid only if the repertoires of
the several record companies indeed were complements rather than
substitutes. If it was sufficient for webcasters to obtain only the
licenses for one (or less than all four) of the major record companies,
then separate negotiations with individual record companies (absent
collusion, tacit or otherwise) could lead to competitively lower
royalty rates.
The parties presented no evidence from which the Judges could
conclude that the repertoires of the respective record companies were
complements or substitutes, or, perhaps, complementary to some degree
and substitutional to some degree.\38\ Thus, the Judges cannot conclude
that SoundExchange necessarily wielded a level of pricing power
sufficient to affect the use of the WSA Agreements as benchmarks.\39\
---------------------------------------------------------------------------
\38\ In Web II, the Judges found that there was testimony
sufficient to indicate that the several repertoires were substitutes
rather than complements. 72 FR at 24093. The contesting parties in
this proceeding did not provide the Judges with evidence sufficient
to make a factual finding as to this issue.
\39\ The Judges reject an additional argument made by
SoundExchange that the WSA Agreements could be construed as
competitive by comparing the prices negotiated by the major record
companies in their agreements with ``custom radio services'' to the
lower prices in the WSA Agreements. Pelcovits WDT at 19. The Judges
agree with Dr. Salinger's critique that a comparison of rates for
``custom radio services'' and noninteractive webcasters is not an
``apples-to-apples'' comparison, because ``custom radio'' adds
additional value in terms of substitutability for the purchase of
music and adds a level of control for the listener. Salinger WRT at
26. Further, even Dr. Pelcovits acknowledges that custom radio
service involves a ``degree of interactivity . . . and therefore is
not necessarily comparable to noninteractive webcasting.'' Pelcovits
WDT at 32. Thus, this issue posits at least two potential
explanatory variables that could explain why the record companies
negotiated higher rates for custom radio than SoundExchange
negotiated for noninteractive services in the WSA Agreements: (i)
The monopoly or oligopoly character of the seller(s); and (ii) the
differentiated nature of the two services. Absent any empirical or
other evidence that indicates how each of these explanatory
variables relates to the pricing differential, SoundExchange's
attempt to rely on the pricing differential as probative of a more
competitive rate must fail.
---------------------------------------------------------------------------
(g) Conclusion Regarding the WSA Agreements
On balance, the Judges conclude that the arguments made by Live365
as to why the WSA Agreements cannot serve as benchmarks are not
persuasive. Therefore, the Judges conclude that the evidence permits
these two agreements to serve as benchmarks in this proceeding.
(2) SoundExchange's Second Proposed Benchmark: The Adjusted Interactive
Subscription Service Rate
In addition to its WSA Agreements benchmark, SoundExchange relied
on Dr. Pelcovits's analysis of another purported benchmark--the market
for interactive webcasting of digital
[[Page 23115]]
performances of sound recordings. According to Dr. Pelcovits, that
interactive market is comparable to the noninteractive market at issue
in this proceeding for the following reasons:
Both markets have similar buyers;
Both markets have similar sellers;
Both markets utilize a blanket license in sound
recordings;
Both markets are input markets;
Both markets have a demand schedule for these inputs that
is derived from the demand of ultimate consumers; and
Both markets deliver the sound recordings via the
Internet.
Pelcovits WDT at 3; 4/19/10 Tr. at 126 (Pelcovits).
In the interactive market, the rates for sound recordings are not
subject to the statutory license. Rather, in the interactive market,
the rates for sound recordings are set through marketplace negotiations
between the owners of the sound recordings, as sellers/licensors, and
the individual interactive webcasters, as buyers/licensees.
The major difference between the two markets is the role of the
ultimate consumer in selecting the sound recordings for listening. In
the interactive market (as the adjective connotes), the ultimate
consumer essentially decides which sound recordings he or she will
receive.\40\ By contrast, in the noninteractive market (as the
adjective again connotes), the consumer plays a more passive role, and
the webcaster offers the consumer music that the webcaster anticipates
the listener might enjoy (much like radio). Compare 17 U.S.C. 114(j)(6)
with 17 U.S.C. 114(j)(7).
---------------------------------------------------------------------------
\40\ The ability of the ultimate consumer to choose to listen to
specific sound recordings renders that decision analogous to the
decision to purchase music digitally or otherwise. Thus, as noted in
the legislative history of the Digital Performance Right in Sound
Recordings Act, that statute permits the owners of sound recordings
to bargain directly with each interactive webcaster over the price
of each transmission, in the same manner as if the parties were
negotiating the price of a digital download for outright purchase.
See H.R. Rep. No. 104-274 at 14 (1995) (``Of all the new forms of
digital transmission services, interactive services are most likely
to have a significant impact on traditional record sales, and
therefore pose the greatest threat to the livelihoods of those whose
income depends upon revenues derived from traditional record
sales.'').
---------------------------------------------------------------------------
Thus, it is necessary to isolate the value of such consumer choice,
i.e., the utility of interactivity, and subtract that value from any
estimate of the value of sound recordings in the interactive market, in
order to make that value more comparable to the value in the
noninteractive market.
Dr. Pelcovits attempted to make such an adjustment in his analysis
(as well as other adjustments discussed infra), which resulted in his
proposed per-performance rate of $0.0036 per play for a statutory
noninteractive webcaster.
The Judges conclude, as the Judges concluded in Web II, that such
an adjusted benchmark constitutes the type of benchmark that the Act
permits (but does not require) the Judges to consider. However, the
fact that this is an appropriate type of benchmark to be considered
does not necessarily mean that any particular application of the
benchmark will be of assistance in a given proceeding. Rather, the
Judges must consider the application of such a benchmark, and decide
whether to adopt or reject it in toto or whether it is necessary to
adjust the proposed benchmark.
As explained infra, the Judges have concluded that the interactive
benchmark proposed by Dr. Pelcovits on behalf of SoundExchange is of
assistance in establishing a zone of reasonableness in this proceeding,
but only after making certain significant adjustments to that proposed
benchmark.
(a) The Methodology Utilized by Dr. Pelcovits in His Interactive
Benchmark Analysis
Dr. Pelcovits opined that ``the interactive, on-demand music
services [are] the best benchmark to use for the purpose of setting
rates for statutory webcasting services in this proceeding.'' Pelcovits
WDT at 23. Dr. Pelcovits testified, ``it is reasonable to predict that
the ratio of per-subscriber royalty fees to consumer subscription
prices will be essentially the same in both the benchmark and target
markets.'' Pelcovits WDT at 23; see 4/20/10 Tr. at 277-78 (Pelcovits).
The theory upon which Dr. Pelcovits relied to make this prediction was
premised on the economic concept of ``derived demand.'' As Dr.
Pelcovits testified, ``webcasters demand or have a need for the music
performance because that's what their customers demand.'' 4/19/10 Tr.
at 132 (Pelcovits); Pelcovits WDT at 23 (``I believe it is reasonable
to predict that the ratio of per-subscriber royalty fees to consumer
subscription prices will be essentially the same in both the benchmark
and target markets.'').
However, in order to use the rates in this interactive benchmark
market to develop rates in the target market, Dr. Pelcovits also
concluded that he was required to make adjustments ``to account for the
differences between the benchmark and target markets.'' Pelcovits WDT
at 22; 4/29/10 Tr. at 127 (Pelcovits). Specifically, Dr. Pelcovits
adjusted (i) the interactive benchmark rates to take into account the
fact that there are more plays per subscriber in the noninteractive
market; and (ii) the subscription prices in the interactive market to
remove the value of interactivity. Pelcovits WDT at 23.
(i) The Marketplace Agreements Considered by Dr. Pelcovits
Dr. Pelcovits obtained 214 agreements between certain interactive
webcasters and the four major record companies, viz., Universal Music
Group, Sony Music Entertainment, Warner Music Group, and EMI, that
spanned the period from approximately 2004 through 2009, with an
emphasis on contracts that were created in the most recent three years.
Pelcovits WDT, App IV. Under the terms of these agreements, Dr.
Pelcovits found that the interactive webcasters generally ``pay
royalties on the basis of the greatest of three measures: A per-play
rate; a percentage of gross revenue rate; and a per-subscriber fee.''
Pelcovits WDT at 29; 4/29/10 Tr. at 129-30 (Pelcovits).
Dr. Pelcovits had available for consideration, inter alia, two
types of interactive webcasting models: (i) Subscription on-demand
interactive streaming services and (ii) advertising-supported
(nonsubscription) on-demand streaming services.\41\ SoundExchange
explained the difference between these models in the following manner,
through the testimony of its industry witness:
---------------------------------------------------------------------------
\41\ Dr. Pelcovits also reviewed agreements between ``custom
radio'' services and the four major record companies, agreements
that, according to SoundExchange's witnesses, occupy a functional
gray area between interactive and noninteractive services. See
McCrady WDT at 16. Dr. Pelcovits made note of such agreements in his
testimony, including a particular reference to the agreement between
WMG and one such custom radio service, Slacker Premium. As discussed
infra, Dr. Pelcovits needed data regarding the number of plays by
Slacker Premium to serve as a proxy for the number of plays by
noninteractive webcasters, because such data was not available for
clearly noninteractive services. Pelcovits WDT at 32.
---------------------------------------------------------------------------
Subscription on-demand interactive streaming.
This type of webcasting allows a paying subscriber to request the
exact song he or she wishes to hear. McCrady WDT at 12. In addition,
most of these services allow their subscribers to conditionally
download requested songs to their personal computer and sometimes to a
portable storage device, such as an iPod. Id. These downloads remain
available for listening at any time by a subscriber, provided that the
subscription remains active. Id.
Advertising-supported (nonsubscription) on-demand
interactive streaming.
This type of webcasting is the same as subscription on-demand
interactive
[[Page 23116]]
streaming except the listener does not subscribe and receives gratis
the songs he or she wishes to hear. The webcaster sells advertising on
the site and the listener hears the advertising as well as the specific
songs requested. Mr. McCrady described these interactive webcasting
services that derive their revenue from advertising alone and not from
subscriptions to be ``experimental'' and not yet ``mature.'' 4/22/10
Tr. at 663 (McCrady); McCrady WDT at 15.
Dr. Pelcovits ultimately elected to ignore the advertising-
supported (nonsubscription) on-demand interactive streaming in his
analysis because, in his opinion, ``it is more straightforward to infer
differences in consumer willingness-to-pay (and by extension how much
the webcaster would be willing to pay for the license) from observed
prices for subscription services.'' Pelcovits WDT at 24.
(ii) Dr. Pelcovits's Calculation of the Per-Play Rate in the Benchmark
Interactive Subscription Market
Dr. Pelcovits proceeded to calculate the ``effective per play
rate'' paid under the contracts between the benchmark interactive
services and the four major record companies. To do so, he obtained
data from the major record companies that revealed:
The revenue reported by the interactive subscription
services to the major record companies; and
The number of unique plays those services reported to
the major record companies.
Pelcovits WDT at 30; 4/29/10 Tr. at 128 (Pelcovits). The revenue data
that Dr. Pelcovits analyzed represented not merely revenue paid under
the per-performance rate structure in the interactive contracts, but
rather all revenue, regardless of whether that revenue had been paid
pursuant to one of the other structures contained in those contracts.
Pelcovits WDT at 30.
As noted at the outset of this determination, given Dr. Pelcovits's
assumption that only a per-performance (i.e., per play) royalty rate
structure would pass muster with the Judges, he only proposed a per-
play royalty rate. Accordingly, Dr. Pelcovits determined an
``effective'' per-play royalty rate by combining the revenue reported
and paid pursuant to the percentage-of-revenue structure and the per-
play structure for the purposes of his analysis. Pelcovits WDT at 30.
The data reviewed by Dr. Pelcovits also showed that the percentage
of plays on the interactive services attributable to the four major
record companies was approximately 85%. 4/20/10 Tr. at 299 (Pelcovits).
Thus, by considering only the data from the four major record
companies, Dr. Pelcovits did not consider 15% of the sellers in his
benchmark market.
With regard to the number of plays per subscriber for his benchmark
market, Dr. Pelcovits counted ``the total number of unique plays of
recorded music owned (or distributed) by the four major record
companies reported by the interactive webcasting service(s).''
Pelcovits WDT at 30; 4/19/10 Tr. at 130-31 (Pelcovits). Dr. Pelcovits
calculated the average number of monthly plays by these interactive
subscription services to be 287.37 per subscriber. Pelcovits WDT at 31.
To derive the effective per-play rate in the interactive market, Dr.
Pelcovits then divided the total revenue collected by the record
companies by 287.37, i.e., the total number of unique plays. This
division resulted in an effective per-play rate for the benchmark
interactive subscription service market of $0.02194 per play. Id.
(iii) Dr. Pelcovits's Adjustments to the $0.02194 Per-Play Rate in the
Benchmark Interactive Subscription Market
Dr. Pelcovits believed that it was necessary to make certain
adjustments to the interactive benchmark streaming per-play rate before
it could be applied to the noninteractive streaming market. In
particular, Dr. Pelcovits adjusted for:
The higher usage intensity (number of plays per month)
by subscribers of noninteractive services compared to subscribers of
interactive services; and
The value that consumers place on the greater
interactivity offered by the on-demand services compared to
statutory services that do not offer that function.
Pelcovits WDT at 3, 31.\42\
---------------------------------------------------------------------------
\42\ Dr. Pelcovits made a third adjustment in an attempt to
account for the substitutional effect of the two types of services
on CD and permanent download sales. Pelcovits WDT at 35-36. As
explained infra, the Judges find that this adjustment is subsumed
within his willing seller/willing buyer analysis.
---------------------------------------------------------------------------
(a) The Adjustment for Usage Intensity/Number of Monthly Plays
Dr. Pelcovits's first adjustment sought to account for the fact
that there were a greater number of plays by subscribers of
noninteractive services than by subscribers on interactive statutory
services. Pelcovits WDT at 31; see 4/19/10 Tr. at 139-41 (Pelcovits).
While, as noted supra, Dr. Pelcovits was able to obtain data
regarding the number of interactive plays, he admitted to difficulty in
calculating the number of noninteractive plays. As Dr. Pelcovits
candidly acknowledged, the noninteractive services ``do not report the
number of subscribers in public documents or in data provided to the
record companies or SoundExchange.'' Pelcovits WDT at 31.
In light of these difficulties, Dr. Pelcovits turned to data
provided to the record companies for the subscription custom radio
service Slacker Premium. Pelcovits WDT at 32. Although Slacker Premium
is not a noninteractive service, because it allows for a degree of user
customization, Dr. Pelcovits claimed that most of the music transmitted
through the service is ``pushed to the consumer,'' rather than being
truly on-demand. Pelcovits WDT at 32. Therefore, he concluded that the
data on plays-per-subscriber for this one service would serve as a good
proxy for plays-per-subscriber for statutory subscription services.\43\
Pelcovits WDT at 32; 4/19/10 Tr. at 141-42 (Pelcovits). Although the
unavailability of data for the number of plays of unambiguously
noninteractive services reduces the usefulness of Dr. Pelcovits's
proposed benchmark, it does not invalidate his methodology and
results.\44\
---------------------------------------------------------------------------
\43\ Dr. Pelcovits established his own definition of ``statutory
services'' as ``services that offer no interactivity or limited
interactivity,'' but he cautioned that he was not making a ``legal
judgment'' as to whether his self-defined ``statutory services''
would qualify legally as noninteractive statutory services.
Pelcovits WDT at 24-25 and n.22.
\44\ Based on other data produced by Live365 during discovery,
Dr. Pelcovits testified that he was able to confirm that the number
of plays per subscriber that he calculated for Slacker Premium
represented a reasonable estimate of the plays per subscriber for
the statutory webcasting market. Pelcovits WDT at 32 n.27.
---------------------------------------------------------------------------
Using the Slacker Premium data, Dr. Pelcovits determined that the
average monthly plays per subscriber for a purely noninteractive
service was 563.36. Pelcovits WDT at 32. Dividing the plays per
subscriber for interactive services (287.37) by the plays per
subscriber for statutory services (563.36) resulted in a per-play
adjustment of 0.5101. Pelcovits WDT at 33.
(b) The Interactivity Adjustment
Dr. Pelcovits also made an adjustment to account for the difference
in the relative value of a service that is interactive to one that is
not. Dr. Pelcovits began his calculation of the interactivity
adjustment by comparing the subscription rates for selected benchmark
interactive services with the subscription rates for certain audio
streaming services that he identified as ``arguably'' noninteractive
services. Pelcovits WDT at 24; Live365 Trial Ex. 5 at 31-32.
Inasmuch as that ``value added'' feature (by definition) is not
available for the noninteractive services, Dr.
[[Page 23117]]
Pelcovits calculated the value of the interactivity feature in order to
subtract it from his proposed benchmark service. Dr. Pelcovits
calculated the purported value added by interactivity in two ways. 4/
19/10 Tr. at 133-34 (Pelcovits); Live365 Trial Ex. 5 at 37-40.
First, Dr. Pelcovits compared the retail subscription prices for
the interactive and noninteractive streaming services that he analyzed.
Pelcovits WDT at 24; Live365 Trial Ex. 5 at 39-40. More particularly,
he supervised the collection of information regarding 41 audio
streaming services out of the agreements that SoundExchange had
provided to him. Pelcovits WDT at 24; 4/19/10 Tr. at 134-35
(Pelcovits). However, Dr. Pelcovits excluded from his analysis 23 of
those 41 services (56% of the total) because they were not subscription
services. The remaining 18 services that he included in his analysis
were paid subscription services. Pelcovits WDT at 24. Of these 18
subscription services, 11 were in the benchmark interactive market, and
7, according to Dr. Pelcovits, ``arguably qualify as statutory
services.'' Pelcovits WDT at 24-25. Dr. Pelcovits found that the
average monthly subscription price for the 7 noninteractive services
that he defined as ``statutory'' was $4.13. Pelcovits WDT at 25.
With regard to the 11 interactive subscription services, Dr.
Pelcovits calculated the average subscription price in two different
ways. Pelcovits WDT at 25.
First, Dr. Pelcovits calculated the average monthly
subscription prices for the 11 interactive services--an average of
$13.70.
Second, Dr. Pelcovits re-calculated the average monthly
subscription prices of 2 of these 11 interactive services to adjust
them downward to reflect additional value these 2 services provided
in the form of a fixed monthly number of permanent downloads at no
additional cost to the subscriber.\45\ This calculation resulted in
a lower average monthly subscription price of $13.30.
---------------------------------------------------------------------------
\45\ These ``permanent'' downloads are distinguished from the
``conditional'' downloads referred to by Mr. McCrady and discussed
supra, because the listener cannot retain the ``conditional''
downloads after his or her subscription has expired. McCrady WDT at
12.
Pelcovits WDT at 25; 4/19/10 Tr. at 135-36 (Pelcovits).
To make his interactivity adjustment, Dr. Pelcovits then subtracted
the average (mean) subscription price of his 7 statutory noninteractive
services ($4.13) from the average (mean) subscription price of his 11
benchmark interactive services. Because he calculated two different
averages for the 11 benchmark interactive services (one ignoring the
bundled free downloads and the other adjusting for the bundled free
downloads, as noted supra), Dr. Pelcovits performed two different
subtractions ($13.70 - $4.13; and $13.30 - $4.13). These calculations
resulted in interactivity adjustment factors of:
0.301 (using the unadjusted subscription prices for the
interactive services); and
0.311 (using the subscription prices for the interactive
services adjusted for the bundled downloads offered by two of the
benchmark interactive services).
Pelcovits WDT at 26; 4/19/10 Tr. at 136-37 (Pelcovits).\46\
---------------------------------------------------------------------------
\46\ ``Interactivity adjustment factor'' is simply the ratio of
the mean noninteractive subscription price ($4.13) to the mean
interactive subscription price, as calculated in two different ways
($13.70 or $13.30). Thus, the math is as follows: $4.13/$13.70 =
0.301 and $4.13/$13.30 = 0.311.
---------------------------------------------------------------------------
As an alternative measure of the value of interactivity (to be
subtracted from the benchmark value), Dr. Pelcovits performed a hedonic
regression. Pelcovits WDT at 26; Live365 Trial Ex. 5 at 38-39. As Dr.
Pelcovits accurately summarized, a hedonic regression is a statistical
technique that can be applied ``to measure the value of different
characteristics of a heterogeneous product.'' Pelcovits WDT at 26. See
also Salinger WRT at 18 (``Hedonic regression is a statistical analysis
of prices that seeks to explain prices as a function of product
features.'').
This hedonic regression was used ``to isolate the value of
interactivity to consumers of on-line music services'' by measuring
``the value of different characteristics of a heterogeneous product,''
which in this case is subscription audio streaming services. Pelcovits
WDT at 26; 4/19/10 Tr. at 137 (Pelcovits). In his hedonic regression,
Dr. Pelcovits analyzed a number of variables across the same 18
subscription-streaming services he had considered in his ``mean
comparison'' interactivity adjustment, and applied those variables to
the subscription price. Pelcovits WDT at 26-27. Among the variables
that Dr. Pelcovits included in his hedonic regression were: (i) The
presence of interactivity; (ii) the availability of a mobile
application for the service; and, (iii) and the ability to
conditionally download tracks to a portable device (expressed as
``Tethered Downloads'' in the regression table). Pelcovits WDT at 27;
see also Live365 Trial Ex. 5 at 39.
Dr. Pelcovits's hedonic regression analysis resulted in an
interactivity coefficient indicating that ``interactivity is worth
$8.52 per month to the typical subscriber.'' Pelcovits WDT at 28; 4/19/
10 Tr. at 137-39 (Pelcovits). Dr. Pelcovits then applied this $8.52
value for interactivity to the $13.30 mean value for the 11 interactive
on-demand services he had analyzed (see supra). By this comparison, the
interactivity feature comprised 64.1% of the entire value of the price
paid by consumers for subscriptions to interactive webcasting
subscriptions ($8.52/$13.30 = 64.1%). Id. Alternatively stated, the
value of a noninteractive subscription would create an alternative
interactivity adjustment factor of 35.9% (i.e., 100% - 64.1%).
Based on the above techniques, Dr. Pelcovits derived three
potential interactivity adjustment factors. Pelcovits WDT at 28. That
range is shown in the following table.
------------------------------------------------------------------------
Interactivity
Source adjustment
------------------------------------------------------------------------
Comparison of Mean Subscription Rates--Unadjusted 0.301
Subscription Prices....................................
Comparison of Mean Subscription Rates--Adjusted 0.311
Subscription Prices....................................
Regression of Subscription Prices....................... 0.359
------------------------------------------------------------------------
Pelcovits WDT at 29.
(iv) Dr. Pelcovits's Derivation of Recommended Rates Based on the
Foregoing Adjusted Benchmark Analysis
Dr. Pelcovits then multiplied the unadjusted per-play rate he had
calculated in the benchmark market by the two adjustment factors. That
is, he multiplied the unadjusted per-play rate by: (i) The per-play
adjustment (that had accounted for the greater number of plays in the
statutory noninteractive market) and (ii) the interactivity adjustment
rate (calculated three different ways--two ``mean'' comparisons and one
hedonic regression). Through this multiplication, Dr. Pelcovits derived
the following range of recommended statutory per-play license fees:
[[Page 23118]]
------------------------------------------------------------------------
Proposed
statutory
Recommended source of interactivity adjustment per-play
rate
(rounded)
------------------------------------------------------------------------
Comparison of Mean Subscription Rates--Unadjusted $0.0034
Subscription Prices ($0.02194 x 0.51 x 0.301) (benchmark
per play rate) x ( of plays adj.) x
(interactivity adj.)......................................
Comparison of Mean Subscription Rates--Adjusted 0.0035
Subscription Prices ($0.02194 x 0.51 x 0.311) (benchmark
per play rate) x ( of plays adj.) x
(interactivity adj.)......................................
Regression of Subscription Prices ($0.02194 x 0.51 x 0.359) 0.0040
(benchmark per play rate) x ( of plays adj.) x
(interactivity adj.)......................................
------------------------------------------------------------------------
Pelcovits WDT at 33; see 4/19/10 Tr. at 142-45 (Pelcovits) (explaining
step-by-step calculations to derive recommended statutory per-play
royalty fee).
Dr. Pelcovits then calculated the simple average of the above three
recommended rates--$0.0036 per play (rounded). Pelcovits WDT at 33; 4/
19/10 Tr. at 145 (Pelcovits).
(b) Review of Dr. Pelcovits's Interactive Benchmark Analysis
(i) The Overemphasis on Subscription Revenues and the Failure To
Account for Advertising Revenues
Dr. Pelcovits's interactive benchmark analysis is of some, albeit
limited, assistance in determining the royalty rate in the
noninteractive market. His analysis was based upon the subscription
revenues of noninteractive webcasters, without accounting for their
advertising revenues. In fact, ``the reality of a lot of the services
is that they have a mix of subscribers and non-subscribers.'' 7/28/10
Tr. at 55 (Salinger); see also 4/20/10 Tr. at 312-13 (Pelcovits)
(acknowledging that most listening to noninteractive webcasting is by
non-subscribers).
Moreover, as noted supra, Dr. Pelcovits possessed data regarding
advertising revenue for both the benchmark market and the statutory
market, yet he chose not to focus on such data, asserting that it
failed to reflect the willingness of consumers to pay for the
services.\47\ Pelcovits WDT at 24.
---------------------------------------------------------------------------
\47\ Dr. Pelcovits's decision to ignore advertising revenues in
his analysis implicitly constituted an a priori rejection of the
noninteractive webcaster business model that seeks revenue primarily
through advertising rather than from subscriptions.
---------------------------------------------------------------------------
The Judges conclude that the interactive benchmark model as
developed by Dr. Pelcovits is compromised, and its usefulness reduced,
by its failure to take into account the advertising revenue received in
both the interactive benchmark market and the statutory noninteractive
market.
(ii) SoundExchange's Failure To Incorporate Independent Label Contract
Rates in its Benchmark Analysis
Dr. Pelcovits relied upon the contracts between the major record
companies and 18 webcasters in performing his interactive benchmark
comparison. However, he completely excluded from his rate analysis the
rates charged by the independent record companies in his benchmark
interactive market and in the noninteractive market that is the subject
of this proceeding. This is an important omission, because, as noted by
Live365's rebuttal economic witness, Dr. Michael Salinger,
approximately 40% of the music streamed on noninteractive webcasts is
owned and licensed by independent labels. Salinger WRT at 15. On the
other hand, Dr. Salinger did not provide any empirical support for the
conclusion that inclusion of the rates charged by independent labels
would have resulted in different rates. SX RFF at ]] 101-103.
Thus, the issue becomes one of allocation of the burden of going
forward with evidence on this point. The Judges conclude that since
SoundExchange had collected information on 214 agreements between
webcasters and record companies, including independents, it was in the
best position to go forward with evidence indicating the impact, vel
non, of the rates charged by the independent labels. By failing to do
so, SoundExchange compromised the probative value of its benchmark
analysis. Accordingly, the Judges conclude that the absence of any
evidence as to the impact of the rates charged by the independent
labels, either within the model itself or as an adjustment, diminishes
the value of that interactive benchmark analysis.
(iii) SoundExchange's Failure To Adjust for the Downward Trend in Rates
in the Interactive Benchmark Market
The effective play rate in the interactive benchmark market
calculated by Dr. Pelcovits covered an 18-month period from 2007
through 2009. 4/20/10 Tr. at 309-10 (Pelcovits). Dr. Pelcovits relied
upon the average rate in that 18-month period. However, he did not
account for the fact that the rate had been declining during this
period, from $0.02610 in 2007 down to $0.01917 in 2009. By relying upon
the average during the period, $0.02194, and not weighting more heavily
in that average the more recent periods, Dr. Pelcovits's model failed
to account for the temporal decline of rates during his period of
analysis. Salinger WRT at 16-17; Live365 Reb. Ex. 1; 7/28/10 Tr. at
127-28 (Salinger).\48\ Thus, the Judges conclude that the interactive
benchmark rate analysis is compromised by the failure to adequately
weight this downward trend in rates.
---------------------------------------------------------------------------
\48\ See note 24 supra, regarding the more serious problem with
attempts to predict future industry trends.
---------------------------------------------------------------------------
However, as Dr. Salinger acknowledged, this concern could have been
addressed by multiplying Dr. Pelcovits's recommended $0.0036 rate by
the ratio of the low 2009 rate to the average rate over the 18-month
period, i.e., by multiplying that rate by .01917/.02194 (or .8737). 7/
28/10 Tr. at 128-29 (Salinger). SoundExchange performed this
calculation and noted that the rate established by its interactive
benchmark analysis decreased to $0.0031, still above its proposed rates
for the term of the license. SX PFF ] 210.
(iv) The Limited Data Regarding Noninteractive Plays
Dr. Pelcovits candidly admitted that he was unable to obtain data
regarding the number of monthly noninteractive plays, because such data
was not available. Pelcovits WDT at 31-32. Although he attempted to use
a different source as a proxy for such data--the monthly plays by the
Slacker Premium service that allegedly had some noninteractive
features--the probative value of his analysis was diminished by this
lack of sufficient data.
[[Page 23119]]
(c) Problems With Dr. Pelcovits's Hedonic Regression Used as an
Alternative To Measure the Value of Interactivity To Be Subtracted From
Interactive Benchmark Value
Dr. Salinger set forth the same valid overarching criticism of Dr.
Pelcovits's hedonic regression adjustment as he had asserted with
regard to Dr. Pelcovits's adjustment based on the ratios of royalties
to mean subscription rates in the two markets. That is, Dr. Salinger
opined ``any estimate of a reasonable royalty rate . . . suffers from
the fundamental flaw that noninteractive Internet radio is primarily an
advertising-supported business, not a subscription business.'' Salinger
WRT at 18 (emphasis added).
On a more granular level, Dr. Salinger further questioned the
results of Dr. Pelcovits's hedonic regression. First, Dr. Salinger
disagreed with Dr. Pelcovits's use of ``dummy variables'' (i.e.,
``fixed effects variables'') in the hedonic regression. Second, Dr.
Salinger questioned the significance of the results given what Dr.
Salinger testified was the relatively broad confidence interval
bracketing the estimated interactivity coefficient in the hedonic
regression. Salinger WRT at 20, 21 n.31 and Exhibit 6; 7/28/10 Tr. at
66-69 (Salinger).
With regard to the first issue, Dr. Salinger noted, and Dr.
Pelcovits did not disagree, that dummy variables ``are indicator
variables that capture unobserved characteristics whose value does not
change over time.'' Salinger WRT at 21; see also Pelcovits WDT at 28.
In the present case, Dr. Pelcovits included fixed effects/dummy
variables for six separate interactive services--one each offered by
Classical Archives, Digitally Imported, Pasito Tunes, and Altnet
(formerly Kazaa), respectively, and two offered by iMesh.com. In his
Written Direct Testimony, Dr. Pelcovits did not comment upon the impact
of these fixed effects/dummy variables. However, he also ran his
regression without these fixed effects/dummy variables. This
alternative regression increased the value of interactivity from $8.52
to $10.55 per subscriber per month. Salinger WRT at 20.
This higher value for the interactivity feature, when subtracted
from the overall value of an interactive service as computed by Dr.
Pelcovits, ``caus[ed] the estimated royalty rate to decline . . . from
$0.0036 to $0.0023.'' Salinger WRT at 20 (emphasis added).
SoundExchange did not contest the probative value of this criticism,
but rather acknowledged: ``Dr. Pelcovits also ran regressions without
the fixed effects variables, and those results were produced to
Live365.'' SX PFF ] 215. The Judges are mindful that this essentially
undisputed revised value--$0.0023--is highly proximate to the rates
established in the WSA Agreements.\49\
---------------------------------------------------------------------------
\49\ Dr. Pelcovits also acknowledged that his hedonic regression
did not necessarily isolate product characteristics (such as
interactivity in the present proceeding) from supply and demand
effects on prices (subscription rates in the present proceeding). 4/
20/10 Tr. at 373-76.
---------------------------------------------------------------------------
Dr. Salinger's second specific criticism of Dr. Pelcovits's hedonic
regression, identified above, concerns the breadth of the confidence
interval within which lies Dr. Pelcovits's estimated interactivity
coefficient. Specifically, Dr. Pelcovits did not provide any
``confidence interval'' around his result. Salinger WRT at 21-22 and
n.31. Dr. Salinger calculated that, at a 95% confidence interval, Dr.
Pelcovits's regression results would have a range that would be far
less (on the low end of the range) than the rate that Live365 proposed
and far higher (on the high end of the range) than the rates that
SoundExchange proposed. Id.
3. The ``Affordability'' of the Proposed Interactive Benchmark Rates
Live365 asserted that SoundExchange's interactive benchmark rate
was too high. Specifically, Live365 asserted that this interactive
benchmark rate could not be utilized because numerous webcasters would
be unable to afford the $0.0036 rate derived from that analysis.
Live365 PFF ]] 216-222. Although Live365 characterizes this alleged
unaffordability as a ``reality check,'' it is no such thing. A single
price established in any market by its very nature inevitably will
restrict some purchasers who are unable or unwilling to pay the market
price. (In common parlance, they may be said to have been ``priced out
of the market.'') The rate of $0.0036 may be too high for other reasons
(and indeed it is), but the fact that any particular number of
webcasters might not profit under that rate, or that others would
either shut down or never enter the market, is not evidence that the
rate deviates from the market rate. The essence of a single market
price is that it rations goods and services; by definition, a non-
discriminatory price system therefore excludes buyers who cannot or
will not pay the market price (and excludes sellers who cannot or will
not accept the market price).
4. Judges' Conclusions Regarding the Commercial Webcasters Rates
To summarize the Judges' conclusions as discussed above: \50\
\50\ In considering the Live365 proposal, the willing buyer/
willing seller standard in the Act encompasses consideration of
economic, competitive, and programming information presented by the
parties, including (i) the promotional or substitution effects of
the use of webcasting services by the public on the sales of
phonorecords or other effects of the use of webcasting that may
interfere with or enhance the sound recording copyright owner's
other streams of revenue from its sound recordings; and (ii) the
relative contributions made by the copyright owner and the
webcasting service with respect to creativity, technology, capital
investment, cost and risk in bringing the copyrighted work and the
service to the public. See 17 U.S.C. 114(f)(2)(B)(i) and (ii). The
adoption of an adjusted benchmark approach to determine the rates
leads this panel to agree with Web II and Web I that such statutory
considerations implicitly have been factored into the negotiated
prices utilized in the benchmark agreements. Web II, 72 FR at 24095;
Web I, 67 FR at 45244. Therefore, the Judges have implicitly
incorporated such considerations in the evaluation of the benchmark
proposals submitted by SoundExchange. Accordingly, the Judges
conclude that SoundExchange's separate analyses discussing these
statutory factors, see SoundExchange PFF, Point IX, are subsumed in
its willing buyer/willing seller analyses.
---------------------------------------------------------------------------
The Judges will set a per-performance rate, in light of
the fact that neither of the contesting parties proposed a
percentage-of-revenue based rate or any other rate structure.
The Judges shall not utilize the Live365 Model to
establish either the rate for commercial webcasters or the zone of
reasonableness within which an appropriate rate would lie.
The Judges shall utilize the rates set forth in the WSA
Agreements between SoundExchange and the NAB and Sirius XM,
respectively, to establish an approximate zone of reasonableness for
the statutory rates to be determined in this proceeding.
The Judges shall utilize the SoundExchange interactive
benchmark analysis, adjusted to reflect the undisputed impact of the
fixed effects/dummy variables, to establish an approximate zone of
reasonableness for the statutory rates to be determined in this
proceeding.
The Judges are also mindful of the procedural context of this
determination, as summarized at the outset of this decision, supra.
Rates were set for noninteractive commercial webcasting almost three
years ago, on March 9, 2011, for the 2011-2015 rate period. No
participant sought a rehearing or appealed those rates to the D.C.
Circuit.
Further, after the D.C. Circuit vacated the March 9, 2011,
determination and the case was remanded to the Judges, neither Live365
nor SoundExchange requested any new proceeding in connection with any
aspect of the prior determination. Indeed, Live365 did not respond to
the Judges' request for
[[Page 23120]]
suggestions as to how to proceed with the remand, and SoundExchange
responded only with regard to the minimum fee issue that had been
challenged on appeal by IBS, stating that the prior determination in
that regard should be reaffirmed.
Thus, it is clear that the contesting parties had accepted the
rates as established in the March 9, 2011, determination. The Judges
are reluctant to upset settled expectations by retroactively altering
rates that have been established for several years, and that licensees
have already paid in some years, provided that those rates fall within
the zone of reasonableness that the Judges determine in this
proceeding.
The present de novo determination is substantively distinct in a
number of respects from the prior determination, but the analysis leads
to an approximate ``zone of reasonableness'' within which an
appropriate rate for commercial webcasters can be established that
includes the rates established in the March 9, 2011 determination.
Specifically, the Judges find that the approximate zone of
reasonableness for the rates for commercial webcasters for the 2011-
2015 rate period is as follows:
------------------------------------------------------------------------
Year Lower bound Upper bound
------------------------------------------------------------------------
2011........................ $0.0017 (NAB/SX $0.0023 (lowest
rate). adjusted
interactive rate).
2012........................ $0.0020 (NAB/SX; $0.0023 (lowest
Sirius XM/SX rate). adjusted
interactive rate).
2013........................ $0.0021 (Sirius XM/ $0.0023 (lowest
SX rate). adjusted
interactive rate).
2014........................ $0.0022 (Sirius SM/ $0.0023 (lowest
SX rate). adjusted
interactive; NAB/SX
rate).
2015........................ $0.0023 (lowest $0.0025 (NAB/SX
adjusted rate).
interactive rate).
------------------------------------------------------------------------
The Judges recognize that the rates set previously for the 2011-
2015 term fall within this zone of reasonableness,\51\ and hereby adopt
them.
---------------------------------------------------------------------------
\51\ However, the zone of reasonableness in this determination
is significantly tighter than the zone established in the vacated
determination. Specifically, the zone in the vacated determination
was bracketed by a low per-play rate of $0.0019 and a high rate of
$0.0036. 76 FR at 13036.
---------------------------------------------------------------------------
Accordingly, with regard to the license for commercial webcasters,
the Judges set the following per-play rates for the five-year period
that began in 2011:
------------------------------------------------------------------------
Year Rate
------------------------------------------------------------------------
2011....................................................... $0.0019
2012....................................................... $0.0021
2013....................................................... $0.0021
2014....................................................... $0.0023
2015....................................................... $0.0023
------------------------------------------------------------------------
V. Rates For Noncommercial Webcasters
A. Noncommercial Educational Webcasters
On August 13, 2009, SoundExchange and CBI submitted a joint motion
under 17 U.S.C. 801(b)(7)(A) regarding a partial settlement ``for
certain internet transmissions by college radio stations and other
noncommercial educational webcasters'' (CBI/SoundExchange Agreement).
The parties sought to make the agreed rates and terms applicable to
noncommercial educational webcasters for the period 2011 through
2015.\52\ Joint Motion to Adopt Partial Settlement, at 1 (Aug. 13,
2009). CBI and SoundExchange reached the CBI/SoundExchange Agreement
under authorization granted by the 2009 WSA. The Copyright Office
published the terms of the settlement in the Federal Register. See 74
FR 40616 (Aug. 12, 2009). By virtue of that publication, the CBI/
SoundExchange Agreement is ``available, as an option, to any . . .
noncommercial webcaster meeting the eligibility conditions of such
agreement.'' 17 U.S.C. 114(f)(5)(B).
---------------------------------------------------------------------------
\52\ The proposed regulatory language in the CBI/SoundExchange
agreement originally included the following sentences in 37 CFR
380.20(b) that created confusion as to whether SoundExchange and CBI
were asking the Judges to adopt the agreement as an option for
noncommercial educational webcasters or whether the agreement would
be binding on all noncommercial educational webcasters:
However, if a Noncommercial Educational Webcaster is also
eligible for any other rates and terms for its Eligible
Transmissions during the period January 1, 2011, through December
31, 2015, it may by written notice to the Collective in a form to be
provided by the Collective, elect to be subject to such other rates
and terms rather than the rates and terms specified in this subpart.
If a single educational institution has more than one station making
Eligible Transmissions, each such station may determine individually
whether it elects to be subject to this subpart.
Digital Performance Right in Sound Recordings and Ephemeral
Recordings, Proposed rule, 75 FR 16377, 16383 (Apr. 1, 2010); see 5/
5/10 Tr. at 5-51 (Hearing on Joint Motion to Adopt Partial
Settlement).
With the concurrence of SoundExchange's counsel, see 5/5/10 Tr.
at 46-47, 50-51 (Hearing on Joint Motion to Adopt Partial
Settlement), the Judges find the language confusing and unnecessary
and decline to adopt it.
---------------------------------------------------------------------------
On April 1, 2010, the Judges published the CBI/SoundExchange
Agreement, with minor changes,\53\ under the authority of section
801(b)(7)(A) of the Act. See 75 FR 16377 (Apr. 1, 2010) (including CBI/
SoundExchange Agreement and NAB/SoundExchange Agreement). With respect
to rates, the Agreement imposes an annual, nonrefundable minimum fee of
$500 for each station or individual channel, including each of its
individual side channels. Id. at 16384. Under the Agreement, those
noncommercial educational webcasters whose monthly ATH exceed 159,140,
pay additional fees on a per-performance basis. The CBI/SoundExchange
Agreement also provides for an optional $100 proxy fee that
noncommercial educational webcasters may pay in lieu of submitting
reports of use of sound recordings. The agreement also contains a
number of payment terms.
---------------------------------------------------------------------------
\53\ The Judges modified a reference to earlier regulations to
bring it up to date. Deeming it inappropriate to the purpose of CRB
regulations, the Judges declined to adopt language regarding
compliance or noncompliance with the Agreement and reservation of
rights. See note 52 supra, and accompanying text.
---------------------------------------------------------------------------
Section 801(b)(7)(A) of the Act provides that, after providing
notice and opportunity for affected parties to comment, the Judges
shall adopt a settlement agreement among some or all of the
participants in a proceeding as a basis for statutory rates and terms,
unless a participant in the proceeding objects and the Judges find that
the agreement does not provide a reasonable basis for setting rates and
terms. The Judges received 24 comments from terrestrial radio stations
favoring adoption of the CBI/SoundExchange Agreement.\54\ IBS opposed
adoption of the CBI/SoundExchange Agreement. The Judges held a hearing
on those objections on May 5, 2010.\55\
---------------------------------------------------------------------------
\54\ Many of these comments asserted that the rate structure was
compatible with their stations' respective budget constraints, see,
e.g., Comment of Bill Keith for WSDP Radio, Plymouth-Canton
Community Schools (Apr. 20, 2010) (``The monetary amount was
reasonable and most college or high school stations can live with
the amounts charged for webcasting''), and several expressed
satisfaction with the $100 proxy fee in lieu of reports of use. See,
e.g., Comments of Christopher Thuringer for WRFL, University of
Kentucky (Apr. 20, 2010); Comments of David Black, General Manager,
WSUM-FM (Apr. 19, 2010).
\55\ The Judges deferred a decision whether to adopt the
settlement until IBS had an opportunity to present its witness
testimony as part of its direct and rebuttal cases.
---------------------------------------------------------------------------
[[Page 23121]]
The rationale for the IBS objection to adoption of the settlement
described in the CBI/SoundExchange Agreement has remained elusive
throughout the proceeding. In its initial comments, IBS expressed its
concern that adoption of the agreement would create an ``impression''
that the Judges had ``prejudged the outcome of the adjudicatory
hearing,'' notwithstanding IBS's acknowledgement that ``the proposed
rates and terms . . . are non-exclusive, i.e., [the Agreement] provides
for other parties' agreeing with SX to different rates and terms.''
Comments of IBS (Apr. 22, 2010).
During the May 5, 2010, hearing, IBS argued that by moving for
adoption of their settlement agreement, CBI and SoundExchange were
``attempt[ing] to freeze IBS out of statutory rights to a decision from
the Board on the record.'' 5/5/10 Tr. at 52 (Hearing on Joint Motion to
Adopt Partial Settlement). IBS also raised for the first time specific
exceptions to the $500 minimum fee and $100 proxy fee that are part of
the CBI/SoundExchange Agreement. Id. at 62-64.
In closing argument, IBS reiterated its objection to adoption of
the CBI/SoundExchange Agreement. When pressed by the Judges to
articulate specific objections, IBS counsel stated that IBS objected to
the agreement to the extent it applied to IBS's smaller members.\56\ By
this, the Judges understand counsel to be expressing concern that
adoption of the agreement would prevent IBS from pursuing its rate
proposal (for ``small'' and ``very small'' noncommercial webcasters) in
the proceeding.
---------------------------------------------------------------------------
\56\ [THE JUDGES]: You're not proposing a rate for noncommercial
educational webcasters. Only CBI and SoundExchange are.
MR. MALONE: Right.
[THE JUDGES]: So why are you objecting to the adoption of that
if you have a--two separate categories that you want adopted?
MR. MALONE: Well, the judges can certainly say that--I mean,
there's nothing incompatible with them. The--
[THE JUDGES]: But I'm asking you why are you still objecting to
the adoption of a $500 minimum fee for noncommercial educational
webcasters when you have proposed new fees for two new types of
services and have not proposed a fee for something called a
noncommercial educational webcaster?
MR. MALONE: Well, our--
[THE JUDGES]: Where is your dog in that fight? I don't see it.
MR. MALONE: All right. The dog in that fight is--and, again,
excluding indirect effects that I understand to be the context of
your question. We have no objection to the terms that are there as
long as they don't apply to our small stations.
[THE JUDGES]: So you're just objecting to it on the theory that
you just hope that what's ever in there doesn't somehow get applied
to your case, even though you're asking for two completely different
services?
MR. MALONE: That's essentially correct, Your Honor.
9/30/10 Tr. at 660-61 (IBS Closing Argument).
---------------------------------------------------------------------------
The Judges find that IBS did not interpose a proper objection under
section 801(b)(7)(A)(ii) of the Act that would require the Judges to
weigh the reasonableness of the CBI/SoundExchange Agreement. IBS's
objection is premised on the erroneous assumption that adoption of the
agreement would prevent IBS from pursuing its rate proposal. IBS's
proposal relates to different categories of webcasters from those
covered by the CBI/SoundExchange Agreement. While the latter covers
noncommercial educational webcasters, the IBS proposal covers
noncommercial webcasters (whether or not they qualify as
``educational'') that fall within its definitions of ``small'' and
``very small.'' Adoption of the one does not preclude (and has not
precluded) consideration of the other.
In addition, even if the Judges were to consider IBS's objection to
be proper, IBS failed to present any evidence to support a conclusion
that the CBI/SoundExchange Agreement does not form a reasonable basis
for setting rates and terms for noncommercial educational webcasters.
IBS's counsel made dire predictions that the rate structure adopted in
the agreement would prevent many IBS members from performing webcasting
services. See, e.g., 5/5/10 Tr. at 62-64 (Hearing on Joint Motion to
Adopt Partial Settlement). IBS did not offer testimony from any
adversely affected member, however, in spite of the Judges' invitation
to do so. Id. at 81-82. By contrast, 24 noncommercial webcasters filed
comments with the Judges stating that they support the rates and terms
of the CBI/SoundExchange Agreement, which they found reasonable and
affordable. The Judges find those comments to be both credible and
persuasive.
Finding neither a proper nor a credible objection to the CBI/
SoundExchange Agreement, nor other grounds requiring rejection, the
Judges adopt the agreement (with the modification described supra at
note 52) as the basis for rates and terms for noncommercial educational
webcasters for the period 2011-2015.
B. Other Noncommercial Webcasters
1. Rate Proposals of the Participants
For noncommercial webcasters, SoundExchange proposes a royalty of
$500 per station or channel (including any side channel maintained by a
broadcaster that is a licensee, if not covered by SoundExchange's
proposed settlement with CBI) for each calendar year or part of a
calendar year during which the webcaster is a licensee under sections
114 and 112 of the Act. The licensee would pay the royalty in the form
of a $500 per station or channel annual minimum fee, with no cap. The
$500 fee would constitute the minimum fee under both 17 U.S.C.
112(e)(4) and 114(f)(2)(B), and would permit the noncommercial
webcaster to perform sound recordings up to a limit of 159,140 ATH per
month. If a station or channel were to exceed the ATH limit in any
month, then the noncommercial webcaster would pay at the commercial
usage rates for any overage. Second Revised Proposed Rates and Terms of
SoundExchange, at 3-4 (July 23, 2010). SoundExchange's proposal would
cover all noncommercial webcasters that are not covered by the CBI/
SoundExchange Agreement (i.e., noncommercial educational webcasters).
The IBS rate proposal is more difficult to discern. See, e.g., 4/
22/10 Tr. at 774-93 (Kass). \57\ IBS proposes to create two new
categories of noncommercial webcasters: Small noncommercial webcasters
(defined as noncommercial webcasters with usage up to 15,914 ATH per
month) and very small noncommercial webcasters (defined as
noncommercial webcasters with usage up to 6,365 ATH per month).
Amplification of IBS's Restated Rate Proposal, at 1 (July 28, 2010).
Under the IBS proposal, small noncommercial webcasters would pay a flat
annual fee of $50, which would also constitute the minimum fee. Very
small noncommercial webcasters would pay a flat annual fee of $20,
which would constitute the minimum fee. Id. at 2. Noncommercial
webcasters that exceed
[[Page 23122]]
15,914 ATH would be subject to the noncommercial webcasting rates
proposed by SoundExchange, including SoundExchange's proposed per
performance rates for transmissions in excess of 159,140 ATH per month.
Id. IBS also expressly adopted SoundExchange's proposal with regard to
ephemeral recordings under section 112. Id.
---------------------------------------------------------------------------
\57\ IBS did not file a formal rate proposal with the Judges
prior to the evidentiary hearing. Instead, IBS included a vague
request in the written direct testimony of one of its three
witnesses, Frederick J. Kass, Jr., IBS's chief operating officer.
Kass WDT at 1, 9 (``IBS Members should only pay for their direct use
of the statutory license by the IBS Member. There should be no
minimum fee greater than that which would reasonably approximate the
annual direct use of the statutory license, not to exceed $25.00
annually.''). Capt. Kass's written testimony also included as an
exhibit a joint petition to adopt an agreement negotiated between
the RIAA, IBS, and the Harvard Radio Broadcasting, Co. that was
submitted to the Copyright Office on August 26, 2004. That agreement
contained rates that diverged from those Capt. Kass proposed in his
testimony. This discrepancy led to a convoluted discussion during
Capt. Kass's live testimony as the Judges strived to determine
precisely what rate structure IBS was seeking. 4/22/10 Tr. at 774-93
(Kass). After the hearing, IBS submitted a ``Restatement of IBS's
Rate Proposal'' on May 21, 2010, and an ``Amplification of IBS's
Restated Rate Proposal'' on July 28, 2010. The proposal summarized
in text is from IBS's July 28, 2010, submission.
---------------------------------------------------------------------------
IBS also proposed that noncommercial webcasters transmitting more
than 15,914 ATH but no more than 55,000 ATH per month, be permitted to
pay a $100 annual proxy fee in lieu of submitting reports of use. Id.
at 3. IBS proposed that noncommercial webcasters transmitting fewer
than 15,914 ATH per month be exempted from making reports of use. Id.
While couched as part of IBS's rate proposal, this is a proposed term
that the Judges will consider in the discussion of terms, infra, part
VI.
As an alternative to the foregoing proposal, IBS stated that it was
``prepared to offer to SoundExchange'' an annual $10,000 payment to
cover IBS members that are small noncommercial webcasters. Id. The
$10,000 payment was apparently an estimate based on IBS's proposed
rates for ``small'' and ``very small'' noncommercial webcasters; to the
extent that participation by IBS members were to exceed $10,000,
``there would be a true up within 15 days of the end of the year.''
Id.\58\
---------------------------------------------------------------------------
\58\ It is unclear whether IBS intended this proposed payment as
part of the rates proposed to the Judges for adoption, or as an
offer to SoundExchange. Given the Judges' rejection of IBS's
proposed rate structure, it is not necessary to resolve this
ambiguity.
---------------------------------------------------------------------------
2. Evaluation of the Rate Proposals and Determination of Rates
Section 114(f)(2)(B) of the Act directs the Judges to ``distinguish
among the different types of . . . services then in operation'' in
applying the willing buyer/willing seller standard to determine rates
and terms. Id. The recognition of different services is to be ``based
on criteria including, but not limited to, the quantity and nature of
the use of sound recordings and the degree to which use of the service
may substitute for or may promote the purchase of phonorecords by
consumers.'' Id.
In Web II, the Judges found that noncommercial webcasters
constituted a different type of service that should be subject to a
different rate from commercial webcasters.
Based on the available evidence, we find that, up to a point,
certain ``noncommercial'' webcasters may constitute a distinct
segment of the noninteractive webcasting market that in a willing
buyer/willing seller hypothetical marketplace would produce
different, lower rates than . . . for Commercial Webcasters. A
segmented marketplace may have multiple equilibrium prices because
it has multiple demand curves for the same commodity relative to a
single supply curve . . . . The multiple demand curves represent
distinct classes of buyers and each demand curve exhibits a
different price elasticity of demand. By definition, if the
commodity in question derives its demand from its ultimate use, then
the marketplace can remain segmented only if buyers are unable to
transfer the commodity easily among ultimate uses. Put another way,
each type of ultimate use must be different.
Web II, 72 FR at 24097. As a safeguard to ensure that the distinct
segment of the market occupied by noncommercial webcasters did not
encroach on the segment occupied by commercial webcasters, the Judges
capped eligibility for the noncommercial rate at 159,140 ATH per month.
Id. at 24097, 24099-100.
In this proceeding both SoundExchange and IBS have proposed rates
for noncommercial webcasters that differ from the rates for commercial
webcasters, implicitly endorsing the commercial/noncommercial
distinction adopted by the Judges in Web II. For noncommercial
webcasters that do not exceed the 159,140 ATH monthly thresholds, these
participants have proposed the continuation of what is economically a
zero rate for the sound recordings (together with a $500 minimum fee).
The Judges conclude that it is appropriate to continue this
commercial/noncommercial distinction because there is a good economic
foundation for maintaining this dichotomy. More specifically, a
``noncommercial'' webcaster by definition is not participating fully in
the private market. Although the costs associated with the production
and delivery of a sound recording remain the same regardless of whether
it is played by a commercial or noncommercial webcaster, apparently the
noncommercial webcaster receives little or no customer or advertiser
revenue. (Revenue must be received from some source though, in order to
pay the minimum fee.)
The zero per-performance fee has an economic basis because it
reflects: (i) The paucity of revenue earned by a noncommercial
webcaster; and (ii) the essentially zero marginal cost to the licensors
of supplying an additional copy of a sound recording. The $500 annual
minimum fee per channel or station defrays a portion of the transaction
costs incurred in administering the license.\59\
---------------------------------------------------------------------------
\59\ Of course, this rate structure does not permit the
licensors to recoup from the noncommercial webcasters any portion of
the long-term (non-marginal) costs incurred in the creation and
production of sound recordings.
---------------------------------------------------------------------------
Where SoundExchange and IBS part company is with IBS's proposal to
make further distinctions among noncommercial webcasters based on the
quantity of sound recordings they transmit under the statutory license
(as measured by ATH).
Section 114(f)(2)(B) expressly mentions the quantity of use of
sound recordings as an element that may be considered in recognizing
different types of services. If a participant in a rate proceeding were
to present evidence that, in a hypothetical marketplace, a willing
buyer and a willing seller would negotiate a different rate for
noncommercial webcasters at a given ATH level than they would for all
other noncommercial webcasters, that would argue in favor of
recognizing noncommercial webcasters at that ATH level as a distinct
type of service. IBS, however, did not present any such evidence.
IBS presented testimony from three witnesses as part of its direct
case.\60\ Mr. John Murphy, general manager of WHUS at the University of
Connecticut, Mr. Benjamin Shaiken, a student at the University of
Connecticut and operations manager of WHUS, and Captain Kass, each
testified about the distinctions between college (and, to a lesser
extent, high school) radio stations and commercial radio stations. 4/
21/10 Tr. at 570-73 (Murphy); Murphy WDT ] 4; 4/21/10 Tr. at 615
(Shaiken); Shaiken WDT ] 6; 4/22/10 Tr. at 761, 765 (Kass); Kass WDT ]
6. This is beside the point. There is no dispute between SoundExchange
and IBS as to whether there should be different rates for commercial
and noncommercial webcasters. Both participants accept the commercial/
noncommercial distinction that was part of the Judges' determination in
Web II, and the Judges adopt it in this proceeding. The issue at hand
is whether there should be a
[[Page 23123]]
distinction among different groups within the category of noncommercial
webcasters.
---------------------------------------------------------------------------
\60\ The Judges declined to admit the testimony of IBS's sole
rebuttal witness, Frederick Kass, after it became apparent that his
Written Rebuttal Testimony was not submitted in accordance with the
Judges' rules (it was not verified in accordance with 37 CFR
350.4(d)) and Capt. Kass was unfamiliar with its contents. 7/29/10
Tr. at 292-96 (Kass). IBS sought reconsideration of the decision,
which the Judges denied. Order Denying IBS's Motion for
Reconsideration of the Rulings Excluding Its Rebuttal Case (Aug. 18,
2010). Even if Capt. Kass's testimony had been admitted, it could
not have made up for the deficiencies of IBS's direct case, as such
testimony would have been outside the scope of rebuttal testimony.
---------------------------------------------------------------------------
IBS's primary contention to support a different rate for ``small''
and ``very small'' noncommercial webcasters was that entities falling
into those categories are unable to pay the $500 minimum fee proposed
by SoundExchange. This argument fails for several reasons.
First and foremost, there is no record evidence to support the
contention that noncommercial webcasters who transmit less than 15,914
ATH per month are unable to pay a $500 minimum royalty. IBS did not
offer testimony from any entity that demonstrably qualified as a
``small'' or ``very small'' noncommercial webcaster.\61\ Conclusory
statements by counsel that a $500 minimum royalty is unaffordable for
smaller noncommercial webcasters are not evidence. See, e.g., 5/5/10
Tr. at 62-64 (Hearing on Joint Motion to Adopt Partial Settlement); IBS
PFF at ]] 9-10; IBS PCL at ] 4. Further, these assertions are undercut
by testimony that some of these same entities pay IBS close to $500
annually for membership dues and fees for attending conferences. See 4/
22/10 Tr. at 803-05 (Kass). The only testimony that mentions any
specifics about the finances of smaller webcasters is a reference by
Captain Kass to a survey that showed that IBS members had an average
annual operating budget of $9,000. Kass WDT at ] 9. The survey, which
was conducted more than ten years ago, 4/22/10 Tr. at 835 (Kass), was
not offered into evidence. Without documentary evidence that would
allow the Judges to assess the validity of the survey, Capt. Kass's
reference to it cannot be accepted as evidence. See 37 CFR 351.10(e).
Even if the Judges could accept such a reference as evidence, it would
not advance IBS's case. On its face, an assertion that the average
operating budget for IBS members is $9,000 does not establish that its
members lack the wherewithal to pay a $500 minimum royalty.
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\61\ The two IBS witnesses who were actually engaged in
webcasting were both affiliated with WHUS at the University of
Connecticut, Storrs. There is no record evidence regarding the
quantity of sound recordings transmitted by WHUS. Two facts in the
record--WHUS's 2009 annual revenues of more than $500,000, and their
annual profits of more than $87,000, 4/21/10 Tr. at 583-86
(Murphy)--suggest that WHUS is not a ``small'' or ``very small''
webcaster as those terms are conventionally understood. See also id.
at 590 (``WHUS is probably one of the most financially well-off
stations in the entire IBS system'').
---------------------------------------------------------------------------
There also is no evidence in the record to establish any
correlation between the quantity of sound recordings being transmitted
by a noncommercial webcaster and the size of that webcaster's operating
budget (and, thus, its ability to pay a $500 annual minimum fee).
In addition, the evidence strongly suggests that the ATH cutoffs
that IBS proposed for ``small'' and ``very small'' noncommercial
webcasters are arbitrary. It appears that IBS chose ATH levels that
represent 10% and 4%, respectively, of the ATH cutoff for noncommercial
webcasters employed in Web II and SoundExchange's rate proposal. Id. at
787, 791; IBS PFF at ] 10; IBS PCL at ] 1. Nothing in the record
substantiates these ATH levels as definitive or conclusive of a
webcaster's ability to pay a $500 minimum royalty.
Finally, even if there were a sufficient basis in the record to
conclude that ``small'' and ``very small'' noncommercial webcasters are
unable to pay a $500 minimum fee, that, in itself, does not demonstrate
that a willing seller in a hypothetical marketplace would be prepared
to negotiate a different, lower rate with them. That proposition is
particularly dubious in this proceeding given the evidence in the
record (discussed infra) that SoundExchange's average annual
administrative cost exceeds $500 per station or side channel. The
record does not support a conclusion that, in a hypothetical
marketplace, a willing seller would agree to a price that is
substantially below its administrative costs.
As to the statutory criterion of the ``nature of the use of sound
recordings'' for distinguishing between types of services, there is no
evidence in the record establishing that the use of sound recordings by
``small'' and ``very small'' noncommercial webcasters differs
qualitatively from that of other noncommercial webcasters. 9/30/10 Tr.
at 647-51 (IBS Closing Argument) (conceding the point).
For the foregoing reasons, the Judges find that IBS has failed to
establish a basis for its proposal to recognize ``small'' and ``very
small'' noncommercial webcasters as types of services that are distinct
from noncommercial webcasters generally. The remainder of the IBS rate
proposal (for noncommercial webcasters that exceed 15,914 ATH per
month) is identical to the SoundExchange rate proposal. As noted supra,
IBS proposed an additional term for a subset of noncommercial
webcasters. This is discussed infra, part VI. The Judges, therefore,
reject the IBS proposal for ``small'' and ``very small'' noncommercial
webcasters and proceed to evaluate the SoundExchange rate proposal for
noncommercial webcasters.
SoundExchange contends that its rate proposal (i) most closely
approximates the rate that a willing buyer and willing seller would
negotiate in a hypothetical market, (ii) is demonstrably affordable to
a broad range of noncommercial webcasters, and (iii) is objectively
reasonable given the average administrative cost per service or
channel. The Judges agree.
The CBI/SoundExchange Agreement (see III.B.2.A, supra) is
persuasive evidence that SoundExchange's proposal satisfies the willing
buyer/willing seller standard. That negotiated agreement employs the
same minimum per-channel fee without a cap, as well as the 159,140 ATH
limitation. The fact that 24 noncommercial webcasters filed comments
supporting the agreement corroborates that conclusion.
SoundExchange points out that it was established in Web II that 363
noncommercial webcasters paid royalties in 2009 similar to
SoundExchange's current rate proposal, with 305 of those webcasters
paying only the $500 minimum fee. Web II (Determination on Remand), 75
FR at 56874. Taken together with IBS's failure to present even a morsel
of contrary evidence, the Judges find this fact to be strong evidence
that noncommercial webcasters are able and willing to pay the proposed
fees.\62\
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\62\ In its proposed findings, IBS introduced two new related
arguments: (i) ``Congress in Section 114(f)(2) intended that the
minimum rate be tailored to the type of service in accord with the
general public policy favoring small businesses,'' and (ii) the
Judges are required under the Regulatory Flexibility Act (RFA), 5
U.S.C. 601(6), to determine whether the $500 fee unnecessarily
burdens IBS's members. IBS PFF (Reformatted) at ]] 10-13. Both
contentions are without merit.
The Judges find no support in the text or legislative history of
the Act for the proposition that rates adopted under section
114(f)(2) must be tailored to benefit small businesses. The statute
is quite clear that the Judges' task is to determine rates that
``most clearly represent the rates and terms that would have been
negotiated in the marketplace between a willing buyer and a willing
seller.'' 17 U.S.C. 114(f)(2)(B).
IBS has also failed to establish that the RFA applies to this
proceeding. The RFA defines a ``rule'' (that triggers review under
the Act) as ``any rule for which the agency publishes a general
notice of proposed rulemaking pursuant to'' the APA. 5 U.S.C.
601(2). Determinations of the Judges in rate proceedings are not
subject to the notice and comment rulemaking process under the APA.
Moreover, the RFA's definition of ``rule'' specifically excludes ``a
rule of particular applicability relating to rates.'' Id.
Nor has IBS established that any of its members (or any entities
falling within its proposed definitions of ``small'' and ``very
small'' noncommercial webcasters) are ``small entities'' as defined
in 5 U.S.C. 601(6). IBS did not introduce any evidence concerning
any webcaster other than WHUS, and never even identified its own
members in this proceeding.
In any event, the Judges did consider the circumstances of
noncommercial webcasters in establishing the $500 fee, and found
that the evidence supported their willingness and ability to pay it.
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[[Page 23124]]
Finally, the testimony of Ms. Barrie Kessler, SoundExchange's Chief
Operating Officer, demonstrates that the $500 annual minimum fee is
reasonable. Ms. Kessler estimated SoundExchange's annual administrative
cost per station or channel to be approximately $825 on average.
Kessler WDT at 25. IBS offered no persuasive evidence to dispute this
estimate. As the Judges have noted in previous proceedings, it is
reasonable and appropriate for the minimum fee to at least cover
SoundExchange's administrative cost. See, e.g., Web II (Determination
on Remand), 75 FR at 56873-74. With the average administrative cost
exceeding $800, the Judges find a $500 minimum fee to be eminently
reasonable and appropriate.
In conclusion, the Judges find that the evidence in this proceeding
strongly supports SoundExchange's rate proposal for noncommercial
webcasters. The Judges adopt that proposal for the 2011-2015 rate
period.
VI. Terms
As part of every rate determination, the Judges adjust the
regulatory language that effects the rate changes. These implementing
terms are published in title 37 of the Code of Federal Regulations. The
Judges are obliged to adopt agreed terms if, after published notice, no
party prospectively bound by the terms objects. See 17 U.S.C.
801(b)(7)(A). For the Judges to adopt a contested proposed term, the
proponent must show support for its adoption by reference to the record
of the proceeding.
In this proceeding, both SoundExchange and Live365 proposed changes
to the existing regulatory language. Some of the terms proposed by
SoundExchange are contained in the NAB/SoundExchange and CBI/
SoundExchange agreements adopted in this proceeding. The Judges will
adopt any contested proposed terms only if the proponent meets its
evidentiary burden.
A. Uncontested Terms
1. Collective
The Judges have concluded previously that designation of a single
Collective is economically and administratively efficient. No party to
this proceeding requested a different or additional Collective.
SoundExchange seeks to continue as the sole Collective for royalties
paid by commercial and noncommercial webcasters under the licenses at
issue in this proceeding for the period 2011-2015.
SoundExchange is a section 501(c)(6) nonprofit organization
governed by a Board of Directors comprised of an equal number of artist
representatives and copyright owners. See Kessler WDT at 2. Over the
years of its service as the Collective, SoundExchange has gained
knowledge and experience and has developed efficient systems for
achieving the goals of the Collective at a reasonable cost to those
entitled to the royalties. See id. at 4. In the absence of any request
or suggestion to the contrary, the Judges designate SoundExchange as
the Collective for the 2011-2015 license period.
2. Stipulated Terms and Technical and Conforming Changes
SoundExchange and Live365 stipulated to certain terms in the
Proposed Regulations appearing as an attachment to the Second Revised
Proposed Rates and Terms of SoundExchange, Inc., filed July 23, 2010.
They stipulated that some of the current provisions of the webcasting
terms remain unchanged, that some provisions be removed or changed
because the terms were applicable only to the 2006-2010 license period,
and that some provisions be changed to reflect the terms of the NAB/
SoundExchange and CBI/SoundExchange agreements.
The Judges find that the stipulated terms constitute for the most
part technical and non-controversial changes that will add to the
clarity of the applicable regulations. The Judges, therefore, adopt the
terms proposed jointly by SoundExchange and Live365. In addition, the
Judges adopt what they deem to be technical and conforming changes to
the regulations proposed by SoundExchange, and not opposed by any
party, in Section IV of their Second Revised Rates and Terms, filed
July 23, 2010.
3. Electronic Signature on Statement of Account
SoundExchange proposed eliminating the requirement of a handwritten
signature on the statement of account found in section 380.4(f)(3). SX
PFF at ] 576. According to SoundExchange, allowing electronic
signatures would make it easier for licensees to submit their
statements of account. Id., citing Funn WRT at 3 n.1. Live365's
proposed regulations would also eliminate the requirement for a
handwritten signature on the statement of account. See Attachment to
PFF, Proposed Regulations, Sec. 380.4(f)(3).
The Judges find that this uncontested term would improve the ease
and efficiency with which statements of account may be processed
electronically. In addition, they find the change to be consonant with
the public policy preference expressed by Congress in adopting the E-
SIGN Act, Public Law 106-229, 114 Stat. 464 (June 30, 2000), which
established a general rule upholding the validity of electronic
signatures in interstate and foreign commerce.
The Judges note that the terms they adopted with regard to other
categories of licensees did not eliminate the extant requirement for a
handwritten signature on statements of account. See, e.g., 37 CFR
380.13(f)(3) (for Broadcasters); 380.23(f)(4) (for Noncommercial
Educational Webcasters). The signatories to the Agreements
incorporating the handwritten signature requirement did not participate
in the hearing, however, and did not request a change in the signature
requirement in this proceeding. Given the advance of technology, the
Judges anticipate such requests in the forthcoming rulemaking
proceeding. See note 66, infra.
The adopted terms are included in the appended regulatory language.
B. Contested Terms for Commercial Webcasters
1. Terms Proposed by Live365
Live365 proposed changes to the definitions of two terms in section
380.2: ``performance'' and ``aggregate tuning hours.'' \63\ Live365 PFF
at ] 387 and PCL at ] 79. Specifically, Live365 proposed to modify the
definition of ``performance'' to ``exclude[ ] any performances of sound
recording that are not more than thirty (30) consecutive seconds.''
Live365 PFF at ] 387. Live365 suggested this modification would conform
the definition of ``performance'' in section 380.2 to that of a
``performance'' or ``play'' defined in the four interactive service
agreements reviewed by Dr. Pelcovits. Id. Live365 also contended that
precedent has excluded partial performances from ``royalty-bearing''
performances, citing Digital Performance Right in Sound Recordings and
Ephemeral Recordings, Docket Nos.
[[Page 23125]]
2002-1 CARP DTRA3 & 2001-2 CARP DTNSRA, 68 FR 27506, 09 (May 20, 2003).
---------------------------------------------------------------------------
\63\ In the proposed regulations attached to its proposed
findings of fact, Live365 included an additional term: A proposed
deadline for the completion and issuance of a report regarding an
audit to verify royalty payments. See Attachment to Live365's
Proposed Findings of Fact and Conclusions of Law, Sec. 380.6(g).
Live365 did not discuss this proposal in its proposed findings and
conclusions, and Live365 presented no evidence to support the need
for such a term. The Judges consider the proposal withdrawn.
---------------------------------------------------------------------------
Live365's proposal regarding the definition of ``aggregate tuning
hours'' sought to exclude programming that does not contain recorded
music, e.g., talk, sports, and advertising not containing music.
Live365 PCL at ] 79. Live365 asserted ``programming without sound
recordings should not be subject to consideration in regulations
dealing with a royalty to be paid for the use of sound recordings.''
Id.
SoundExchange opposed both of the Live365 proposed modifications.
SoundExchange contended that these proposed modifications would
constitute new terms, not revisions to a rate proposal, which
SoundExchange asserted may be revised, under section 351.4(b)(3), at
any time up to and including submission of proposed findings of
fact.\64\ SX Reply Findings of Fact at ] 223 (hereinafter, RFF).
---------------------------------------------------------------------------
\64\ The Judges need not address this argument as they decline
to adopt the proposal on other grounds.
---------------------------------------------------------------------------
SoundExchange asserted that Live365's citation to interactive
service agreements without more did not provide sufficient analysis and
was insufficient to show the need for or benefit of the requested
redefinition of ``performance.'' Id. at ]] 226-228. SoundExchange
pointed to Live365's failure to consider the potential effect of its
definition of ``performance'' on the per-performance rate presented by
Drs. Pelcovits and Fratrik. Id. at ] 230. SoundExchange contended that
if the Live365 performance exclusion proposal were adopted,
SoundExchange would require an upward adjustment to the per-performance
rate.\65\ Id.
---------------------------------------------------------------------------
\65\ According to SoundExchange, the upward adjustment would
result from a reduction in the number of plays in the calculation of
a per-performance rate. SX RFF at ] 230.
---------------------------------------------------------------------------
With regard to the request to redefine ``aggregate tuning hours,''
SoundExchange argued that Live365 failed to point to anything in the
record explaining, much less supporting, the need for the proposed
change. Id. at ]] 231-232. Live365 offered no evidence or analysis
regarding the development of a performance rate based on the current
definition of ``aggregate tuning hours.'' The parties developed their
evidence regarding the proposed performance royalty rates using the
existing definition.
Live365 has not met its burden regarding adoption of these terms.
The Judges, therefore, decline to adopt either of Live365's proposed
definitions.
2. Terms Proposed by SoundExchange
SoundExchange proposed several terms relating to the Webcasters'
royalties at issue in this proceeding.\66\ The terms proposed by
SoundExchange follow.
---------------------------------------------------------------------------
\66\ On October 21, 2013, during the pendency of this remand
proceeding, SoundExchange filed a petition for rulemaking seeking
changes to the CRB Notice and Recordkeeping regulations. In the
petition, SoundExchange proposes changes to: (i) Standardize,
consolidate, identify, and match reports to facilitate distribution
of royalties; (ii) conform report formatting of electronic reports,
including adoption of electronic signatures; (iii) require use of
the International Standard Recording Code or another unambiguous
identifier of tracks actually transmitted; (iv) require reports to
include all performances transmitted by a licensee, even though some
may not be subject to the statutory license; (v) address late or
missing Reports of Use by shortening the reporting period, imposing
late fees, and allowing proxy distributions; (vi) set time limits
for submission of corrected or amended Reports of Use; (vii) require
licensees to retain source documents for the data reported on the
Reports of Use; and (viii) implement several regulatory changes
denominated by SoundExchange as ``housekeeping.''
---------------------------------------------------------------------------
a. Server Log Retention
SoundExchange urged the Judges expressly to include server logs as
records to be retained pursuant to section 380.4(h). See Second Revised
Rates and Terms of SoundExchange, Inc., Section III.A., Proposed
Regulations, Sec. 380.4(h) (July 23, 2010); Kessler Corrected WDT at
27. SoundExchange asserted that retention of these records is required
under the current regulations, but requested this amendment because not
all licensees retain server logs. SX PFF at ]] 556-57; Kessler
Corrected WDT at 27. SoundExchange asserted that ``[t]he evidence
indicates marketplace acceptance of such a term,'' citing to the CBI/
SoundExchange Agreement which contains an equivalent term. SX PFF at ]
555.
In its opposition to this term, Live365 noted that neither the NAB/
SoundExchange Agreement nor the Commercial Webcasters Agreement
contained this term nor do any of the interactive service agreements
submitted in this proceeding. Live365 RFF at ] 555. Live365 further
argued that SoundExchange failed to establish that the benefits to
SoundExchange of this term outweigh the burden on licensees to comply.
Id. at ] 557.
The Judges find that SoundExchange has failed to meet its
evidentiary burden. None of the interactive agreements in evidence is
as specific as the regulation SoundExchange proposes. Live365 Exs. 17
and 18; McCrady WDT, Exs. 104-DR & 106-DR. Rather, the agreements
require licensees only to retain records relating to their obligations
under the agreement and in terms no more specific than in the current
regulation. See, e.g., Live365 Exs. 17 at ] 7(h) and Ex. 18 at ] 7(h);
McCrady WDT, Exs. 104-DR at ] 6(j) and 106-DR at ] 4(h). Since these
agreements were negotiated in a setting free from the constraints of
the regulatory scheme, they provide the best evidence of the agreement
of a willing buyer and a willing seller in this respect.
SoundExchange's assertion that inclusion of this term in the CBI/
SoundExchange Agreement constitutes ``marketplace acceptance'' is
overbroad. As SoundExchange acknowledged, the parties reached agreement
under atypical marketplace conditions, overshadowed by the possibility
of a regulatory proceeding. See 9/30/10 Tr. at 547-48 (SoundExchange
Closing Argument). Furthermore, while the CBI/SoundExchange Agreement
contains the term, the NAB/SoundExchange and Sirius XM Agreements do
not, thus undercutting the thrust of the SoundExchange argument.
SoundExchange failed to note, let alone balance, the burden on
licensees against the likely benefits from the proposed change. The
Judges are loathe to adopt a term without such evidence. The Judges
decline to amend Sec. 380.4(h) to specify server logs.
b. Standardized Forms for Statements of Account
SoundExchange proposed to require licensees to submit statements of
account on a standardized form prescribed by SoundExchange.
SoundExchange asserted that a standard form would simplify licensees'
calculations of the royalties owed and facilitate SoundExchange's
efficient collection of information from licensees. SX PFF at ]] 572,
575. At the time of hearing in this proceeding, SoundExchange provided
a template statement of account on its Web site. Id. at ] 574.
SoundExchange noted that noncommercial educational webcasters are
required pursuant to their WSA agreement to use a form supplied by
SoundExchange. McCrady WDT, Ex. 103-DP at section 4.4.1.
Live365 opposed adoption of this term because it would have general
application, thus affecting parties that did not participate in this
proceeding. Live365 asserted that a change with such an impact is
addressed more appropriately in a rulemaking proceeding. Live365 RFF at
] 574.
The Judges do not find support in the record for adoption of a
mandatory standardized statement of account. As Mr. Funn testified, the
majority of
[[Page 23126]]
webcasters currently use the template form made available on
SoundExchange's Web site. Funn WRT at 2; 8/2/10 Tr. at 492 (Funn)
(``much more than half'' of webcasters currently use template). Mr.
Funn provided no information quantifying the additional work for
SoundExchange to process a nonconforming statement of account from the
webcasters that choose not to use the template. Further, neither the
NAB/SoundExchange Agreement nor the Sirius XM/SoundExchange Agreement
contains this term. McCrady WDT, Exs. 101-DP and 102-DP.
Given the already widespread use of SoundExchange's template form,
the lack of quantification in the record of the time savings to
SoundExchange by having a standardized form, and SoundExchange's
failure to include this term in the NAB/SoundExchange and Sirius XM/
SoundExchange Agreements, the Judges find that the record does not
support the adoption of this term.
c. Identification of Licensees and Late Fee for Reports of Use
SoundExchange requested that the Judges harmonize identification of
licensees among the (i) notice of intent to use licenses under sections
112 and 114, (ii) statements of account, and (iii) reports of use, and
to impose a late fee for reports of use. These two requests differ from
the rest of the SoundExchange requests in that these are notice and
recordkeeping terms.\67\ Ms. Kessler acknowledges, at least with
respect to the late fees for reports of use, that they could be
implemented either in the notice and recordkeeping regulations or in
the license terms. See Kessler WDT at 20-23, 27-28. The Judges decline
to adopt SoundExchange's proposals regarding the harmonization of
licensee identification and the imposition of a late fee for reports of
use. The evidence does not compel amendment of the current
recordkeeping regulations; rather, these issues are more appropriately
addressed in a future rulemaking proceeding.
---------------------------------------------------------------------------
\67\ See n.66, supra. SoundExchange requested these same, or
similar, changes in an earlier rulemaking, in which the Judges
imposed census reporting for all services except those broadcasters
paying no more than the minimum fee. See Comments of SoundExchange,
Docket No. RM 2008-7, at 20-23 (Jan. 29, 2009). The requests were
outside the scope of that rulemaking, which was to improve the
reporting regulations in light of technological developments since
promulgation of the interim regulation. The Judges deferred
SoundExchange's requests for consideration in a future rulemaking.
See Notice and Recordkeeping for Use of Sound Recordings Under
Statutory License (Final rule), 74 FR 52418, 52422-23 (Oct. 13,
2009).
---------------------------------------------------------------------------
(1) Identification of Licensees
SoundExchange asserted that harmonization of the identification of
licensees can be accomplished by (i) requiring licensees to identify
themselves on their statements of account and reports of use ``in
exactly the same way [they are] identified on the corresponding notice
of use . . . and that they cover the same scope of activity (e.g., the
same channels or stations),'' SX PFF at ] 568, Kessler WDT at 28; (ii)
making the regulations clear that the ``Licensee'' is ``the entity
identified on the notice of use, statement of account, and report of
use and that each Licensee must submit its own notice of use, statement
of account, and report of use,'' id. (emphasis in original); and (iii)
requiring licensees to use an account number issued by SoundExchange.
Id. at ] 571. Ms. Kessler testified that these proposals would allow
SoundExchange to match to the requisite notice of use, statement of
account, and report of use to the correct licensee more quickly and
efficiently. Kessler WDT at 29; 4/20/10 Tr. at 461 (Kessler). She also
claimed that, for ``little or no evident cost'' to licensees, their
accounting and reporting efforts would be simplified by use of an
account number. Kessler WDT at 29. SoundExchange also asserted that
these proposals are included in the NAB/SoundExchange and CBI/
SoundExchange Agreements. SX PFF at ] 569. In fact, neither Agreement
requires use of an account number.
Live365 did not controvert SoundExchange's proposed findings of
fact relating to the identification issue, nor did it stipulate to the
proposed term. As the term is not agreed, the Judges treat it as a
litigated term. SoundExchange's witness asserted, without evidence,
that the cost to licensees of conforming their reports and using an
assigned account number would be minimal. Kessler WDT at 29.
Conformity of reporting and use of an account number system,
however, is not a feature of the WSA Agreements in evidence. McCrady
WDT, Exs. 101-DP (NAB), 102-DP (Commercial Webcasters) and 103-DP
(CBI). The CBI/SoundExchange Agreement requires that statements of
account list the licensee's name as it appears on the notice of use,
see Sec. 380.23(f)(1), but it does not impose that requirement on
reports of use. Compare McCrady Ex. 103-DP, section 5.2.2 with Sec.
380.23(g).
If adopted in this proceeding, therefore, SoundExchange's proposal
would create an inconsistency within the webcasting regulations. The
Judges decline to adopt this proposal, but find that the issue would be
more appropriately addressed in a future rulemaking proceeding.
(2) Late Fee for Reports of Use
SoundExchange sought imposition of a late fee of 1.5% for reports
of use. The regulations currently require a late fee for untimely
payments and statements of account. See 37 CFR 380.4(c). In support of
this request, Ms. Kessler testified that there was widespread
noncompliance with reporting requirements. She cited failure to file
reports of use as well as late or ``grossly inadequate'' reports.
Kessler WDT at 28. Ms. Kessler testified that noncompliance with the
report of use and payment requirements significantly hamper
SoundExchange's ability to make timely royalty distributions. Kessler
WDT at 28; 4/20/10 Tr. at 458 (Kessler). SoundExchange also points to
the inclusion of a late fee for untimely reports of use in the NAB/
SoundExchange and CBI/SoundExchange Agreements as further support for
its request. SX PFF at ] 564.
Live365 questioned SoundExchange's characterization of a payment as
being useless without a report of use given that both the NAB/
SoundExchange and CBI/SoundExchange Agreements contain reporting
waivers. Live365 RCL at ] 20.
The Judges are not persuaded that a late fee for reports of use is
necessary. None of the interactive agreements in evidence contains such
a term. Live365 Exs. 17, 18; McCrady WDT, Exs.104-DR and 106-DR. Only
the NAB/SoundExchange and CBI/SoundExchange Agreements contain the late
fee; the parties did not include a late fee in the Sirius XM/
SoundExchange Agreement.
SoundExchange failed to meet its burden with regard to this
proposal; the Judges decline to adopt the proposed late fee terms.
C. Contested Terms for Noncommercial Webcasters
IBS proposed two new terms. The first is an exemption from the
recordkeeping reporting requirements, or a permissive proxy fee in lieu
of reporting, for noncommercial webcasters whose usage exceeds 15,914
ATH per month, but is less than 55,000 ATH per month. The second term
proposed by IBS is an express authorization that SoundExchange ``may
elect to accept collective payments on behalf of small and very small
noncommercial webcasters.'' IBS PFF at ] 26.
The Judges decline to adopt IBS's proposed subcategories of
noncommercial webcasters, rendering
[[Page 23127]]
moot their proposed exception from reporting for small and very small
noncommercial webcasters. Their proposal to create an ad hoc
subcategory of noncommercial webcasters whose usage falls between
15,914 and 55,000 ATH suffers from the same defects as their proposal
to create formal categories for small and very small noncommercial
webcasters. IBS presented no evidence to support differential treatment
for webcasters falling in this ad hoc subcategory. While there was
evidence regarding the appropriateness and desirability of a proxy fee
for educational noncommercial webcasters, there was no evidence
presented by any party that the same is true for noncommercial
webcasters other than educational webcasters (who may already take
advantage of the CBI/SoundExchange Agreement).
The Judges decline to adopt IBS's second proposal. As the Judges do
not recognize IBS's proposed subcategories, the second proposal is
rendered moot.
VII. Determination and Order
Having fully considered the record, the Copyright Royalty Judges
make the above Findings of Fact and Determination based on the record.
The Judges issue the foregoing as a Final Determination. The Register
of Copyrights may review the Judges' Final Determination for legal
error in resolving a material issue of substantive copyright law. The
Librarian shall cause the Judges' Final Determination, and any
correction thereto by the Register, to be published in the Federal
Register no later than the conclusion of the 60-day review period.
So ordered.
Dated: February 12, 2014.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
Jesse M. Feder,
Copyright Royalty Judge.
List of Subjects in 37 CFR Part 380
Copyright, Sound recordings.
Final Regulations
0
In consideration of the foregoing, the Copyright Royalty Judges revise
part 380 of title 37 of the Code of Federal Regulations to read as
follows:
PART 380--RATES AND TERMS FOR CERTAIN ELIGIBLE NONSUBSCRIPTION
TRANSMISSIONS, NEW SUBSCRIPTION SERVICES AND THE MAKING OF
EPHEMERAL REPRODUCTIONS
Subpart A--Commercial Webcasters and Noncommercial Webcasters
Sec.
380.1 General.
380.2 Definitions.
380.3 Royalty fees for the public performance of sound recordings
and for ephemeral recordings.
380.4 Terms for making payment of royalty fees and statements of
account.
380.5 Confidential Information.
380.6 Verification of royalty payments.
380.7 Verification of royalty distributions.
380.8 Unclaimed funds.
Subpart B--Broadcasters
Sec.
380.10 General.
380.11 Definitions.
380.12 Royalty fees for the public performance of sound recordings
and for ephemeral recordings.
380.13 Terms for making payment of royalty fees and statements of
account.
380.14 Confidential Information.
380.15 Verification of royalty payments.
380.16 Verification of royalty distributions.
380.17 Unclaimed funds.
Subpart C--Noncommercial Educational Webcasters
Sec.
380.20 General.
380.21 Definitions.
380.22 Royalty fees for the public performance of sound recordings
and for ephemeral recordings
380.23 Terms for making payment of royalty fees and statements of
account.
380.24 Confidential Information.
380.25 Verification of royalty payments.
380.26 Verification of royalty distributions.
380.27 Unclaimed funds.
Authority: 17 U.S.C. 112(e), 114(f), 804(b)(3).
Subpart A--Commercial Webcasters and Noncommercial Webcasters
Sec. 380.1 General.
(a) Scope. This subpart establishes rates and terms of royalty
payments for the public performance of sound recordings in certain
digital transmissions by Licensees as set forth in this subpart in
accordance with the provisions of 17 U.S.C. 114, and the making of
Ephemeral Recordings by Licensees in accordance with the provisions of
17 U.S.C. 112(e), during the period January 1, 2011, through December
31, 2015.
(b) Legal compliance. Licensees relying upon the statutory licenses
set forth in 17 U.S.C. 112(e) and 114 shall comply with the
requirements of those sections, the rates and terms of this subpart,
and any other applicable regulations.
(c) Relationship to voluntary agreements. Notwithstanding the
royalty rates and terms established in this subpart, the rates and
terms of any license agreements entered into by Copyright Owners and
Licensees shall apply in lieu of the rates and terms of this subpart to
transmission within the scope of such agreements.
Sec. 380.2 Definitions.
For purposes of this subpart, the following definitions shall
apply:
Aggregate Tuning Hours (ATH) means the total hours of programming
that the Licensee has transmitted during the relevant period to all
listeners within the United States from all channels and stations that
provide audio programming consisting, in whole or in part, of eligible
nonsubscription transmissions or noninteractive digital audio
transmissions as part of a new subscription service, less the actual
running time of any sound recordings for which the Licensee has
obtained direct licenses apart from 17 U.S.C. 114(d)(2) or which do not
require a license under United States copyright law. By way of example,
if a service transmitted one hour of programming to 10 simultaneous
listeners, the service's Aggregate Tuning Hours would equal 10. If 3
minutes of that hour consisted of transmission of a directly licensed
recording, the service's Aggregate Tuning Hours would equal 9 hours and
30 minutes. As an additional example, if one listener listened to a
service for 10 hours (and none of the recordings transmitted during
that time was directly licensed), the service's Aggregate Tuning Hours
would equal 10.
Broadcaster is a type of Licensee that owns and operates a
terrestrial AM or FM radio station that is licensed by the Federal
Communications Commission.
Collective is the collection and distribution organization that is
designated by the Copyright Royalty Judges. For the 2011-2015 license
period, the Collective is SoundExchange, Inc.
Commercial Webcaster is a Licensee, other than a Noncommercial
Webcaster, that makes eligible digital audio transmissions.
Copyright Owners are sound recording copyright owners who are
entitled to royalty payments made under this subpart pursuant to the
statutory licenses under 17 U.S.C. 112(e) and 114.
Ephemeral Recording is a phonorecord created for the purpose of
[[Page 23128]]
facilitating a transmission of a public performance of a sound
recording under a statutory license in accordance with 17 U.S.C. 114,
and subject to the limitations specified in 17 U.S.C. 112(e).
Licensee is a person that has obtained a statutory license under 17
U.S.C. 114, and the implementing regulations, to make eligible
nonsubscription transmissions, or noninteractive digital audio
transmissions as part of a new subscription service (as defined in 17
U.S.C. 114(j)(8)) other than a Service as defined in Sec. 383.2(h) of
this chapter, or that has obtained a statutory license under 17 U.S.C.
112(e), and the implementing regulations, to make Ephemeral Recordings
for use in facilitating such transmissions, but that is not--
(1) A Broadcaster as defined in Sec. 380.11; or
(2) A Noncommercial Educational Webcaster as defined in Sec.
380.21.
Noncommercial Webcaster is a Licensee that makes eligible digital
audio transmissions and:
(1) Is exempt from taxation under section 501 of the Internal
Revenue Code of 1986 (26 U.S.C. 501),
(2) Has applied in good faith to the Internal Revenue Service for
exemption from taxation under section 501 of the Internal Revenue Code
and has a commercially reasonable expectation that such exemption shall
be granted, or
(3) Is operated by a State or possession or any governmental entity
or subordinate thereof, or by the United States or District of
Columbia, for exclusively public purposes.
Performance is each instance in which any portion of a sound
recording is publicly performed to a listener by means of a digital
audio transmission (e.g., the delivery of any portion of a single track
from a compact disc to one listener) but excluding the following:
(1) A performance of a sound recording that does not require a
license (e.g., a sound recording that is not copyrighted);
(2) A performance of a sound recording for which the service has
previously obtained a license from the Copyright Owner of such sound
recording; and
(3) An incidental performance that both:
(i) Makes no more than incidental use of sound recordings
including, but not limited to, brief musical transitions in and out of
commercials or program segments, brief performances during news, talk
and sports programming, brief background performances during disk
jockey announcements, brief performances during commercials of sixty
seconds or less in duration, or brief performances during sporting or
other public events, and
(ii) Other than ambient music that is background at a public event,
does not contain an entire sound recording and does not feature a
particular sound recording of more than thirty seconds (as in the case
of a sound recording used as a theme song).
Performers means the independent administrators identified in 17
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C.
114(g)(2)(D).
Qualified Auditor is a Certified Public Accountant.
Side Channel is a channel on the Web site of a Broadcaster which
channel transmits eligible transmissions that are not simultaneously
transmitted over the air by the Broadcaster.
Sec. 380.3 Royalty fees for the public performance of sound
recordings and for ephemeral recordings.
(a) Royalty rates. Royalty rates and fees for eligible digital
transmissions of sound recordings made pursuant to 17 U.S.C. 114, and
the making of ephemeral recordings pursuant to 17 U.S.C. 112(e) are as
follows:
(1) Commercial Webcasters. For all digital audio transmissions,
including simultaneous digital audio retransmissions of over-the-air AM
or FM radio broadcasts, and related Ephemeral Recordings, a Commercial
Webcaster will pay a royalty of: $0.0019 per performance for 2011;
$0.0021 per performance for 2012; $0.0021 per performance for 2013;
$0.0023 per performance for 2014; and $0.0023 per performance for 2015.
(2) Noncommercial Webcasters. (i) For all digital audio
transmissions totaling not more than 159,140 Aggregate Tuning Hours
(ATH) in a month, including simultaneous digital audio retransmissions
of over-the-air AM or FM radio broadcasts, and related Ephemeral
Recordings, a Noncommercial Webcaster will pay an annual per channel or
per station performance royalty of $500 in 2011, 2012, 2013, 2014, and
2015.
(ii) For all digital audio transmissions totaling in excess of
159,140 Aggregate Tuning Hours (ATH) in a month, including simultaneous
digital audio retransmissions of over-the-air AM or FM radio
broadcasts, and related Ephemeral Recordings, a Noncommercial Webcaster
will pay a royalty of: $0.0019 per performance for 2011; $0.0021 per
performance for 2012; $0.0021 per performance for 2013; $0.0023 per
performance for 2014; and $0.0023 per performance for 2015.
(b) Minimum fee--(1) Commercial Webcasters. Each Commercial
Webcaster will pay an annual, nonrefundable minimum fee of $500 for
each calendar year or part of a calendar year of the period 2011-2015
during which it is a Licensee pursuant to 17 U.S.C. 112(e) or 114. This
annual minimum fee is payable for each individual channel and each
individual station maintained by Commercial Webcasters, and is also
payable for each individual Side Channel maintained by Broadcasters who
are Commercial Webcasters, provided that a Commercial Webcaster shall
not be required to pay more than $50,000 per calendar year in minimum
fees in the aggregate (for 100 or more channels or stations). For each
such Commercial Webcaster, the annual minimum fee described in this
paragraph (b)(1) shall constitute the minimum fees due under both 17
U.S.C. 112(e)(4) and 114(f)(2)(B). Upon payment of the minimum fee, the
Commercial Webcaster will receive a credit in the amount of the minimum
fee against any additional royalty fees payable in the same calendar
year.
(2) Noncommercial Webcasters. Each Noncommercial Webcaster will pay
an annual, nonrefundable minimum fee of $500 for each calendar year or
part of a calendar year of the period 2011-2015 during which it is a
Licensee pursuant to 17 U.S.C. 112(e) or 114. This annual minimum fee
is payable for each individual channel and each individual station
maintained by Noncommercial Webcasters, and is also payable for each
individual Side Channel maintained by Broadcasters who are
Noncommercial Webcasters. For each such Noncommercial Webcaster, the
annual minimum fee described in this paragraph (b)(2) shall constitute
the minimum fees due under both 17 U.S.C. 112(e)(4) and 114(f)(2)(B).
Upon payment of the minimum fee, the Noncommercial Webcaster will
receive a credit in the amount of the minimum fee against any
additional royalty fees payable in the same calendar year.
(c) Ephemeral recordings. The royalty payable under 17 U.S.C.
112(e) for the making of all Ephemeral Recordings used by the Licensee
solely to facilitate transmissions for which it pays royalties shall be
included within, and constitute 5% of, the total royalties payable
under 17 U.S.C. 112(e) and 114.
Sec. 380.4 Terms for making payment of royalty fees and statements of
account.
(a) Payment to the Collective. A Licensee shall make the royalty
payments due under Sec. 380.3 to the Collective.
(b) Designation of the Collective. (1) Until such time as a new
designation is made, SoundExchange, Inc., is
[[Page 23129]]
designated as the Collective to receive statements of account and
royalty payments from Licensees due under Sec. 380.3 and to distribute
such royalty payments to each Copyright Owner and Performer, or their
designated agents, entitled to receive royalties under 17 U.S.C. 112(e)
or 114(g).
(2) If SoundExchange, Inc. should dissolve or cease to be governed
by a board consisting of equal numbers of representatives of Copyright
Owners and Performers, then it shall be replaced by a successor
Collective upon the fulfillment of the requirements set forth in
paragraph (b)(2)(i) of this section.
(i) By a majority vote of the nine Copyright Owner representatives
and the nine Performer representatives on the SoundExchange board as of
the last day preceding the condition precedent in paragraph (b)(2) of
this section, such representatives shall file a petition with the
Copyright Royalty Judges designating a successor to collect and
distribute royalty payments to Copyright Owners and Performers entitled
to receive royalties under 17 U.S.C. 112(e) or 114(g) that have
themselves authorized the Collective.
(ii) The Copyright Royalty Judges shall publish in the Federal
Register within 30 days of receipt of a petition filed under paragraph
(b)(2)(i) of this section an order designating the Collective named in
such petition.
(c) Monthly payments. A Licensee shall make any payments due under
Sec. 380.3 on a monthly basis on or before the 45th day after the end
of each month for that month. All monthly payments shall be rounded to
the nearest cent.
(d) Minimum payments. A Licensee shall make any minimum payment due
under Sec. 380.3(b) by January 31 of the applicable calendar year,
except that payment for a Licensee that has not previously made
eligible nonsubscription transmissions, noninteractive digital audio
transmissions as part of a new subscription service or Ephemeral
Recordings pursuant to the licenses in 17 U.S.C. 114 and/or 17 U.S.C.
112(e) shall be due by the 45th day after the end of the month in which
the Licensee commences to do so.
(e) Late payments and statements of account. A Licensee shall pay a
late fee of 1.5% per month, or the highest lawful rate, whichever is
lower, for any payment and/or statement of account received by the
Collective after the due date. Late fees shall accrue from the due date
until payment and the related statement of account are received by the
Collective.
(f) Statements of account. Any payment due under Sec. 380.3 shall
be accompanied by a corresponding statement of account. A statement of
account shall contain the following information:
(1) Such information as is necessary to calculate the accompanying
royalty payment;
(2) The name, address, business title, telephone number, facsimile
number (if any), electronic mail address and other contact information
of the person to be contacted for information or questions concerning
the content of the statement of account;
(3) The signature of:
(i) The owner of the Licensee or a duly authorized agent of the
owner, if the Licensee is not a partnership or corporation;
(ii) A partner or delegee, if the Licensee is a partnership; or
(iii) An officer of the corporation, if the Licensee is a
corporation.
(4) The printed or typewritten name of the person signing the
statement of account;
(5) The date of signature;
(6) If the Licensee is a partnership or corporation, the title or
official position held in the partnership or corporation by the person
signing the statement of account;
(7) A certification of the capacity of the person signing; and
(8) A statement to the following effect:
I, the undersigned owner or agent of the Licensee, or officer or
partner, have examined this statement of account and hereby state that
it is true, accurate, and complete to my knowledge after reasonable due
diligence.
(g) Distribution of royalties. (1) The Collective shall promptly
distribute royalties received from Licensees to Copyright Owners and
Performers, or their designated agents, that are entitled to such
royalties. The Collective shall only be responsible for making
distributions to those Copyright Owners, Performers, or their
designated agents who provide the Collective with such information as
is necessary to identify the correct recipient. The Collective shall
distribute royalties on a basis that values all performances by a
Licensee equally based upon the information provided under the reports
of use requirements for Licensees contained in Sec. 370.4 of this
chapter.
(2) If the Collective is unable to locate a Copyright Owner or
Performer entitled to a distribution of royalties under paragraph
(g)(1) of this section within 3 years from the date of payment by a
Licensee, such royalties shall be handled in accordance with Sec.
380.8.
(h) Retention of records. Books and records of a Licensee and of
the Collective relating to payments of and distributions of royalties
shall be kept for a period of not less than the prior 3 calendar years.
Sec. 380.5 Confidential Information.
(a) Definition. For purposes of this subpart, ``Confidential
Information'' shall include the statements of account and any
information contained therein, including the amount of royalty
payments, and any information pertaining to the statements of account
reasonably designated as confidential by the Licensee submitting the
statement.
(b) Exclusion. Confidential Information shall not include documents
or information that at the time of delivery to the Collective are
public knowledge. The party claiming the benefit of this provision
shall have the burden of proving that the disclosed information was
public knowledge.
(c) Use of Confidential Information. In no event shall the
Collective use any Confidential Information for any purpose other than
royalty collection and distribution and activities related directly
thereto.
(d) Disclosure of Confidential Information. Access to Confidential
Information shall be limited to:
(1) Those employees, agents, attorneys, consultants and independent
contractors of the Collective, subject to an appropriate
confidentiality agreement, who are engaged in the collection and
distribution of royalty payments hereunder and activities related
thereto, for the purpose of performing such duties during the ordinary
course of their work and who require access to the Confidential
Information;
(2) An independent and Qualified Auditor, subject to an appropriate
confidentiality agreement, who is authorized to act on behalf of the
Collective with respect to verification of a Licensee's statement of
account pursuant to Sec. 380.6 or on behalf of a Copyright Owner or
Performer with respect to the verification of royalty distributions
pursuant to Sec. 380.7;
(3) Copyright Owners and Performers, including their designated
agents, whose works have been used under the statutory licenses set
forth in 17 U.S.C. 112(e) and 114 by the Licensee whose Confidential
Information is being supplied, subject to an appropriate
confidentiality agreement, and including those employees, agents,
attorneys, consultants and independent contractors of such Copyright
Owners and Performers and their designated agents, subject to an
appropriate confidentiality agreement, for the purpose of performing
their duties
[[Page 23130]]
during the ordinary course of their work and who require access to the
Confidential Information; and
(4) In connection with future proceedings under 17 U.S.C. 112(e)
and 114 before the Copyright Royalty Judges, and under an appropriate
protective order, attorneys, consultants and other authorized agents of
the parties to the proceedings or the courts.
(e) Safeguarding of Confidential Information. The Collective and
any person identified in paragraph (d) of this section shall implement
procedures to safeguard against unauthorized access to or dissemination
of any Confidential Information using a reasonable standard of care,
but no less than the same degree of security used to protect
Confidential Information or similarly sensitive information belonging
to the Collective or person.
Sec. 380.6 Verification of royalty payments.
(a) General. This section prescribes procedures by which the
Collective may verify the royalty payments made by a Licensee.
(b) Frequency of verification. The Collective may conduct a single
audit of a Licensee, upon reasonable notice and during reasonable
business hours, during any given calendar year, for any or all of the
prior 3 calendar years, but no calendar year shall be subject to audit
more than once.
(c) Notice of intent to audit. The Collective must file with the
Copyright Royalty Judges a notice of intent to audit a particular
Licensee, which shall, within 30 days of the filing of the notice,
publish in the Federal Register a notice announcing such filing. The
notification of intent to audit shall be served at the same time on the
Licensee to be audited. Any such audit shall be conducted by an
independent and Qualified Auditor identified in the notice, and shall
be binding on all parties.
(d) Acquisition and retention of report. The Licensee shall use
commercially reasonable efforts to obtain or to provide access to any
relevant books and records maintained by third parties for the purpose
of the audit. The Collective shall retain the report of the
verification for a period of not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent and Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to the
Collective, except where the auditor has a reasonable basis to suspect
fraud and disclosure would, in the reasonable opinion of the auditor,
prejudice the investigation of such suspected fraud, the auditor shall
review the tentative written findings of the audit with the appropriate
agent or employee of the Licensee being audited in order to remedy any
factual errors and clarify any issues relating to the audit; Provided
that an appropriate agent or employee of the Licensee reasonably
cooperates with the auditor to remedy promptly any factual errors or
clarify any issues raised by the audit.
(g) Costs of the verification procedure. The Collective shall pay
the cost of the verification procedure, unless it is finally determined
that there was an underpayment of 10% or more, in which case the
Licensee shall, in addition to paying the amount of any underpayment,
bear the reasonable costs of the verification procedure.
Sec. 380.7 Verification of royalty distributions.
(a) General. This section prescribes procedures by which any
Copyright Owner or Performer may verify the royalty distributions made
by the Collective; provided, however, that nothing contained in this
section shall apply to situations where a Copyright Owner or Performer
and the Collective have agreed as to proper verification methods.
(b) Frequency of verification. A Copyright Owner or Performer may
conduct a single audit of the Collective upon reasonable notice and
during reasonable business hours, during any given calendar year, for
any or all of the prior 3 calendar years, but no calendar year shall be
subject to audit more than once.
(c) Notice of intent to audit. A Copyright Owner or Performer must
file with the Copyright Royalty Judges a notice of intent to audit the
Collective, which shall, within 30 days of the filing of the notice,
publish in the Federal Register a notice announcing such filing. The
notification of intent to audit shall be served at the same time on the
Collective. Any audit shall be conducted by an independent and
Qualified Auditor identified in the notice, and shall be binding on all
Copyright Owners and Performers.
(d) Acquisition and retention of report. The Collective shall use
commercially reasonable efforts to obtain or to provide access to any
relevant books and records maintained by third parties for the purpose
of the audit. The Copyright Owner or Performer requesting the
verification procedure shall retain the report of the verification for
a period of not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent and Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to a Copyright
Owner or Performer, except where the auditor has a reasonable basis to
suspect fraud and disclosure would, in the reasonable opinion of the
auditor, prejudice the investigation of such suspected fraud, the
auditor shall review the tentative written findings of the audit with
the appropriate agent or employee of the Collective in order to remedy
any factual errors and clarify any issues relating to the audit;
Provided that the appropriate agent or employee of the Collective
reasonably cooperates with the auditor to remedy promptly any factual
errors or clarify any issues raised by the audit.
(g) Costs of the verification procedure. The Copyright Owner or
Performer requesting the verification procedure shall pay the cost of
the procedure, unless it is finally determined that there was an
underpayment of 10% or more, in which case the Collective shall, in
addition to paying the amount of any underpayment, bear the reasonable
costs of the verification procedure.
Sec. 380.8 Unclaimed funds.
If the Collective is unable to identify or locate a Copyright Owner
or Performer who is entitled to receive a royalty distribution under
this subpart, the Collective shall retain the required payment in a
segregated trust account for a period of 3 years from the date of
distribution. No claim to such distribution shall be valid after the
expiration of the 3-year period. After expiration of this period, the
Collective may apply the unclaimed funds to offset any costs deductible
under 17 U.S.C. 114(g)(3). The foregoing shall apply notwithstanding
the common law or statutes of any State.
Subpart B--Broadcasters
Sec. 380.10 General.
(a) Scope. This subpart establishes rates and terms of royalty
payments for the public performance of sound recordings in certain
digital transmissions made by Broadcasters as
[[Page 23131]]
set forth herein in accordance with the provisions of 17 U.S.C. 114,
and the making of Ephemeral Recordings by Broadcasters as set forth
herein in accordance with the provisions of 17 U.S.C. 112(e), during
the period January 1, 2011, through December 31, 2015.
(b) Legal compliance. Broadcasters relying upon the statutory
licenses set forth in 17 U.S.C. 112(e) and 114 shall comply with the
requirements of those sections, the rates and terms of this subpart,
and any other applicable regulations not inconsistent with the rates
and terms set forth herein.
(c) Relationship to voluntary agreements. Notwithstanding the
royalty rates and terms established in this subpart, the rates and
terms of any license agreements entered into by Copyright Owners and
digital audio services shall apply in lieu of the rates and terms of
this subpart to transmission within the scope of such agreements.
Sec. 380.11 Definitions.
For purposes of this subpart, the following definitions shall
apply:
Aggregate Tuning Hours means the total hours of programming that
the Broadcaster has transmitted during the relevant period to all
listeners within the United States from any channels and stations that
provide audio programming consisting, in whole or in part, of Eligible
Transmissions.
Broadcaster means an entity that:
(1) Has a substantial business owning and operating one or more
terrestrial AM or FM radio stations that are licensed as such by the
Federal Communications Commission;
(2) Has obtained a compulsory license under 17 U.S.C. 112(e) and
114 and the implementing regulations therefor to make Eligible
Transmissions and related ephemeral recordings;
(3) Complies with all applicable provisions of Sections 112(e) and
114 and applicable regulations; and
(4) Is not a noncommercial webcaster as defined in 17 U.S.C.
114(f)(5)(E)(i).
Broadcaster Webcasts mean eligible nonsubscription transmissions
made by a Broadcaster over the Internet that are not Broadcast
Retransmissions.
Broadcast Retransmissions mean eligible nonsubscription
transmissions made by a Broadcaster over the Internet that are
retransmissions of terrestrial over-the-air broadcast programming
transmitted by the Broadcaster through its AM or FM radio station,
including ones with substitute advertisements or other programming
occasionally substituted for programming for which requisite licenses
or clearances to transmit over the Internet have not been obtained. For
the avoidance of doubt, a Broadcast Retransmission does not include
programming that does not require a license under United States
copyright law or that is transmitted on an Internet-only side channel.
Collective is the collection and distribution organization that is
designated by the Copyright Royalty Judges. For the 2011-2015 license
period, the Collective is SoundExchange, Inc.
Copyright Owners are sound recording copyright owners who are
entitled to royalty payments made under this subpart pursuant to the
statutory licenses under 17 U.S.C. 112(e) and 114(f).
Eligible Transmission shall mean either a Broadcaster Webcast or a
Broadcast Retransmission.
Ephemeral Recording is a phonorecord created for the purpose of
facilitating an Eligible Transmission of a public performance of a
sound recording under a statutory license in accordance with 17 U.S.C.
114(f), and subject to the limitations specified in 17 U.S.C. 112(e).
Performance is each instance in which any portion of a sound
recording is publicly performed to a listener by means of a digital
audio transmission (e.g., the delivery of any portion of a single track
from a compact disc to one listener) but excluding the following:
(1) A performance of a sound recording that does not require a
license (e.g., a sound recording that is not copyrighted);
(2) A performance of a sound recording for which the Broadcaster
has previously obtained a license from the Copyright Owner of such
sound recording; and
(3) An incidental performance that both:
(i) Makes no more than incidental use of sound recordings
including, but not limited to, brief musical transitions in and out of
commercials or program segments, brief performances during news, talk
and sports programming, brief background performances during disk
jockey announcements, brief performances during commercials of sixty
seconds or less in duration, or brief performances during sporting or
other public events, and
(ii) Other than ambient music that is background at a public event,
does not contain an entire sound recording and does not feature a
particular sound recording of more than thirty seconds (as in the case
of a sound recording used as a theme song).
Performers means the independent administrators identified in 17
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C.
114(g)(2)(D).
Qualified Auditor is a Certified Public Accountant.
Small Broadcaster is a Broadcaster that, for any of its channels
and stations (determined as provided in Sec. 380.12(c)) over which it
transmits Broadcast Retransmissions, and for all of its channels and
stations over which it transmits Broadcaster Webcasts in the aggregate,
in any calendar year in which it is to be considered a Small
Broadcaster, meets the following additional eligibility criteria:
(1) During the prior year it made Eligible Transmissions totaling
less than 27,777 Aggregate Tuning Hours; and
(2) During the applicable year it reasonably expects to make
Eligible Transmissions totaling less than 27,777 Aggregate Tuning
Hours; provided that, one time during the period 2011-2015, a
Broadcaster that qualified as a Small Broadcaster under the foregoing
definition as of January 31 of one year, elected Small Broadcaster
status for that year, and unexpectedly made Eligible Transmissions on
one or more channels or stations in excess of 27,777 aggregate tuning
hours during that year, may choose to be treated as a Small Broadcaster
during the following year notwithstanding paragraph (1) of the
definition of ``Small Broadcaster'' if it implements measures
reasonably calculated to ensure that it will not make Eligible
Transmissions exceeding 27,777 aggregate tuning hours during that
following year. As to channels or stations over which a Broadcaster
transmits Broadcast Retransmissions, the Broadcaster may elect Small
Broadcaster status only with respect to any of its channels or stations
that meet all of the foregoing criteria.
Sec. 380.12 Royalty fees for the public performance of sound
recordings and for ephemeral recordings.
(a) Royalty rates. Royalties for Eligible Transmissions made
pursuant to 17 U.S.C. 114, and the making of related ephemeral
recordings pursuant to 17 U.S.C. 112(e), shall, except as provided in
Sec. 380.13(g)(3), be payable on a per-performance basis, as follows:
(1) 2011: $0.0017;
(2) 2012: $0.0020;
(3) 2013: $0.0022;
(4) 2014: $0.0023;
(5) 2015: $0.0025.
(b) Ephemeral royalty. The royalty payable under 17 U.S.C. 112(e)
for any reproduction of a phonorecord made by a Broadcaster during this
license period and used solely by the Broadcaster to facilitate
transmissions for which it pays royalties as and when provided in this
[[Page 23132]]
section is deemed to be included within such royalty payments and to
equal the percentage of such royalty payments determined by the
Copyright Royalty Judges for other webcasting as set forth in Sec.
380.3.
(c) Minimum fee. Each Broadcaster will pay an annual, nonrefundable
minimum fee of $500 for each of its individual channels, including each
of its individual side channels, and each of its individual stations,
through which (in each case) it makes Eligible Transmissions, for each
calendar year or part of a calendar year during 2011-2015 during which
the Broadcaster is a licensee pursuant to licenses under 17 U.S.C.
112(e) and 114, provided that a Broadcaster shall not be required to
pay more than $50,000 in minimum fees in the aggregate (for 100 or more
channels or stations). For the purpose of this subpart, each individual
stream (e.g., HD radio side channels, different stations owned by a
single licensee) will be treated separately and be subject to a
separate minimum, except that identical streams for simulcast stations
will be treated as a single stream if the streams are available at a
single Uniform Resource Locator (URL) and performances from all such
stations are aggregated for purposes of determining the number of
payable performances hereunder. Upon payment of the minimum fee, the
Broadcaster will receive a credit in the amount of the minimum fee
against any additional royalties payable for the same calendar year for
the same channel or station. In addition, an electing Small Broadcaster
also shall pay a $100 annual fee (the ``Proxy Fee'') to the Collective
for the reporting waiver discussed in Sec. 380.13(g)(2).
Sec. 380.13 Terms for making payment of royalty fees and statements
of account.
(a) Payment to the Collective. A Broadcaster shall make the royalty
payments due under Sec. 380.12 to the Collective.
(b) Designation of the Collective. (1) Until such time as a new
designation is made, SoundExchange, Inc., is designated as the
Collective to receive statements of account and royalty payments from
Broadcasters due under Sec. 380.12 and to distribute such royalty
payments to each Copyright Owner and Performer, or their designated
agents, entitled to receive royalties under 17 U.S.C. 112(e) and
114(g).
(2) If SoundExchange, Inc. should dissolve or cease to be governed
by a board consisting of equal numbers of representatives of Copyright
Owners and Performers, then it shall be replaced by a successor
Collective upon the fulfillment of the requirements set forth in
paragraph (b)(2)(i) of this section.
(i) By a majority vote of the nine Copyright Owner representatives
and the nine Performer representatives on the SoundExchange board as of
the last day preceding the condition precedent in paragraph (b)(2) of
this section, such representatives shall file a petition with the
Copyright Royalty Board designating a successor to collect and
distribute royalty payments to Copyright Owners and Performers entitled
to receive royalties under 17 U.S.C. 112(e) or 114(g) that have
themselves authorized such Collective.
(ii) The Copyright Royalty Judges shall publish in the Federal
Register within 30 days of receipt of a petition filed under paragraph
(b)(2)(i) of this section an order designating the Collective named in
such petition.
(c) Monthly payments and reporting. Broadcasters must make monthly
payments where required by Sec. 380.12, and provide statements of
account and reports of use, for each month on the 45th day following
the month in which the Eligible Transmissions subject to the payments,
statements of account, and reports of use were made. All monthly
payments shall be rounded to the nearest cent.
(d) Minimum payments. A Broadcaster shall make any minimum payment
due under Sec. 380.12(b) by January 31 of the applicable calendar
year, except that payment by a Broadcaster that was not making Eligible
Transmissions or Ephemeral Recordings pursuant to the licenses in 17
U.S.C. 114 and/or 17 U.S.C. 112(e) as of said date but begins doing so
thereafter shall be due by the 45th day after the end of the month in
which the Broadcaster commences to do so.
(e) Late fees. A Broadcaster shall pay a late fee for each instance
in which any payment, any statement of account or any report of use is
not received by the Collective in compliance with applicable
regulations by the due date. The amount of the late fee shall be 1.5%
of a late payment, or 1.5% of the payment associated with a late
statement of account or report of use, per month, or the highest lawful
rate, whichever is lower. The late fee shall accrue from the due date
of the payment, statement of account or report of use until a fully
compliant payment, statement of account or report of use is received by
the Collective, provided that, in the case of a timely provided but
noncompliant statement of account or report of use, the Collective has
notified the Broadcaster within 90 days regarding any noncompliance
that is reasonably evident to the Collective.
(f) Statements of account. Any payment due under Sec. 380.12 shall
be accompanied by a corresponding statement of account. A statement of
account shall contain the following information:
(1) Such information as is necessary to calculate the accompanying
royalty payment;
(2) The name, address, business title, telephone number, facsimile
number (if any), electronic mail address (if any) and other contact
information of the person to be contacted for information or questions
concerning the content of the statement of account;
(3) The handwritten signature of:
(i) The owner of the Broadcaster or a duly authorized agent of the
owner, if the Broadcaster is not a partnership or corporation;
(ii) A partner or delegee, if the Broadcaster is a partnership; or
(iii) An officer of the corporation, if the Broadcaster is a
corporation.
(4) The printed or typewritten name of the person signing the
statement of account;
(5) The date of signature;
(6) If the Broadcaster is a partnership or corporation, the title
or official position held in the partnership or corporation by the
person signing the statement of account;
(7) A certification of the capacity of the person signing; and
(8) A statement to the following effect:
I, the undersigned owner or agent of the Broadcaster, or officer or
partner, have examined this statement of account and hereby state that
it is true, accurate, and complete to my knowledge after reasonable due
diligence.
(g) Reporting by Broadcasters in General. (1) Broadcasters other
than electing Small Broadcasters covered by paragraph (g)(2) of this
section shall submit reports of use on a per-performance basis in
compliance with the regulations set forth in part 370 of this chapter,
except that the following provisions shall apply notwithstanding the
provisions of such part 370 of this chapter from time to time in
effect:
(i) Broadcasters may pay for, and report usage in, a percentage of
their programming hours on an Aggregate Tuning Hour basis as provided
in paragraph (g)(3) of this section.
(ii) Broadcasters shall submit reports of use to the Collective on
a monthly basis.
(iii) As provided in paragraph (d) of this section, Broadcasters
shall submit reports of use by no later than the 45th day following the
last day of the month to which they pertain.
[[Page 23133]]
(iv) Except as provided in paragraph (g)(3) of this section,
Broadcasters shall submit reports of use to the Collective on a census
reporting basis (i.e., reports of use shall include every sound
recording performed in the relevant month and the number of
performances thereof).
(v) Broadcasters shall either submit a separate report of use for
each of their stations, or a collective report of use covering all of
their stations but identifying usage on a station-by-station basis;
(vi) Broadcasters shall transmit each report of use in a file the
name of which includes:
(A) The name of the Broadcaster, exactly as it appears on its
notice of use, and
(B) If the report covers a single station only, the call letters of
the station.
(vii) Broadcasters shall submit reports of use with headers, as
presently described in Sec. 370.4(e)(7) of this chapter.
(viii) Broadcasters shall submit a separate statement of account
corresponding to each of their reports of use, transmitted in a file
the name of which includes:
(A) The name of the Broadcaster, exactly as it appears on its
notice of use, and
(B) If the statement covers a single station only, the call letters
of the station.
(2) On a transitional basis for a limited time in light of the
unique business and operational circumstances currently existing with
respect to Small Broadcasters and with the expectation that Small
Broadcasters will be required, effective January 1, 2016, to report
their actual usage in compliance with then-applicable regulations.
Small Broadcasters that have made an election pursuant to paragraph (h)
of this section for the relevant year shall not be required to provide
reports of their use of sound recordings for Eligible Transmissions and
related Ephemeral Recordings. The immediately preceding sentence
applies even if the Small Broadcaster actually makes Eligible
Transmissions for the year exceeding 27,777 Aggregate Tuning Hours, so
long as it qualified as a Small Broadcaster at the time of its election
for that year. In addition to minimum royalties hereunder, electing
Small Broadcasters will pay to the Collective a $100 Proxy Fee to
defray costs associated with this reporting waiver, including
development of proxy usage data.
(3) Broadcasters generally reporting pursuant to paragraph (g)(1)
of this section may pay for, and report usage in, a percentage of their
programming hours on an Aggregate Tuning Hours basis, if:
(i) Census reporting is not reasonably practical for the
programming during those hours, and
(ii) If the total number of hours on a single report of use,
provided pursuant to paragraph (g)(1) of this section, for which this
type of reporting is used is below the maximum percentage set forth
below for the relevant year:
(A) 2011: 16%;
(B) 2012: 14%;
(C) 2013: 12%;
(D) 2014: 10%;
(E) 2015: 8%.
(iii) To the extent that a Broadcaster chooses to report and pay
for usage on an Aggregate Tuning Hours basis pursuant to paragraph
(g)(3) of this section, the Broadcaster shall
(A) Report and pay based on the assumption that the number of sound
recordings performed during the relevant programming hours is 12 per
hour;
(B) Pay royalties (or recoup minimum fees) at the per-performance
rates provided in Sec. 380.12 on the basis of paragraph (g)(3)(iii)(A)
of this section;
(C) Include Aggregate Tuning Hours in reports of use; and
(D) Include in reports of use complete playlist information for
usage reported on the basis of Aggregate Tuning Hours.
(h) Election of Small Broadcaster Status. To be eligible for the
reporting waiver for Small Broadcasters with respect to any particular
channel in a given year, a Broadcaster must satisfy the definition set
forth in Sec. 380.11 and must submit to the Collective a completed and
signed election form (available on the SoundExchange Web site at http://www.soundexchange.com) by no later than January 31 of the applicable
year. Even if a Broadcaster has once elected to be treated as a Small
Broadcaster, it must make a separate, timely election in each
subsequent year in which it wishes to be treated as a Small
Broadcaster.
(i) Distribution of royalties. (1) The Collective shall promptly
distribute royalties received from Broadcasters to Copyright Owners and
Performers, or their designated agents, that are entitled to such
royalties. The Collective shall only be responsible for making
distributions to those Copyright Owners, Performers, or their
designated agents who provide the Collective with such information as
is necessary to identify and pay the correct recipient. The Collective
shall distribute royalties on a basis that values all performances by a
Broadcaster equally based upon information provided under the report of
use requirements for Broadcasters contained in Sec. 370.4 of this
chapter and this subpart, except that in the case of electing Small
Broadcasters, the Collective shall distribute royalties based on proxy
usage data in accordance with a methodology adopted by the Collective's
Board of Directors.
(2) If the Collective is unable to locate a Copyright Owner or
Performer entitled to a distribution of royalties under paragraph
(g)(1) of this section within 3 years from the date of payment by a
Broadcaster, such distribution may be first applied to the costs
directly attributable to the administration of that distribution. The
foregoing shall apply notwithstanding the common law or statutes of any
State.
(j) Retention of records. Books and records of a Broadcaster and of
the Collective relating to payments of and distributions of royalties
shall be kept for a period of not less than the prior 3 calendar years.
Sec. 380.14 Confidential Information.
(a) Definition. For purposes of this subpart, ``Confidential
Information'' shall include the statements of account and any
information contained therein, including the amount of royalty
payments, and any information pertaining to the statements of account
reasonably designated as confidential by the Broadcaster submitting the
statement.
(b) Exclusion. Confidential Information shall not include documents
or information that at the time of delivery to the Collective are
public knowledge. The party claiming the benefit of this provision
shall have the burden of proving that the disclosed information was
public knowledge.
(c) Use of Confidential Information. In no event shall the
Collective use any Confidential Information for any purpose other than
royalty collection and distribution and activities related directly
thereto.
(d) Disclosure of Confidential Information. Access to Confidential
Information shall be limited to:
(1) Those employees, agents, attorneys, consultants and independent
contractors of the Collective, subject to an appropriate
confidentiality agreement, who are engaged in the collection and
distribution of royalty payments hereunder and activities related
thereto, for the purpose of performing such duties during the ordinary
course of their work and who require access to the Confidential
Information;
(2) An independent and Qualified Auditor, subject to an appropriate
confidentiality agreement, who is authorized to act on behalf of the
[[Page 23134]]
Collective with respect to verification of a Broadcaster's statement of
account pursuant to Sec. 380.15 or on behalf of a Copyright Owner or
Performer with respect to the verification of royalty distributions
pursuant to Sec. 380.16;
(3) Copyright Owners and Performers, including their designated
agents, whose works have been used under the statutory licenses set
forth in 17 U.S.C. 112(e) and 114(f) by the Broadcaster whose
Confidential Information is being supplied, subject to an appropriate
confidentiality agreement, and including those employees, agents,
attorneys, consultants and independent contractors of such Copyright
Owners and Performers and their designated agents, subject to an
appropriate confidentiality agreement, for the purpose of performing
their duties during the ordinary course of their work and who require
access to the Confidential Information; and
(4) In connection with future proceedings under 17 U.S.C. 112(e)
and 114(f) before the Copyright Royalty Judges, and under an
appropriate protective order, attorneys, consultants and other
authorized agents of the parties to the proceedings or the courts.
(e) Safeguarding of Confidential Information. The Collective and
any person identified in paragraph (d) of this section shall implement
procedures to safeguard against unauthorized access to or dissemination
of any Confidential Information using a reasonable standard of care,
but not less than the same degree of security used to protect
Confidential Information or similarly sensitive information belonging
to the Collective or person.
Sec. 380.15 Verification of royalty payments.
(a) General. This section prescribes procedures by which the
Collective may verify the royalty payments made by a Broadcaster.
(b) Frequency of verification. The Collective may conduct a single
audit of a Broadcaster, upon reasonable notice and during reasonable
business hours, during any given calendar year, for any or all of the
prior 3 calendar years, but no calendar year shall be subject to audit
more than once.
(c) Notice of intent to audit. The Collective must file with the
Copyright Royalty Board a notice of intent to audit a particular
Broadcaster, which shall, within 30 days of the filing of the notice,
publish in the Federal Register a notice announcing such filing. The
notification of intent to audit shall be served at the same time on the
Broadcaster to be audited. Any such audit shall be conducted by an
independent and Qualified Auditor identified in the notice, and shall
be binding on all parties.
(d) Acquisition and retention of report. The Broadcaster shall use
commercially reasonable efforts to obtain or to provide access to any
relevant books and records maintained by third parties for the purpose
of the audit. The Collective shall retain the report of the
verification for a period of not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent and Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to the
Collective, except where the auditor has a reasonable basis to suspect
fraud and disclosure would, in the reasonable opinion of the auditor,
prejudice the investigation of such suspected fraud, the auditor shall
review the tentative written findings of the audit with the appropriate
agent or employee of the Broadcaster being audited in order to remedy
any factual errors and clarify any issues relating to the audit;
Provided that an appropriate agent or employee of the Broadcaster
reasonably cooperates with the auditor to remedy promptly any factual
error or clarify any issues raised by the audit.
(g) Costs of the verification procedure. The Collective shall pay
the cost of the verification procedure, unless it is finally determined
that there was an underpayment of 10% or more, in which case the
Broadcaster shall, in addition to paying the amount of any
underpayment, bear the reasonable costs of the verification procedure.
Sec. 380.16 Verification of royalty distributions.
(a) General. This section prescribes procedures by which any
Copyright Owner or Performer may verify the royalty distributions made
by the Collective; provided, however, that nothing contained in this
section shall apply to situations where a Copyright Owner or Performer
and the Collective have agreed as to proper verification methods.
(b) Frequency of verification. A Copyright Owner or Performer may
conduct a single audit of the Collective upon reasonable notice and
during reasonable business hours, during any given calendar year, for
any or all of the prior 3 calendar years, but no calendar year shall be
subject to audit more than once.
(c) Notice of intent to audit. A Copyright Owner or Performer must
file with the Copyright Royalty Board a notice of intent to audit the
Collective, which shall, within 30 days of the filing of the notice,
publish in the Federal Register a notice announcing such filing. The
notification of intent to audit shall be served at the same time on the
Collective. Any audit shall be conducted by an independent and
Qualified Auditor identified in the notice, and shall be binding on all
Copyright Owners and Performers.
(d) Acquisition and retention of report. The Collective shall use
commercially reasonable efforts to obtain or to provide access to any
relevant books and records maintained by third parties for the purpose
of the audit. The Copyright Owner or Performer requesting the
verification procedure shall retain the report of the verification for
a period of not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent and Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to a Copyright
Owner or Performer, except where the auditor has a reasonable basis to
suspect fraud and disclosure would, in the reasonable opinion of the
auditor, prejudice the investigation of such suspected fraud, the
auditor shall review the tentative written findings of the audit with
the appropriate agent or employee of the Collective in order to remedy
any factual errors and clarify any issues relating to the audit;
Provided that the appropriate agent or employee of the Collective
reasonably cooperates with the auditor to remedy promptly any factual
errors or clarify any issues raised by the audit.
(g) Costs of the verification procedure. The Copyright Owner or
Performer requesting the verification procedure shall pay the cost of
the procedure, unless it is finally determined that there was an
underpayment of 10% or more, in which case the Collective shall, in
addition to paying the amount of any underpayment, bear the reasonable
costs of the verification procedure.
Sec. 380.17 Unclaimed funds.
If the Collective is unable to identify or locate a Copyright Owner
or Performer who is entitled to receive a royalty distribution under
this subpart,
[[Page 23135]]
the Collective shall retain the required payment in a segregated trust
account for a period of 3 years from the date of distribution. No claim
to such distribution shall be valid after the expiration of the 3-year
period. After expiration of this period, the Collective may apply the
unclaimed funds to offset any costs deductible under 17 U.S.C.
114(g)(3). The foregoing shall apply notwithstanding the common law or
statutes of any State.
Subpart C--Noncommercial Educational Webcasters
Sec. 380.20 General.
(a) Scope. This subpart establishes rates and terms, including
requirements for royalty payments, recordkeeping and reports of use,
for the public performance of sound recordings in certain digital
transmissions made by Noncommercial Educational Webcasters as set forth
herein in accordance with the provisions of 17 U.S.C. 114, and the
making of Ephemeral Recordings by Noncommercial Educational Webcasters
as set forth herein in accordance with the provisions of 17 U.S.C.
112(e), during the period January 1, 2011, through December 31, 2015.
(b) Legal compliance. Noncommercial Educational Webcasters relying
upon the statutory licenses set forth in 17 U.S.C. 112(e) and 114 shall
comply with the requirements of those sections, the rates and terms of
this subpart, and any other applicable regulations not inconsistent
with the rates and terms set forth herein.
(c) Relationship to voluntary agreements. Notwithstanding the
royalty rates and terms established in this subpart, the rates and
terms of any license agreements entered into by Copyright Owners and
digital audio services shall apply in lieu of the rates and terms of
this subpart to transmissions within the scope of such agreements.
Sec. 380.21 Definitions.
For purposes of this subpart, the following definitions shall
apply:
ATH or Aggregate Tuning Hours means the total hours of programming
that a Noncommercial Educational Webcaster has transmitted during the
relevant period to all listeners within the United States over all
channels and stations that provide audio programming consisting, in
whole or in part, of Eligible Transmissions, including from any
archived programs, less the actual running time of any sound recordings
for which the Noncommercial Educational Webcaster has obtained direct
licenses apart from 17 U.S.C. 114(d)(2) or which do not require a
license under United States copyright law. By way of example, if a
Noncommercial Educational Webcaster transmitted one hour of programming
to 10 simultaneous listeners, the Noncommercial Educational Webcaster's
Aggregate Tuning Hours would equal 10. If three minutes of that hour
consisted of transmission of a directly licensed recording, the
Noncommercial Educational Webcaster's Aggregate Tuning Hours would
equal 9 hours and 30 minutes. As an additional example, if one listener
listened to a Noncommercial Educational Webcaster for 10 hours (and
none of the recordings transmitted during that time was directly
licensed), the Noncommercial Educational Webcaster's Aggregate Tuning
Hours would equal 10.
Collective is the collection and distribution organization that is
designated by the Copyright Royalty Judges. For the 2011-2015 license
period, the Collective is SoundExchange, Inc.
Copyright Owners are sound recording copyright owners who are
entitled to royalty payments made under this subpart pursuant to the
statutory licenses under 17 U.S.C. 112(e) and 114(f).
Eligible Transmission means an eligible nonsubscription
transmission made by a Noncommercial Educational Webcaster over the
Internet.
Ephemeral Recording is a phonorecord created for the purpose of
facilitating an Eligible Transmission of a public performance of a
sound recording under a statutory license in accordance with 17 U.S.C.
114(f), and subject to the limitations specified in 17 U.S.C. 112(e).
Noncommercial Educational Webcaster means Noncommercial Webcaster
(as defined in 17 U.S.C. 114(f)(5)(E)(i)) that:
(1) Has obtained a compulsory license under 17 U.S.C. 112(e) and
114 and the implementing regulations therefor to make Eligible
Transmissions and related ephemeral recordings;
(2) Complies with all applicable provisions of Sections 112(e) and
114 and applicable regulations;
(3) Is directly operated by, or is affiliated with and officially
sanctioned by, and the digital audio transmission operations of which
are staffed substantially by students enrolled at, a domestically
accredited primary or secondary school, college, university or other
post-secondary degree-granting educational institution; and
(4) Is not a ``public broadcasting entity'' (as defined in 17
U.S.C. 118(g)) qualified to receive funding from the Corporation for
Public Broadcasting pursuant to the criteria set forth in 47 U.S.C.
396.
Performance is each instance in which any portion of a sound
recording is publicly performed to a listener by means of a digital
audio transmission (e.g., the delivery of any portion of a single track
from a compact disc to one listener) but excluding the following:
(1) A performance of a sound recording that does not require a
license (e.g., a sound recording that is not copyrighted);
(2) A performance of a sound recording for which the Noncommercial
Educational Webcaster has previously obtained a license from the
Copyright Owner of such sound recording; and
(3) An incidental performance that both:
(i) Makes no more than incidental use of sound recordings,
including, but not limited to, brief musical transitions in and out of
commercials or program segments, brief performances during news, talk
and sports programming, brief background performances during disk
jockey announcements, brief performances during commercials of sixty
seconds or less in duration, or brief performances during sporting or
other public events; and
(ii) Other than ambient music that is background at a public event,
does not contain an entire sound recording and does not feature a
particular sound recording of more than thirty seconds (as in the case
of a sound recording used as a theme song).
Performers means the independent administrators identified in 17
U.S.C. 114(g)(2)(B) and (C) and the parties identified in 17 U.S.C.
114(g)(2)(D).
Qualified Auditor is a Certified Public Accountant.
Sec. 380.22 Royalty fees for the public performance of sound
recordings and for ephemeral recordings.
(a) Minimum fee. Each Noncommercial Educational Webcaster shall pay
an annual, nonrefundable minimum fee of $500 (the ``Minimum Fee'') for
each of its individual channels, including each of its individual side
channels, and each of its individual stations, through which (in each
case) it makes Eligible Transmissions, for each calendar year it makes
Eligible Transmissions subject to this subpart. For clarity, each
individual stream (e.g., HD radio side channels, different stations
owned by a single licensee) will be treated separately and be subject
to a separate minimum. In addition, a Noncommercial Educational
Webcaster electing the reporting waiver
[[Page 23136]]
described in Sec. 380.23(g)(1), shall pay a $100 annual fee (the
``Proxy Fee'') to the Collective.
(b) Additional usage fees. If, in any month, a Noncommercial
Educational Webcaster makes total transmissions in excess of 159,140
Aggregate Tuning Hours on any individual channel or station, the
Noncommercial Educational Webcaster shall pay additional usage fees
(``Usage Fees'') for the Eligible Transmissions it makes on that
channel or station after exceeding 159,140 total ATH at the following
per-performance rates:
(1) 2011: $0.0017;
(2) 2012: $0.0020;
(3) 2013: $0.0022;
(4) 2014: $0.0023;
(5) 2015: $0.0025.
(6) For a Noncommercial Educational Webcaster unable to calculate
actual total performances and not required to report ATH or actual
total performances under Sec. 380.23(g)(3), the Noncommercial
Educational Webcaster may pay its Usage Fees on an ATH basis, provided
that the Noncommercial Educational Webcaster shall pay its Usage Fees
at the per-performance rates provided in paragraphs (b)(1) through (5)
of this section based on the assumption that the number of sound
recordings performed is 12 per hour. The Collective may distribute
royalties paid on the basis of ATH hereunder in accordance with its
generally applicable methodology for distributing royalties paid on
such basis. In addition, and for the avoidance of doubt, a
Noncommercial Educational Webcaster offering more than one channel or
station shall pay Usage Fees on a per-channel or -station basis.
(c) Ephemeral royalty. The royalty payable under 17 U.S.C. 112(e)
for any ephemeral reproductions made by a Noncommercial Educational
Webcaster and covered by this subpart is deemed to be included within
the royalty payments set forth in paragraphs (a) and (b)(1) through (5)
of this section and to equal the percentage of such royalty payments
determined by the Copyright Royalty Judges for other webcasting in
Sec. 380.3.
Sec. 380.23 Terms for making payment of royalty fees and statements
of account.
(a) Payment to the Collective. A Noncommercial Educational
Webcaster shall make the royalty payments due under Sec. 380.22 to the
Collective.
(b) Designation of the Collective. (1) Until such time as a new
designation is made, SoundExchange, Inc., is designated as the
Collective to receive statements of account and royalty payments from
Noncommercial Educational Webcasters due under Sec. 380.22 and to
distribute such royalty payments to each Copyright Owner and Performer,
or their designated agents, entitled to receive royalties under 17
U.S.C. 112(e) or 114(g).
(2) If SoundExchange, Inc., should dissolve or cease to be governed
by a board consisting of equal numbers of representatives of Copyright
Owners and Performers, then it shall be replaced by a successor
Collective upon the fulfillment of the requirements set forth in
paragraph (b)(2)(i) of this section.
(i) By a majority vote of the nine Copyright Owner representatives
and the nine Performer representatives on the SoundExchange board as of
the last day preceding the condition precedent in this paragraph
(b)(2), such representatives shall file a petition with the Copyright
Royalty Board designating a successor to collect and distribute royalty
payments to Copyright Owners and Performers entitled to receive
royalties under 17 U.S.C. 112(e) or 114(g) that have themselves
authorized such Collective.
(ii) The Copyright Royalty Judges shall publish in the Federal
Register within 30 days of receipt of a petition filed under paragraph
(b)(2)(i) of this section an order designating the Collective named in
such petition.
(c) Minimum fee. Noncommercial Educational Webcasters shall submit
the Minimum Fee, and Proxy Fee if applicable, accompanied by a
statement of account, by January 31st of each calendar year, except
that payment of the Minimum Fee, and Proxy Fee if applicable, by a
Noncommercial Educational Webcaster that was not making Eligible
Transmissions or Ephemeral Recordings pursuant to the licenses in 17
U.S.C. 114 and/or 17 U.S.C. 112(e) as of said date but begins doing so
thereafter shall be due by the 45th day after the end of the month in
which the Noncommercial Educational Webcaster commences doing so.
Payments of minimum fees must be accompanied by a certification, signed
by an officer or another duly authorized faculty member or
administrator of the institution with which the Noncommercial
Educational Webcaster is affiliated, on a form provided by the
Collective, that the Noncommercial Educational Webcaster:
(1) Qualifies as a Noncommercial Educational Webcaster for the
relevant year; and
(2) Did not exceed 159,140 total ATH in any month of the prior year
for which the Noncommercial Educational Webcaster did not submit a
statement of account and pay any required Usage Fees. At the same time
the Noncommercial Educational Webcaster must identify all its stations
making Eligible Transmissions and identify which of the reporting
options set forth in paragraph (g) of this section it elects for the
relevant year (provided that it must be eligible for the option it
elects).
(d) Usage fees. In addition to its obligations pursuant to
paragraph (c) of this section, a Noncommercial Educational Webcaster
must make monthly payments of Usage Fees where required by Sec.
380.22(b), and provide statements of account to accompany these
payments, for each month on the 45th day following the month in which
the Eligible Transmissions subject to the Usage Fees and statements of
account were made. All monthly payments shall be rounded to the nearest
cent.
(e) Late fees. A Noncommercial Educational Webcaster shall pay a
late fee for each instance in which any payment, any statement of
account or any report of use is not received by the Collective in
compliance with the applicable regulations by the due date. The amount
of the late fee shall be 1.5% of the late payment, or 1.5% of the
payment associated with a late statement of account or report of use,
per month, compounded monthly for the balance due, or the highest
lawful rate, whichever is lower. The late fee shall accrue from the due
date of the payment, statement of account or report of use until a
fully compliant payment, statement of account or report of use (as
applicable) is received by the Collective, provided that, in the case
of a timely provided but noncompliant statement of account or report of
use, the Collective has notified the Noncommercial Educational
Webcaster within 90 days regarding any noncompliance that is reasonably
evident to the Collective.
(f) Statements of account. Any payment due under Sec. 380.22 shall
be accompanied by a corresponding statement of account. A statement of
account shall contain the following information:
(1) The name of the Noncommercial Educational Webcaster, exactly as
it appears on the notice of use, and if the statement of account covers
a single station only, the call letters or name of the station;
(2) Such information as is necessary to calculate the accompanying
royalty payment as prescribed in this subpart;
(3) The name, address, business title, telephone number, facsimile
number (if any), electronic mail address (if any) and other contact
information of the person to be contacted for information or questions
concerning the content of the statement of account;
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(4) The handwritten signature of an officer or another duly
authorized faculty member or administrator of the applicable
educational institution;
(5) The printed or typewritten name of the person signing the
statement of account;
(6) The date of signature;
(7) The title or official position held by the person signing the
statement of account;
(8) A certification of the capacity of the person signing; and
(9) A statement to the following effect:
I, the undersigned officer or other duly authorized faculty member
or administrator of the applicable educational institution, have
examined this statement of account and hereby state that it is true,
accurate, and complete to my knowledge after reasonable due diligence.
(g) Reporting by Noncommercial Educational Webcasters in general--
(1) Reporting waiver. In light of the unique business and operational
circumstances currently existing with respect to Noncommercial
Educational Webcasters, and for the purposes of this subpart only, a
Noncommercial Educational Webcaster that did not exceed 55,000 total
ATH for any individual channel or station for more than one calendar
month in the immediately preceding calendar year and that does not
expect to exceed 55,000 total ATH for any individual channel or station
for any calendar month during the applicable calendar year may elect to
pay to the Collective a nonrefundable, annual Proxy Fee of $100 in lieu
of providing reports of use for the calendar year pursuant to the
regulations at Sec. 370.4 of this chapter. In addition, a
Noncommercial Educational Webcaster that unexpectedly exceeded 55,000
total ATH on one or more channels or stations for more than one month
during the immediately preceding calendar year may elect to pay the
Proxy Fee and receive the reporting waiver described in this paragraph
(g)(1) during a calendar year, if it implements measures reasonably
calculated to ensure that it will not make Eligible Transmissions
exceeding 55,000 total ATH during any month of that calendar year. The
Proxy Fee is intended to defray the Collective's costs associated with
this reporting waiver, including development of proxy usage data. The
Proxy Fee shall be paid by the date specified in paragraph (c) of this
section for paying the Minimum Fee for the applicable calendar year and
shall be accompanied by a certification on a form provided by the
Collective, signed by an officer or another duly authorized faculty
member or administrator of the applicable educational institution,
stating that the Noncommercial Educational Webcaster is eligible for
the Proxy Fee option because of its past and expected future usage and,
if applicable, has implemented measures to ensure that it will not make
excess Eligible Transmissions in the future.
(2) Sample-basis reports. A Noncommercial Educational Webcaster
that did not exceed 159,140 total ATH for any individual channel or
station for more than one calendar month in the immediately preceding
calendar year and that does not expect to exceed 159,140 total ATH for
any individual channel or station for any calendar month during the
applicable calendar year may elect to provide reports of use on a
sample basis (two weeks per calendar quarter) in accordance with the
regulations at Sec. 370.4 of this chapter, except that,
notwithstanding Sec. 370.4(d)(2)(vi), such an electing Noncommercial
Educational Webcaster shall not be required to include ATH or actual
total performances and may in lieu thereof provide channel or station
name and play frequency. Notwithstanding the foregoing, a Noncommercial
Educational Webcaster that is able to report ATH or actual total
performances is encouraged to do so. These reports of use shall be
submitted to the Collective no later than January 31st of the year
immediately following the year to which they pertain.
(3) Census-basis reports. If any of the following three conditions
is satisfied, a Noncommercial Educational Webcaster must report
pursuant to this paragraph (g)(3):
(i) The Noncommercial Educational Webcaster exceeded 159,140 total
ATH for any individual channel or station for more than one calendar
month in the immediately preceding calendar year;
(ii) The Noncommercial Educational Webcaster expects to exceed
159,140 total ATH for any individual channel or station for any
calendar month in the applicable calendar year; or
(iii) The Noncommercial Educational Webcaster otherwise does not
elect to be subject to paragraphs (g)(1) or (2) of this section. A
Noncommercial Educational Webcaster required to report pursuant to
paragraph (g)(3) of this section shall provide reports of use to the
Collective quarterly on a census reporting basis (i.e., reports of use
shall include every sound recording performed in the relevant quarter),
containing information otherwise complying with applicable regulations
(but no less information than required by Sec. 370.4 of this chapter),
except that, notwithstanding Sec. 370.4(d)(2)(vi), such a
Noncommercial Educational Webcaster shall not be required to include
ATH or actual total performances, and may in lieu thereof provide
channel or station name and play frequency, during the first calendar
year it reports in accordance with paragraph (g)(3) of this section.
For the avoidance of doubt, after a Noncommercial Educational Webcaster
has been required to report in accordance with paragraph (g)(3) of this
section for a full calendar year, it must thereafter include ATH or
actual total performances in its reports of use. All reports of use
under paragraph (g)(3) of this section shall be submitted to the
Collective no later than the 45th day after the end of each calendar
quarter.
(h) Distribution of royalties. (1) The Collective shall promptly
distribute royalties received from Noncommercial Educational Webcasters
to Copyright Owners and Performers, or their designated agents, that
are entitled to such royalties. The Collective shall only be
responsible for making distributions to those Copyright Owners,
Performers, or their designated agents who provide the Collective with
such information as is necessary to identify and pay the correct
recipient. The Collective shall distribute royalties on a basis that
values all performances by a Noncommercial Educational Webcaster
equally based upon the information provided under the report of use
requirements for Noncommercial Educational Webcasters contained in
Sec. 370.4 of this chapter and this subpart, except that in the case
of Noncommercial Educational Webcasters that elect to pay a Proxy Fee
in lieu of providing reports of use pursuant to paragraph (g)(1) of
this section, the Collective shall distribute the aggregate royalties
paid by electing Noncommercial Educational Webcasters based on proxy
usage data in accordance with a methodology adopted by the Collective's
Board of Directors.
(2) If the Collective is unable to locate a Copyright Owner or
Performer entitled to a distribution of royalties under paragraph
(h)(1) of this section within 3 years from the date of payment by a
Noncommercial Educational Webcaster, such distribution may first be
applied to the costs directly attributable to the administration of
that distribution. The foregoing shall apply notwithstanding the common
law or statutes of any State.
(i) Server logs. Noncommercial Educational Webcasters shall retain
for a period of no less than three full calendar years server logs
sufficient to substantiate all information relevant to eligibility,
rate calculation and reporting under this subpart. To the extent that a
third-party Web hosting or service
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provider maintains equipment or software for a Noncommercial
Educational Webcaster and/or such third party creates, maintains, or
can reasonably create such server logs, the Noncommercial Educational
Webcaster shall direct that such server logs be created and maintained
by said third party for a period of no less than three full calendar
years and/or that such server logs be provided to, and maintained by,
the Noncommercial Educational Webcaster.
(ii) [Reserved]
Sec. 380.24 Confidential Information.
(a) Definition. For purposes of this subpart, ``Confidential
Information'' shall include the statements of account and any
information contained therein, including the amount of Usage Fees paid,
and any information pertaining to the statements of account reasonably
designated as confidential by the Noncommercial Educational Webcaster
submitting the statement.
(b) Exclusion. Confidential Information shall not include documents
or information that at the time of delivery to the Collective are
public knowledge. The party claiming the benefit of this provision
shall have the burden of proving that the disclosed information was
public knowledge.
(c) Use of Confidential Information. In no event shall the
Collective use any Confidential Information for any purpose other than
royalty collection and distribution and activities related directly
thereto.
(d) Disclosure of Confidential Information. Access to Confidential
Information shall be limited to:
(1) Those employees, agents, attorneys, consultants and independent
contractors of the Collective, subject to an appropriate
confidentiality agreement, who are engaged in the collection and
distribution of royalty payments hereunder and activities related
thereto, for the purpose of performing such duties during the ordinary
course of their work and who require access to Confidential
Information;
(2) An independent Qualified Auditor, subject to an appropriate
confidentiality agreement, who is authorized to act on behalf of the
Collective with respect to verification of a Noncommercial Educational
Webcaster's statement of account pursuant to Sec. 380.25 or on behalf
of a Copyright Owner or Performer with respect to the verification of
royalty distributions pursuant to Sec. 380.26;
(3) Copyright Owners and Performers, including their designated
agents, whose works have been used under the statutory licenses set
forth in 17 U.S.C. 112(e) and 114(f) by the Noncommercial Educational
Webcaster whose Confidential Information is being supplied, subject to
an appropriate confidentiality agreement, and including those
employees, agents, attorneys, consultants and independent contractors
of such Copyright Owners and Performers and their designated agents,
subject to an appropriate confidentiality agreement, for the purpose of
performing their duties during the ordinary course of their work and
who require access to the Confidential Information; and
(4) In connection with future proceedings under 17 U.S.C. 112(e)
and 114(f) before the Copyright Royalty Judges, and under an
appropriate protective order, attorneys, consultants and other
authorized agents of the parties to the proceedings or the courts.
(e) Safeguarding of Confidential Information. The Collective and
any person identified in paragraph (d) of this section shall implement
procedures to safeguard against unauthorized access to or dissemination
of any Confidential Information using a reasonable standard of care,
but no less than the same degree of security used to protect
Confidential Information or similarly sensitive information belonging
to the Collective or person.
Sec. 380.25 Verification of royalty payments.
(a) General. This section prescribes procedures by which the
Collective may verify the royalty payments made by a Noncommercial
Educational Webcaster.
(b) Frequency of verification. The Collective may conduct a single
audit of a Noncommercial Educational Webcaster, upon reasonable notice
and during reasonable business hours, during any given calendar year,
for any or all of the prior 3 calendar years, but no calendar year
shall be subject to audit more than once.
(c) Notice of intent to audit. The Collective must file with the
Copyright Royalty Board a notice of intent to audit a particular
Noncommercial Educational Webcaster, which shall, within 30 days of the
filing of the notice, publish in the Federal Register a notice
announcing such filing. The notification of intent to audit shall be
served at the same time on the Noncommercial Educational Webcaster to
be audited. Any such audit shall be conducted by an independent
Qualified Auditor identified in the notice and shall be binding on all
parties.
(d) Acquisition and retention of report. The Noncommercial
Educational Webcaster shall use commercially reasonable efforts to
obtain or to provide access to any relevant books and records
maintained by third parties for the purpose of the audit. The
Collective shall retain the report of the verification for a period of
not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to the
Collective, except where the auditor has a reasonable basis to suspect
fraud and disclosure would, in the reasonable opinion of the auditor,
prejudice the investigation of such suspected fraud, the auditor shall
review the tentative written findings of the audit with the appropriate
agent or employee of the Noncommercial Educational Webcaster being
audited in order to remedy any factual errors and clarify any issues
relating to the audit; Provided that an appropriate agent or employee
of the Noncommercial Educational Webcaster reasonably cooperates with
the auditor to remedy promptly any factual errors or clarify any issues
raised by the audit.
(g) Costs of the verification procedure. The Collective shall pay
the cost of the verification procedure, unless it is finally determined
that there was an underpayment of 10% or more, in which case the
Noncommercial Educational Webcaster shall, in addition to paying the
amount of any underpayment, bear the reasonable costs of the
verification procedure.
Sec. 380.26 Verification of royalty distributions.
(a) General. This section prescribes procedures by which any
Copyright Owner or Performer may verify the royalty distributions made
by the Collective; provided, however, that nothing contained in this
section shall apply to situations where a Copyright Owner or Performer
and the Collective have agreed as to proper verification methods.
(b) Frequency of verification. A Copyright Owner or Performer may
conduct a single audit of the Collective upon reasonable notice and
during reasonable business hours, during any given calendar year, for
any or all of the prior 3 calendar years, but no calendar year shall be
subject to audit more than once.
(c) Notice of intent to audit. A Copyright Owner or Performer must
file with the Copyright Royalty Board a
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notice of intent to audit the Collective, which shall, within 30 days
of the filing of the notice, publish in the Federal Register a notice
announcing such filing. The notification of intent to audit shall be
served at the same time on the Collective. Any audit shall be conducted
by an independent Qualified Auditor identified in the notice, and shall
be binding on all Copyright Owners and Performers.
(d) Acquisition and retention of report. The Collective shall use
commercially reasonable efforts to obtain or to provide access to any
relevant books and records maintained by third parties for the purpose
of the audit. The Copyright Owner or Performer requesting the
verification procedure shall retain the report of the verification for
a period of not less than 3 years.
(e) Acceptable verification procedure. An audit, including
underlying paperwork, which was performed in the ordinary course of
business according to generally accepted auditing standards by an
independent Qualified Auditor, shall serve as an acceptable
verification procedure for all parties with respect to the information
that is within the scope of the audit.
(f) Consultation. Before rendering a written report to a Copyright
Owner or Performer, except where the auditor has a reasonable basis to
suspect fraud and disclosure would, in the reasonable opinion of the
auditor, prejudice the investigation of such suspected fraud, the
auditor shall review the tentative written findings of the audit with
the appropriate agent or employee of the Collective in order to remedy
any factual errors and clarify any issues relating to the audit;
Provided that the appropriate agent or employee of the Collective
reasonably cooperates with the auditor to remedy promptly any factual
errors or clarify any issues raised by the audit.
(g) Costs of the verification procedure. The Copyright Owner or
Performer requesting the verification procedure shall pay the cost of
the procedure, unless it is finally determined that there was an
underpayment of 10% or more, in which case the Collective shall, in
addition to paying the amount of any underpayment, bear the reasonable
costs of the verification procedure.
Sec. 380.27 Unclaimed funds.
If the Collective is unable to identify or locate a Copyright Owner
or Performer who is entitled to receive a royalty distribution under
this subpart, the Collective shall retain the required payment in a
segregated trust account for a period of 3 years from the date of
distribution. No claim to such distribution shall be valid after the
expiration of the 3-year period. After expiration of this period, the
Collective may apply the unclaimed funds to offset any costs deductible
under 17 U.S.C. 114(g)(3). The foregoing shall apply notwithstanding
the common law or statutes of any State.
Dated: February 12, 2014.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
Approved By:
James H. Billington,
Librarian of Congress.
[FR Doc. 2014-08664 Filed 4-24-14; 8:45 am]
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