[Federal Register Volume 82, Number 229 (Thursday, November 30, 2017)]
[Rules and Regulations]
[Pages 56725-56735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25816]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 382
[Docket No. 2006-1 CRB DSTRA (2007-2012)]
Determination of Rates and Terms for Preexisting Subscription
Services and Satellite Digital Audio Radio Services
AGENCY: Copyright Royalty Board (CRB), Library of Congress.
ACTION: Ruling on regulatory interpretation.
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SUMMARY: The Copyright Royalty Judges publish their ruling on
regulatory interpretation that was referred to them by the United
States District Court for the District Of Columbia. The regulation at
issue is about gross revenue exclusions that a satellite digital audio
radio service may use when calculating royalty payments owed to
SoundExchange, a collective for copyright owners, for digital
transmissions of sound recordings pursuant to a statutory license. The
Judges find that Sirius XM properly interpreted the regulation to apply
to pre-'72 sound recordings and that it improperly excluded certain
revenues from its Gross Revenues royalty base.
DATES: November 30, 2017.
ADDRESSES: Docket: For access to the docket to read background
documents, go to eCRB, the Copyright Royalty Board's electronic filing
and case management system, at https://app.crb.gov/ and search for
docket number 2006-1 CRB DSTRA (2007-2012). For documents not yet
uploaded to eCRB (because it is a new system), go to the agency Web
site at https://www.crb.gov/ or contact the CRB Program Specialist.
FOR FURTHER INFORMATION CONTACT: Anita Blaine, CRB Program Specialist,
by telephone at (202) 707-7658 or email at [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
SoundExchange, Inc. (SoundExchange) is the Collective designated by
the Copyright Royalty Judges (Judges) to receive, administer, and
distribute royalty funds due from entities making digital transmissions
of sound recordings under the statutory licenses described at 17 U.S.C.
114.\1\ Sirius XM Radio, Inc. (Sirius XM) \2\ is a licensee,
transmitting sound recordings digitally over its satellite radio
network.\3\ In 2007, after considering oral and written evidence and
arguments of counsel, the Copyright Royalty Judges (Judges) determined
that Sirius XM's royalty obligations for its satellite radio business
would be determined as a percentage of Gross Revenues. See
Determination of Rates and Terms for Preexisting Subscription Services
and Satellite Digital Audio Radio Services (SDARS I), Docket No. 2006-1
CRB DSTRA (Determination), 73 FR 4080, 4084 (Jan. 24, 2008). Gross
Revenues are defined in the regulations the Judges adopted as part of
the Determination and codified as 37 CFR 382.11 (2008).
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\1\ The Judges determine rates and terms for the section 112
license (ephemeral recordings to facilitate digital transmissions of
sound recordings) concurrently with their determination of rates and
terms for the section 114 license. The section 112 license is not at
issue here.
\2\ Sirius XM Radio, Inc. is the entity resulting from the
merger of Sirius Satellite Radio Inc. and XM Satellite Radio Inc.
\3\ Section 114 authorizes and describes licenses available to
several transmitting and streaming media. The standards the Judges
are to apply in setting rates for the various section 114 licenses
are detailed in 17 U.S.C. 114 and 801.
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A. Procedural Setting
In 2013, SoundExchange filed a complaint in the United States
District Court for the District of Columbia (District Court) against
Sirius XM seeking additional royalty payments for the period 2007-2012.
See SoundExchange, Inc. v. Sirius XM Radio, Inc. 65 F. Supp. 3d 150
(D.D.C. 2014) (DC Action). On January 10, 2017, the Judges issued a
Ruling (Initial Ruling) on two questions referred by the District Court
under the doctrine of primary jurisdiction. See id. at 157. The issues
referred by the District Court arose from the CRB's 2008 regulations.
The District Court Judge concluded that in the promulgated regulations
``the gross revenue exclusions are ambiguous.'' Id. at 155.
After seeking an opinion from the Register of Copyrights (Register)
under 17 U.S.C. 802(f)(1)(B) regarding their authority to render the
interpretation required by the District Court referral, the Judges
proceeded with the analysis that resulted in the Initial Ruling. The
Judges transmitted the Initial Ruling to the Register for the legal
review required by the Copyright Act. See 17 U.S.C. 802(f)(1)(D).
In March 2017, upon further reflection, the Judges withdrew the
Initial Ruling from the parties and from the Register's statutorily
required review for legal error. See Order Withdrawing Ruling and
Soliciting Briefing on Unresolved Issues (Mar. 9, 2017) at 2. The
Judges solicited briefs from the parties to address specifically the
breadth of the District Court referral. The Judges sought memoranda of
law from the parties to the District Court controversy to address:
(1) Whether section (V)(C)(1)(b) of the Initial Ruling (at pp. 14-
16 therein) constituted an interpretation of the 2008 regulations or an
application of the Judges' interpretation of those regulations;
(2) Whether the District Court referral to the Judges under the
doctrine of primary jurisdiction included not only a referral of
questions of interpretation of the 2008 regulations, but also a
referral of questions relating to the application of the 2008
regulations;
(3) Whether, regardless of the District Court's intent, the Judges
have jurisdiction under the Copyright Act to apply their
interpretations of the regulations to the facts in the record and reach
binding conclusions regarding the parties' compliance with the
interpreted regulations;
(4) Whether question (3) poses a material question of substantive
law under the Copyright Act that the Judges may refer to the Register
of Copyrights under 17 U.S.C. 802(f)(1)(A) or a novel material question
of substantive law under the Copyright Act that the Judges must refer
to the Register of Copyrights under 17 U.S.C. 802(f)(1)(B); and
(5) Whether, under the doctrine of primary jurisdiction, the Judges
may recommend to the District Court applications of their
interpretations of the regulations to the facts in the record before
the District Court regarding the parties' compliance with the
interpreted regulations.
B. Parties' Analyses
In its briefing, SoundExchange asserted that (1) the language the
Judges are reconsidering constituted an allowable interpretation of the
CRB regulations; (2) even if the subject
[[Page 56726]]
portions of the Initial Ruling conducted or required an application of
the Judges' interpretation, that application was responsive to the
District Court's inquiries in the referral; (3) the Judges have
jurisdiction to interpret and apply their regulations; (4) this aspect
of the Judges' authority need not be referred to the Register as a
material or novel material question of law requiring the Register's
input; and (5) the Judges may not make nonbinding recommendations to
the District Court regarding application of the CRB regulations. See
SoundExchange's Brief in Response to the Judges' Order Dated March 9,
2017 (SoundExchange Initial Brief) at 1-2. SoundExchange took the
position that the Judges' Initial Ruling was appropriately broad in
offering interpretation of the subject regulation. In fact,
SoundExchange asserted that it would be inappropriate to distinguish
between interpretation and application of the regulations in this
context. Id. at 5-7. SoundExchange asserted that the Judges'
conclusions should be binding on the parties, thus its opposition to
the Judges making nonbinding recommendations to the District Court. Id.
at 12-14.
Sirius XM countered that (1) the section about which the Judges
inquired constitutes both an interpretation and application of the CRB
regulations, that ``goes beyond the limited interpretive guidance
appropriate for a primary jurisdiction referral;'' (2) the District
Court's referral was limited to a request for regulatory
interpretation; (3) the Judges' continuing jurisdiction to interpret
their regulations does not extend to a detailed review of the facts of
the parties' application of the regulation; (4) the question regarding
the limits of the Judges' jurisdiction is a material question the
Judges may refer to the Register, but not a novel question that the
Judges must refer to the Register; and (5) the Judges are not
authorized to make findings or recommendations regarding specific
rulings regarding a party's compliance with the regulations. See Sirius
XM Radio Inc.'s Memorandum of Law . . . on Unresolved Issues (Sirius XM
Initial Brief) at 1-2. Sirius XM reinforced its position by noting
that, in presenting the referred issues for the Judges' ruling, the
parties engaged in limited discovery. Regardless of resolution of the
interpretation vs. application question,\4\ Sirius XM argued that the
limits on discovery left the Judges insufficiently informed to apply
their interpretation of the subject regulation in this instance. See
id. at 6.
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\4\ Sirius XM did not agree with SoundExchange that a
distinction between interpretation and application would be
inappropriate, but did acknowledge that the distinction between
those two acts ``is not a bright-line rule that separates what the
Judges have the authority to do from what they do not.'' Sirius XM
Initial Brief at 7, footnote omitted.
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C. Judges' Conclusions
In its Reply Brief, Sirius XM summarized the points at which it
perceived agreement between the parties regarding the Initial Ruling.
See Sirius XM Radio Inc.'s Reply Memorandum of Law . . . on Unresolved
Issues (Sirius XM Reply Brief) at 1-2. The Judges agree with Sirius
XM's statement of the parties' points of agreement. The Judges disagree
with SoundExchange's argument that it is inappropriate to draw a
distinction between interpretation and application in this
circumstance. The distinction might not always be a bright-line, but it
is not a distinction totally without difference in the present
circumstance.
After consideration of the arguments of both parties, the Judges
conclude: (1) Section V(C)(1)(b) of the Initial Ruling applies the
Judges' interpretive conclusions to facts the parties presented in
their merits presentations; (2) the District Court referral was
ambiguous in the task referred to the Judges; (3) regardless of the
scope or intended scope of the District Court's referral, in this
particular circumstance, the Judges' application of their
interpretations of the regulations was inappropriate; (4) the question
of interpretation vs application in this instance is not a material or
novel question of law referable to the Register; and (5) the
application of the Judges' interpretations is more appropriately
carried out by the District Court, so it is unnecessary for the Judges
to recommend proposed findings or conclusions.
1. Application of the Regulatory Interpretation in the Initial Ruling
In the Initial Ruling, the Judges concluded that GAAP standards did
not offer guidance for interpreting the subject regulations. The Judges
concluded, therefore, that a standard of reasonableness should prevail.
To the extent the Judges observed what actions might meet the
reasonableness standard, they were appropriately offering
interpretation relating to the regulations. Going beyond that guidance,
the Judges' ruling was an application of the regulations to the present
dispute pending in the District Court. Application of the Judges'
interpretation is better done by the District Court, after a review of
the complete factual record.
2. Scope of District Court Referral
The District Court referred this issue of regulatory interpretation
to the Judges under the doctrine of primary jurisdiction. The doctrine
provides that a court may defer to an administrative agency when, based
on its special competency, the agency ``is best suited to make the
initial decision on the issues in dispute.'' See SoundExchange, 65 F.
Supp. 3d at 154 (citations omitted). Whatever the interpretation of the
language of the District Court's Memorandum Opinion,\5\ the District
Court could not have referred to the Judges resolution of the ultimate
issues of fact presented by the SoundExchange litigation. The District
Court is the forum in which resolution of the factual dispute lies.
That factual dispute requires full discovery. The issues presented to
the CRB were not the subject of full discovery nor were the factual
issues fully developed, briefed, or argued for the Judges'
determination. Notwithstanding language or rhetoric regarding the
application of the CRB regulations to the facts of the District Court
matter, the narrow question referable to the Judges was one of
interpretation.\6\
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\5\ In seeking referral to the CRB, Sirius XM argued that the
primary disputes involved both interpreting and applying the CRB
regulations. See 65 F. Supp. 3d at 154. The District Court
concluded, and the Register accepted, that ``the meaning of the
relevant [regulations], and the application of those provisions to
the particular fact pattern presented here, is [sic] uncertain.''
See Memorandum Opinion on a Novel Question of Law at 6, citation
omitted. The District Court's referral posed two questions: (1)
Whether Sirius XM's attribution of revenues to pre-'72 recordings
and the exclusion of those attributed revenues from the royalty base
were permissible and (2) whether Sirius XM's Premier service was
excludable from Gross Revenues for purposes of calculating the
royalty. See 65 F. Supp. 3d at 154-55.
\6\ The District Court ``agreed with Sirius XM'' that the
disputes at issue involve ``interpreting and applying'' the CRB's
regulations. SoundExchange, 65 F. Supp. 3d at 154. In framing the
issues referred, however, the District Court did not ask the CRB to
complete a factual analysis. See id. at 154-55 (issues are revenue
exclusion for pre-'72 recordings and for Premier package upcharges).
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3. Regulatory or Inherent Authority To Apply Interpretation to These
Facts
Sirius XM argued to the District Court that the CRB bore or should
bear the task of both interpretation and application of the 2008
regulations. See, e.g., SoundExchange, 65 F.Supp.3d at 154 (both
disputes best suited to CRB resolution as they involve interpreting and
applying regulations). In response to the Judges' request for
additional briefing after withdrawing the Initial Ruling, Sirius XM
argued forcefully the other side of the coin. See Sirius XM Initial
Brief at 11-14. SoundExchange,
[[Page 56727]]
which initially challenged the Judges' authority to interpret their
regulations, argued in their reply papers that the Judges have the
authority to both interpret and apply their regulations. SoundExchange
Initial Brief at 9 (Register's confirmation of continuing jurisdiction
to resolve ambiguity equivalent to conclusion of jurisdiction to apply
interpretation).
The Judges accept the scope of their ``continuing jurisdiction''
under 17 U.S.C. 803(c)(4) as described by the Register. The Judges do
not agree with SoundExchange, however, that the continuing jurisdiction
to interpret, or their ability to provide ``interpretive guidance,''
somehow endows them with jurisdiction to resolve factual disputes
relating to application of those regulations. As Sirius XM represented,
the parties agree that the Judges ``lack enforcement jurisdiction and,
therefore, can neither order compliance nor fix penalties.'' Sirius XM
Reply Memorandum . . . on Unresolved Issues (Sirius XM Reply) at 2.
Lacking those enforcement and remedial powers necessarily leads to the
conclusion that the Judges' jurisdiction does not extend to application
and factual dispute resolution regarding application of the
regulations.
4. No Material or Novel Question of Substantive Law Remains
The parties agree that the question of the Judges' jurisdiction to
apply their regulatory interpretations is not a novel question
requiring referral to the Register. Id. The Register reviewed and
analyzed the question of the Judges' continuing jurisdiction in her
April 2015 opinion.
5. The Judges May Not Make Recommendations to the District Court
The parties agree, as do the Judges, that nothing in the doctrine
of primary jurisdiction or in the Judges' authority would suggest that
the Judges could or should make recommendations to the District Court
regarding its determination of the factual questions properly before
the Court.
In light of the foregoing conclusions, the Judges hereby reissue
the Initial Ruling as an Amended Ruling, the text of which follows.
II. Introduction and Summary of Amended Decision
The issues before the Judges arose in the context of
SoundExchange's action against Sirius XM in District Court.
SoundExchange sued to recover additional sound recording royalties from
Sirius XM for licenses used during the period 2007 to 2012. The alleged
underpayment occurred, according to SoundExchange, because Sirius XM
improperly excluded two categories of revenue when calculating ``Gross
Revenues,'' before it determined the royalties due to SoundExchange. 65
F. Supp. 3d at 153. Because the royalties in SDARS I were set as a
percentage of Sirius XM's ``Gross Revenues'' (rather than on a per-
performance basis), exclusions of revenue by Sirius XM had the effect
of reducing the royalties paid to SoundExchange. See 73 FR at 4084.
Sirius XM controverted the SoundExchange complaint and moved the
District Court to stay or dismiss the DC Action in favor of a
resolution by the Judges. In August 2014, the District Court stayed the
DC Action and referred this matter to the Judges citing the doctrine of
primary jurisdiction.
In the DC Action, SoundExchange alleged that Sirius XM had
misinterpreted and misapplied the Judges' 2008 regulations regarding
exclusions from Gross Revenues for (1) sound recordings made before
1972 (and therefore exempt from the federal statutory license) and (2)
a portion of subscription revenues that Sirius XM allocated to
``premier'' channels with primarily talk content that use only
incidental performances of sound recordings. With regard to these
allegations, the District Court referred two questions to the Judges
for resolution. 65 F. Supp. 3d at 154-55. Specifically, the District
Court described two ``open'' questions for the Judges: (1) Whether
Sirius XM improperly applied the Judges' regulations in calculating the
amount of royalties it paid to SoundExchange ``such that it owes
SoundExchange additional [royalties] for times past'' and (2) whether
the Judges consider the Sirius XM Premier channels to be ``offered for
a separate charge'' permitting Sirius XM to exclude Premier
subscription revenues from Gross Revenues. Id. at 156.
In response to the District Court Judge's Memorandum Opinion
(Referral Opinion), and on motion of SoundExchange, the Judges reopened
the SDARS I proceeding. Order Reopening Proceeding for Limited Purpose
(Dec. 9, 2014). In their Order, the Judges requested briefing by the
participants regarding the existence and scope of the Judges'
jurisdiction and authority to entertain the issues raised in the DC
Action. On March 9, 2015, after considering the participants' briefs,
the Judges referred three legal questions to the Register of Copyrights
(Register) pursuant to 17 U.S.C. 802(f)(1)(B):
(1) Do the Judges have jurisdiction under title 17, or authority
otherwise, to interpret the regulations adopted in the captioned
proceeding?
(2) If the Judges have authority to interpret regulations adopted
in the course of a rate determination, is that authority time-limited?
(3) Would the answer regarding the Judges' jurisdiction or
authority be different if the terms at issue regulated a current, as
opposed to a lapsed, rate period?
The Register opined that the Judges have jurisdiction under 17
U.S.C. 803(c)(4) to clarify the regulations adopted in SDARS I. The
Register added that the Judges' jurisdiction is not time-limited and
the Judges do not lose their jurisdiction and authority when the issues
relate to a lapsed rate period. Register's Memorandum Opinion on a
Novel Question of Law at 4-5 (Apr. 8, 2015) (Register's Opinion).\7\
Based on the language of the Referral Opinion and the Register's
Opinion, the Judges hereby address the issues presented to them in the
Referral Opinion.\8\
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\7\ The Register declined to opine as to whether the Gross
Revenues definitional provisions at issue constituted a regulatory
``term,'' as to which, by statute, the Judges may issue a
``clarification.'' According to the Register, the Judges' separate
statutory power to ``correct any technical . . . errors'' provides a
sufficient basis for the Judges to issue an Order clarifying a prior
Determination. Id. at n.3.
\8\ The Copyright Act and the Judges' regulations do not
prescribe a procedure for administering a District Court referral
pursuant to the primary jurisdiction doctrine. Accordingly, the
Judges have established the procedures to address this referral
pursuant to their inherent jurisdiction and pursuant to their
general authority under 17 U.S.C. 803(c) ``to make any necessary
procedural or evidentiary rulings in any proceedings under this
chapter.''
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To address the revenue-exclusion issues, the Judges have engaged in
a thorough review of the SDARS I record. Additionally, the Judges
ordered the participants to supplement the extant record by engaging in
discovery, exchanging expert reports and filing Opening (Initial) and
Rebuttal Submissions. See Case Scheduling Order (Oct. 6, 2015). The
participants appended to their Initial and Rebuttal Submissions
discovery and expert materials on which they rely.
As detailed in this Ruling, the Judges conclude that Generally
Accepted Accounting Principles (GAAP) apply broadly to the definition
of Gross Revenues in 37 CFR 382.11 (2008). GAAP does not, however,
address specifically the two revenue exclusions at issue in this
referral; consequently, the Judges must look beyond the specific words
of the regulation to answer the questions posed by the District Court.
For the reasons explicated in this Ruling, the Judges conclude that a
reasonableness standard
[[Page 56728]]
must apply to both inclusions and exclusions from Gross Revenues. Based
on the following reasoning, the Judges conclude that Sirius XM employed
different methodologies with regard to excluding revenues attributable
to pre-1972 sound recordings. A determination of reasonableness of
either methodology, or both, will require closer examination.\9\
Further, because Sirius XM did not offer the channels included for
subscribers to the Premier package for a separate charge, it could not
reasonably exclude from Gross Revenues revenue attributable to the
Premier subscription price differential.
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\9\ Application of the methodologies relating to pre-'72
recordings is a fact determination for the District Court and is not
before the Judges.
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III. Procedural History
On January 9, 2006, the Judges commenced the original SDARS I
proceeding to determine ``reasonable rates and terms of royalty
payments for . . . transmissions by preexisting satellite digital audio
radio services [SDARS] . . . .'' 17 U.S.C. 114(f)(1)(A).\10\ See Notice
Announcing Commencement of Proceeding with Request for Petitions to
Participate, 71 FR 1455 (Jan. 9, 2006). Three parties: SoundExchange,
on behalf of the licensors, and two licensees, Sirius and XM (Sirius
XM's pre-merger predecessors) participated in the rate determination
hearing. Id.\11\
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\10\ The proceeding was originally commenced also to establish
rates and terms for preexisting subscription services, pursuant to
the same statutory section. The participants in that aspect of the
hearing settled prior to the hearing. SDARS I, 73 FR at 4081.
\11\ On July 29, 2008, Sirius and XM completed a merger, and the
successor-by-merger was named Sirius XM Radio Inc. http://investor.siriusxm.com/investor-overview/press-releases/press-release-details/2008/SIRIUS-and-XM-Complete-Merger/default.aspx
(last visited January 3, 2017).
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Following a twenty-six day hearing,\12\ and the participants'
submission of Proposed Findings of Fact (PFF) and Conclusions of Law
(COL) and replies thereto, the Judges issued their Initial
Determination on December 3, 2007. See SDARS I, 73 FR at 4080, 4081
(Jan. 24, 2008) (SDARS I Determination). Thereafter, SoundExchange
filed a Motion for Rehearing. Upon the Judges' request, Sirius XM
responded to the Motion for Rehearing. Id. On January 8, 2008, the
Judges issued an Order Denying Motion for Rehearing (Rehearing
Order).\13\
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\12\ The oral testimony comprised 7,700 pages of transcripts,
more than 230 exhibits were admitted and the docket contained over
400 pleadings, motions and orders. Id.
\13\ Although the Judges styled their January 8, 2008, Rehearing
Order as one ``denying'' the Motion for Rehearing, the Judges
expressly clarified and amended a portion of their Initial
Determination in a manner that bears on the present proceeding.
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SoundExchange appealed the Judges' SDARS I Determination and the
U.S. Court of Appeals for the D.C. Circuit affirmed all aspects of the
Judges' SDARS I Determination relating to the rates and terms
established for the section 114 licensing of sound recordings.
SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 1220 (D.C. Cir.
2009).\14\
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\14\ The D.C. Circuit vacated and remanded the Judges' SDARS I
Determination for reconsideration of an issue unrelated to the
section 114 issues presently before the Judges. 571 F.3d at 1225-26.
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IV. The Parties' Dispute
SoundExchange commenced the D.C. Action in 2013, seeking additional
royalties from Sirius XM for the period 2007-2012. SoundExchange
alleged that, in order to reduce its royalty payments during that
period Sirius XM improperly
(1) Reduced Gross Revenues by an amount it estimated was
attributable to pre-1972 sound recordings; \15\ [and]
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\15\ Pursuant to 17 U.S.C. 301(c), ``no sound recording fixed
before February 15, 1972, shall be subject to copyright under this
title . . . .'' For ease of expression, commercial actors, jurists
and attorneys commonly describe the time before February 15, 1972 as
the ``pre-`72'' period.
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(2) excluded from Gross Revenues the revenue received from the
price difference between its standard [Basic] package and its premium
[Premier] package, the latter of which includes additional talk
channels, but no additional music channels . . . .\16\
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\16\ For ease of reference, Sirius XM's subscription offering
that included its base channels is referred to herein as the Basic
package, and the offering that bundled the base channels and the
additional channels is referred to herein as the Premier package,
(regardless of any previous names used by Sirius XM or its
predecessors, unless the context requires reference to the names of
predecessor subscription offerings).
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65 F. Supp. 3d at 153 (citations omitted); see also Sirius XM's
Initial Submission at 2.\17\ SoundExchange contends that the actions by
Sirius XM resulted in significant royalty shortfalls.
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\17\ Other claims made by SoundExchange in the Complaint are not
germane to the issues referred to the Judges.
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During the SDARS I rate period, the regulations stated ``Gross
Revenues shall mean revenue recognized by the Licensee in accordance
with GAAP from the operation of an SDARS, and shall be comprised of . .
. [s]ubscription revenue recognized by Licensee directly from
residential U.S. subscribers for Licensee's SDARS . . . .'' 37 CFR
382.11 (2008) (definition of Gross Revenues). The regulations permitted
a number of exclusions from Gross Revenues, two of which are relevant
to the present dispute, namely, those recognized by Licensee (1) for
the provision of ``[c]hannels, programming, products and/or other
services offered for a separate charge where such channels use only
incidental performances of sound recordings'' and (2) for the
provisions of ``[c]hannels, programming, products and/or other services
for which performance of sound recordings and/or the making of
ephemeral recordings is exempt from any license requirement or is
separately licensed, including by a statutory license . . . .'' 37 CFR
382.11(2008).
SoundExchange asserts that the Sirius XM interpretation of the
regulation is contrary to the standards of GAAP.\18\ SoundExchange
focuses on (1) the term ``recognized'' revenue, (2) the methodology
employed by Sirius XM to exclude revenues it attributes to pre-`72
sound recordings, and (3) Sirius XM's exclusion from Gross Revenues of
the subscription revenue differential between its Basic package of
channels and the Premier package Sirius XM offers for an increased
subscription fee.\19\ Sirius XM contends the pre-'72 recordings
satisfied the requirement in paragraph (3)(vi)(D) of the Gross Revenues
definition that, for the revenue exclusion to apply, performances must
be ``exempt from any license requirement.'' According to Sirius XM the
exclusion of the ``additional charge'' (Upcharge) paid for Premier
channels satisfied the requirement in paragraph (3)(vi)(B) of the
definition that channels be offered for a ``separate charge.'' Id.
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\18\ GAAP stands for Generally Accepted Accounting Principles.
\19\ SoundExchange does not dispute that the channels added to
the basic package to comprise the Premium package are stations that
make only incidental use of sound recordings. SoundExchange Initial
Submission ]] 54-59.
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V. Issues for the Judges Under the Primary Jurisdiction Referral
In invoking the doctrine of primary jurisdiction, the District
Court tasked the Judges with interpreting the Gross Revenues regulation
and, to the extent appropriate, providing ``interpretive guidance.''
The District Court concluded that the ``gross revenue exclusions are
ambiguous and do not, on their face, make clear whether Sirius XM's
approaches were permissible under the regulations.'' 65 F. Supp. 3d at
155. The District Court instructed the Judges, in interpreting the
Gross Revenues regulation, to utilize their ``technical and policy
expertise.'' Id. The District Court specifically noted that the
``technical and policy expertise'' to which it referred were in the
domains
[[Page 56729]]
of ``copyright law'' and ``economics.'' Id. at 155-56.
Based on its application of the principles of primary jurisdiction,
the District Court identified two broad questions for the Judges to
answer:
(1) Were Sirius XM's attribution of revenues to performances of
pre-'72 recordings and its exclusion of those attributed revenues from
the Gross Revenues royalty base permissible under the SDARS I
regulations?
(2) Were the additional talk channels on Sirius XM's Premier
service ``offered for a separate charge,'' and therefore excludable
from Gross Revenues?
See id. at 154-55. The District Court concluded that the Judges
have the statutory authority to answer these questions pursuant to
their continuing jurisdiction to ``issue an amendment to a written
determination to correct any technical . . . errors in the
determination or to modify the terms, but not the rates, of royalty
payments in response to unforeseen circumstances that would frustrate
the proper implementation of such determination.'' Id. at 156 (quoting
17 U.S.C. 803(c)(4)). The Register echoed the District Court's
assessment of the Judges' task in this referred proceeding, accepting
``the district court's conclusion that both the meaning of the relevant
regulatory provisions, and the application of those provisions to the
particular fact pattern presented here, are uncertain.'' Register's
Opinion at 6.
VI. Analysis
To address the issues presented in the Referral Opinion, the Judges
answer the following specific questions.
(1) Does the Gross Revenues definition require that the revenue
exclusions satisfy applicable GAAP?
(2) If so, what GAAP principles, if any, apply to the two
exclusions?
A. (3) If no GAAP principles are applicable, what is the standard,
if any, that the two exclusions must satisfy?
A. Application of GAAP to Gross Revenues Definition
The parties and their experts disagree regarding the application of
the regulatory phrase ``recognized in accordance with GAAP.'' \20\
Section 382.11, in paragraph (1) of the definition of ``Gross
Revenues,'' defines ``Gross Revenues'' as ``revenue recognized by the
Licensee in accordance with GAAP from the operation of an SDARS.'' 37
CFR 382.11, paragraph (1) of the definition of ``Gross Revenues.''
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\20\ GAAP is defined in the applicable regulation as ``generally
accepted accounting principles in effect from time to time in the
United States.'' 37 CFR 382.11. ``GAAP refers to the set of
standards, conventions, and rules that define accepted accounting
practices.'' Lys Report ] 26.
---------------------------------------------------------------------------
SoundExchange argues that GAAP applies in full and equal measure to
the regulatory exclusions as to the inclusions that comprise the
definition of ``Gross Revenues.'' SoundExchange Memorandum of Law at 9-
10. In support of this point, SoundExchange and its expert, Dr. Thomas
Lys, rely on paragraph (3)(vi) of the definition of ``Gross Revenues''
in Sec. 382.11, which limits the categorical revenue exclusions at
issue in this proceeding to ``[r]evenues recognized by Licensee . . .
.'' Id.; see also SoundExchange Initial Submission, App. Ex. 1 at
A.131, (Deposition of Professor Lys) at 129 (Lys Dep.) SoundExchange
notes that ``GAAP is the only accounting standard mentioned in the
definition of ``Gross Revenues'' and argues that it would be
``implausible'' to suppose that the Judges ``actually meant to
incorporate sub silentio some other accounting standard elsewhere in
the definition . . . or for that matter, that the Judges meant to
divorce portions of the definition from any accounting standard at all
. . . .'' SoundExchange Memorandum of Law at 10.
Sirius XM does not disagree with these broad points. Rather, it
contends that its treatment of revenue from pre-'72 recordings is fully
consistent with GAAP, stating:
Sirius XM's exclusion of revenue for its transmissions of pre-1972
sound recordings and its separately charged premium non-music channels
during the Satellite I period was consistent with the plain language
and purpose of the regulations. Sirius XM implemented the regulations
in a clear and straightforward manner in line with . . . GAAP.
Written Merits Rebuttal Submission of Sirius XM . . . (Sirius
Merits Rebuttal) at 2.
The Judges find and conclude that the applicable regulations
require that Sirius XM's inclusions and exclusions of revenue in the
Gross Revenues definition must not be inconsistent with GAAP. The
Judges utilize the double negative intentionally, because an issue
exists as to whether GAAP in fact provides rules or guidance regarding
the method by which the pre-'72 exclusions may be taken. That is, if
GAAP does not address a particular issue, then a party's treatment of
that issue cannot be ``inconsistent'' with GAAP, and, equally so, it
would be senseless to consider whether such treatment was
``consistent'' with GAAP.
Sirius XM makes two arguments regarding the applicability of GAAP
to its calculation and exclusions of revenue. First, Sirius XM asserts
that all its revenues were recognized pursuant to GAAP. With regard to
pre-'72 recordings, Sirius XM's financial and accounting expert, John
W. Wills states ``there is no doubt that all of its subscription
revenue--including that earned for performing pre-1972 recordings--is
`recognized' consistent with GAAP'' since ``the subscriber revenue
recognized by Sirius XM on its financial statements includes the
entirety of its entertainment and information content delivered during
the period at issue.'' Expert Report of John W. Wills, at 7 (May 9,
2016) (Wills Report). Mr. Wills employs the same reasoning to reach the
same conclusion regarding the Upcharge revenue. See Wills Rebuttal
Report at 11.
Based on that 100% recognition argument, Sirius XM contends that it
had no obligation, under the regulations or the authority of GAAP, to
separately recognize the excluded revenue it attributed to pre-'72
recordings or to the Upcharge. See Wills Report at 8 ([``T]here is no
requirement in GAAP to record revenue separately for pre-1972
recordings (or any other type of content), and no support for the idea
that it is not recognized if not separately reported.''); Wills
Rebuttal Report at 11 (``GAAP is irrelevant . . . to the further
question of how much of Sirius XM's recognized subscription revenue is
attributable to non-music content offered for a separate charge . . .
.'').
SoundExchange does not dispute the first point, tacitly
acknowledging that all of the subscription revenue--including any
revenue that allegedly could be attributable to pre-'72 sound recording
performances--was recognized pursuant to GAAP as part of an
undifferentiated sum. See, e.g., SoundExchange Rebuttal Submission at
10 (``It is . . . irrelevant whether Sirius XM recognized all of its
subscription revenue at the most aggregated level . . . .''). However,
SoundExchange strongly disputes the second point, viz., Sirius XM's
assertion that the latter need not separately comply with GAAP in
quantifying an excludable sub-set of that revenue as attributable to
the performance of pre-'72 sound recordings. Id. (``The regulation
actually provides that excludable revenue must be `recognized by
Licensee . . . .' '').
The Judges find that Sirius XM cannot rely on the fact that 100% of
its undifferentiated subscription revenue was ``recognized'' as a
sufficient basis to support its assertion that an excluded sub-set of
that revenue was independently ``recognized'' in accordance with GAAP.
The repetition of the word ``recognized'' in the
[[Page 56730]]
exclusionary language clearly indicates that in SDARS I the Judges did
not intend to supersede or disregard GAAP as it might pertain to the
standards applicable to potentially excludable revenue.\21\
---------------------------------------------------------------------------
\21\ The regulations also separately reference revenue
``recognized'' by the Licensee with regard to included revenue,
without redundantly reiterating there that the ``recognition'' must
satisfy GAAP. 37 CFR 382.11 (paragraph (1)(i) of ``Gross Revenues''
definition).
---------------------------------------------------------------------------
The Judges agree with SoundExchange that ``[t]he only reasonable
reading of the Gross Revenues definition is that [GAAP] flows through
its entirety.'' SoundExchange Memorandum of Law at 10. Accordingly, if
there are GAAP provisions that required Sirius XM to recognize pre-'72
revenue separately, it would have been obliged to follow them.\22\
Thus, in order for the Judges to decide whether Sirius XM ran afoul of
GAAP--and therefore the regulations--the Judges must determine whether
any GAAP provisions in fact apply to this pre-'72 exclusion.
---------------------------------------------------------------------------
\22\ The record reflects that in the SDARS I proceeding the
participants did not identify and analyze specific GAAP provisions.
Rather, they selected GAAP as a comprehensive default set of
standards to be utilized as the regulatory standard to resolve
accounting issues.
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B. GAAP Principles, if Any, That Apply to Exclusions at Issue
SoundExchange argues at length that Sirius XM failed to abide by
GAAP in identifying and quantifying revenues supposedly attributable to
the performance of pre-'72 sound recordings, SoundExchange Initial
Submission ]] 25-38, and to the Upcharge. Id. at ]] 60-66. According to
SoundExchange, ``GAAP sets forth clear rules on how a company should
recognize revenue for bundles or packages . . . which GAAP sometimes
calls ``multiple element arrangements' or `MEAs.' '' Id. ] 24. The
entirety of SoundExchange's GAAP-based argument is conditioned on the
categorization of (i) the pre-'72 recordings; and (ii) the premium
nonmusic channels, respectively, as MEAs.
However, SoundExchange's accounting and economic expert, Professor
Lys, expressly declined to opine that the MEA concept is even
applicable to the two exclusions.
One question relevant to this lawsuit is whether GAAP's multiple
element arrangement (``MEA'') rules \23\ can be used to justify
Sirius XM's exclusions of pre-1972 recordings. . . . GAAP does not
define the term ``element'' . . . . For the purposes of my
subsequent analysis, I treat Sirius XM subscription arrangements as
if they fall within the scope of GAAP for multiple element
arrangements . . . . I note, however, that details of Sirius XM's
subscription agreement suggest that the provision of pre-1972
recordings and the incremental premium programming would not be seen
as separate deliverables or elements. Specifically, the Sirius XM
subscription agreement does not list specific programming as an
obligation of Sirius XM. Furthermore, Sirius XM reserves the right
to change, rearrange, add or delete programming.
---------------------------------------------------------------------------
\23\ When referring to the applicable GAAP, the Judges are
referring to EITF-0021 and ASC 605-25, which are the GAAP provisions
relating to MEAs relied on by Professor Lys. As he explained, GAAP
at present is set forth in the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC). Prior to 2009 (and
during the SDARS I period), official guidance on the implementation
of GAAP was provided by the Emerging Issues Task Force (EITF). Lys
Report ] 30. Professor Lys notes that there is no difference between
EITF-0021 and ASC 605-25 as they relate to the MEA argument he
advances in this proceeding. Id. 39, n.40. Accord, Wills Expert
Report at 11 (``ASC 605-25 . . . incorporates . . . the guidance
from EITF 00-21 [on] `Revenue Recognition Multiple-Element
Arrangements.' '').
Lys Report ]] 34, 36 and n.39 (emphasis added); see also EITF-0021
([MEA rule] applies ``to all deliverables (that is, products, services,
or rights to use assets) within contractually binding arrangements. . .
.'') (emphasis added).
Professor Lys's candid refusal to answer his own question in the
affirmative, i.e., ``whether GAAP's . . . MEA rules can be used to
justify Sirius XM's exclusions,'' leaves the Judges with no basis to
conclude that such an MEA-based approach is mandated in these
circumstances. Rather, the Judges agree with Mr. Wills that
SoundExchange has misapplied GAAP's MEA rules to the issues in this
proceeding. As Mr. Wills stated, the key point is that ``while ASC 605-
25 may serve as a mandate as to recognition where an MEA and separate
units of accounting exist, it is not a block or limit on recognition
where such conditions do not exist.'' Wills Rebuttal Report at 6
(emphasis added).
Thus, the Judges decline to adopt Dr. Lys's decision to analyze
Sirius XM's treatment of either pre-'72 recordings or the Premier
Upcharges ``as if'' the product/service delivered by Sirius XM to its
customers would constitute an MEA.\24\ Rather, the Judges conclude that
the record fails to identify particular provisions of GAAP that apply
to the accounting treatment of the two exclusions at issue.
---------------------------------------------------------------------------
\24\ To be clear, the Judges do not concur with a broader
assertion made by Sirius XM (see Sirius XM Rebuttal Submission at 4)
that the MEA analysis (or any test derived from it) is inapposite
merely because that specific accounting principle is ``stated
nowhere in the Gross Revenues definition.'' As noted supra, the
Judges conclude that the regulations regarding Gross Revenues do
incorporate GAAP in all of GAAP's particulars, but only to the
extent those GAAP particulars apply.
---------------------------------------------------------------------------
The Judges reject the application of the MEA approach for an
additional reason. Even assuming the MEA approach is not inapplicable
for the foregoing reasons, the MEA approach would still be inapplicable
because it is only relevant in a context in which several elements are
deliverable over time. That is, GAAP's ``separate unit of accounting''
principles do not apply to the allocation of revenue between or among
products or services that are provided simultaneously to the customer.
As Mr. Wills stated in his report, GAAP is completely irrelevant
to the question in this dispute. The issue addressed by [GAAP] is
how to deal with multiple deliverables within a package that may
occur at different points in time, such that revenue for certain
items may need to be allocated, and its recognition deferred, until
later periods when the item is actually earned. In other words, it
deals with the timing of recognition . . . . That simply is not an
issue here. Sirius XM delivers all elements of its monthly
subscription package--performances of pre[hyphen]72 recordings and
other content alike--during the same monthly period, and all revenue
from such a package rightly is recognized as earned on a monthly
basis. It therefore is not the kind of ``arrangement with multiple
deliverables'' addressed by [GAAP], which envisions a mix of
delivered and ``undelivered'' items.
Wills Report at 12-13. Referring to relevant source materials, the
Judges note that the language in EITF 00-21 relied upon by both Mr.
Wills and Professor Lys states at the outset that the issue it
addresses ``involve[s] the delivery or performance of multiple
products, services, or rights to use assets, and performances [that]
may occur at different points in time or over different periods of
time.'' EITF 00-21 at 2, ] 1 (emphasis added). Similarly, ASC 605-25,
which codifies EITF 00-21, provides that the standard it codifies is
for situations in which ``deliverables often are provided at different
points in time or over different time periods.'' ASC 605-25 at 1
(emphasis added).
Neither SoundExchange nor its expert, Professor Lys, point to any
language within either EITF 00-21 or ASC 605-25 that expressly applies
the MEA process to simultaneous deliverables. Professor Lys also relies
on SEC Staff Accounting Bulletin No. 13, which he understands to
provide that entities ``first evaluate whether an element is a separate
unit of accounting and then evaluate whether each unit of accounting
has been delivered and therefore whether revenue for that element has
been earned.'' Lys Rebuttal Report ] 28. However, the SEC
[[Page 56731]]
document, like the other documents upon which Professor Lys relies,
does not indicate that the ``separate unit of accounting'' approach
applies to elements that are delivered simultaneously.
At any rate, in the present case, the timing of deliverables is
irrelevant. SoundExchange is not concerned with the timing of revenue
recognition. SoundExchange does not contest that any Sirius XM revenue
properly within the definition of Gross Revenues (and not excluded by
that definition) will be subject to royalties at the applicable rate.
Therefore, SoundExchange's reliance on the timing rationale behind
revenue recognition principles is not applicable in the present case.
SoundExchange conducted two audits of Sirius XM relating to the
2007-2012 rate period.\25\ Importantly, the results of those audits
confirm the inapplicability of GAAP in evaluating Sirius XM's
application of the two exclusions at issue here. SoundExchange engaged
two auditing firms, PricewaterhouseCoopers, d/b/a PwC (PwC) and
EisnerAmper LLP (EisnerAmper), to audit Sirius XM's books and records
for the SDARS I period. Sirius XM asserts that the results of the
audits confirm the inapplicability of GAAP in determining the
appropriate manner in which to evaluate Sirius XM's application of the
two exclusions. Further, according to Sirius XM, neither of the firms
concluded that its exclusions violated GAAP or were otherwise improper.
See Written Merits Opening Submission of Sirius XM . . . (Sirius XM
Merits Submission) at 13-14. Rather, as Sirius XM points out,
EisnerAmper concluded that the dispute regarding the two exclusions was
a ``legal issue.'' Id.
---------------------------------------------------------------------------
\25\ SoundExchange conducted these audits pursuant to its
verification rights under 37 CFR 382.15.
---------------------------------------------------------------------------
SoundExchange attempts to minimize the importance of the auditing
firms' conclusions, arguing that the auditors simply ``declined to take
sides on how the regulations should be interpreted'' because they were
told by Sirius XM ``that this matter is a legal issue.'' SoundExchange
Written Merits Rebuttal Submission (SoundExchange Rebuttal Submission)
at 7 n.5.
The Judges find SoundExchange's point unsupportive of its position.
The gravamen of SoundExchange's argument is that GAAP applies to the
propriety of Sirius XM's two categorical revenue exclusions. That is,
SoundExchange asserts that the legal interpretation of the Gross
Revenues definition must be determined by applying GAAP. Indeed, that
it is precisely what SoundExchange's expert, Professor Lys, purported
to do in this proceeding. Thus, SoundExchange argues that if GAAP
applies, the proper legal result is wholly dependent upon the proper
accounting treatment under GAAP. In fact, the Judges agree with that
line of reasoning, but only to the extent GAAP actually addresses the
issues in dispute.
SoundExchange offers no explanation for why neither of its auditing
firms opined that Sirius XM's exclusions of revenue for performances of
pre-'72 recordings and for the subscription price differential for the
Premier package (the Upcharge) were inconsistent with GAAP. If the
auditors had so concluded, SoundExchange could have perhaps
bootstrapped such a conclusion into its legal argument. The fact that
neither auditing firm reached the conclusion proffered by SoundExchange
supports the Judges' conclusion that the revenue exclusion issues in
this proceeding are not addressed by GAAP.
For these reasons, the Judges find no record evidence indicating
that GAAP provides a particular method for quantifying the two
exclusions at issue in this proceeding.\26\ Given the absence of any
applicable GAAP, the Judges seek to answer the District Court's
inquiries by analyzing the applicable standard to interpret and apply
the two revenue exclusions at issue.
---------------------------------------------------------------------------
\26\ The Judges recognize that in the SDARS II Determination,
the judges held that ``[r]evenue exclusion is not the proper means
of addressing pre-'72 recordings [as] there is no revenue
recognition for the performance of pre-1972 works.'' SDARS II, 78 FR
at 23073 (emphasis added). The District Court found this statement
to be dicta because ``the construction and application of the
[SDARS] I rates were not before the CRB in the [SDARS] II
proceeding.'' 65 F. Supp. 3d at 156. Further, as the SDARS II
Determination does not contain any record citations that would
support this finding, the Judges do not now view it as persuasive
authority and decline to follow it.
---------------------------------------------------------------------------
C. Determination of Appropriate Standard in Absence of Applicable GAAP
Guidance
Without specifically applicable GAAP principles, the Judges must
construe and interpret their regulation using legal principles. The
Judges consider both the language and the purposes of the regulations
to determine those standards.\27\ The non-applicability of specific
GAAP principles did not and does not afford Sirius XM unfettered
discretion regarding its application of the two revenue exclusions at
issue.\28\
---------------------------------------------------------------------------
\27\ SoundExchange argues that, when construing the revenue
exclusion regulations, the Judges should apply the interpretative
doctrine of contra proferentem. That is, because the revenue
exclusions were proposed and initially drafted by Sirius XM, they
should be interpreted against Sirius XM. SoundExchange Memorandum of
Law at 17-18. The Judges agree with Sirius XM, however, that the law
on which SoundExchange relies applies to contracts, not regulations.
See Sirius XM Rebuttal Submission at 10 n.10 (and cases cited
therein). Therefore, the doctrine of contra proferentem is
inapplicable.
More broadly, the Judges note that a review of the SDARS I
record of proceeding shows that the participants presented fairly
cursory arguments regarding treatment of pre-'72 recordings. The
SDARS I participants did not address directly the issue of how to
quantify or estimate the monetary value of a pre-'72 exclusion.
Thus, the evidence and arguments proffered by the SDARS I
participants are of limited value in the present proceeding.
\28\ Sirius XM itself recognizes that, even though GAAP is
inapplicable, it could not exclude revenue in an unconstrained
manner.
This is not to say--as SoundExchange misleadingly suggests--that
Sirius XM could ``slice and dice'' its revenue however it saw fit
without accounting controls. . . . While Mr. Wills testified that
GAAP does not direct (or limit) how a company subdivides already
recognized revenue for internal or regulatory purposes, such
attribution is still governed by principles of managerial and cost
accounting and subject to audit.
Sirius XM's Rebuttal Submission at 5 n.2 (emphasis added).
Unfortunately, Mr. Wills fails to identify any ``principles of
managerial and cost accounting'' that Sirius XM did apply to these
exclusion issues, nor does he even identify any such principles that
should be applied.
---------------------------------------------------------------------------
Absent guidance from the participants, the Judges look first to the
authority by which they are bound: The Copyright Act. In SDARS
proceedings under section 114(f)(1)(B), the Copyright Act contains a
core requirement that the Judges set terms (and rates) that are
``reasonable.'' 17 U.S.C. 801(b)(1). The obligation to set reasonable
rates and terms imposes upon the Judges a requirement to assure that
the rates and terms they codify are neither vague nor ambiguous, but
rather are subject to reasonable interpretation. In its referral, the
District Court has termed ambiguous the provisions of the regulations
at issue here. 65 F. Supp. 3d at 155.
Further, assuming the Judges' regulations are reasonable or may be
reasonably interpreted,\29\ the Judges' clarification must likewise be
reasonable and aimed at reasonable interpretation going forward.
Ultimately, licensors and licensees should be confident of compliance
when attempting a reasonable interpretation and application of those
regulations. Even though the Judges find no specific GAAP guideline
applicable to the interpretation of the regulation at issue, they
nonetheless look to the standard established by the overarching
concepts within GAAP. GAAP requires that an entity provide a ``faithful
representation'' of the facts in its financial reporting, i.e., a
presentation that is ``complete'' and ``free of error
[[Page 56732]]
. . . to the extent possible.'' FASB Statement of Financial Accounting
Concepts No. 8 at 27 (Quality Characteristic (QC) 12) (September 2010).
This overarching GAAP standard guides the Judges' regulatory
interpretation notwithstanding the absence of any GAAP principle
specifically applicable to the regulations at issue.
---------------------------------------------------------------------------
\29\ As the parties agreed, they proposed the text of the
regulation at issue, which the Judges adopted as reasonable.
---------------------------------------------------------------------------
Moreover, QC 30 in FASB Statement of Financial Accounting Concepts
No. 8 also requires that financial reporting be ``understandable.''
That GAAP pronouncement notes that ``understandability'' embodies
``transparency.'' Id. at 21, 31 (QC 30; Basis for Conclusion (BC) 3.44)
(``transparency, high quality, internal consistency, true and fair view
or fair presentation are different words to describe information that
has the qualitative characteristic[ ] of . . . understandability.'')
emphasis added).
These GAAP standards are consonant with the Judges' application of
the pre-'72 exclusion in SDARS II. There, the Judges concluded that the
statutory requirement for reasonable terms is satisfied when those
terms are ``precise'' (i.e., ``reasonably accurate'') and
``methodologically transparent.'' 78 FR at 23073.\30\ The Judges thus
apply the GAAP standards of understandability (embodying transparency),
faithfulness, accuracy, and transparency, in shorthand,
``reasonableness,'' in the circumstances at issue.
---------------------------------------------------------------------------
\30\ In SDARS II the Judges articulated this standard in
connection with exclusion of royalties attributed to performances of
pre-'72 sound recordings. The Judges conclude that the SDARS II
determination is not precedential or binding on the Judges'
interpretation of regulations that preceded that determination. See
78 FR 23054 (Apr. 17, 2013). Nonetheless, the Judges accept as
instructive the language in SDARS II relating to revenues or
exclusion of royalties attributed to performances of pre-'72
recordings.
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1. The Pre-'72 Sound Recordings
(a) Paragraph (3)(vi)(D) Exclusion for ``Exempt'' Performances
Paragraph (3)(vi)(D) of the definition of Gross Revenues, relating
to exclusions, does not explicitly identify pre-'72 sound recordings as
excludable from Gross Revenues. Rather, Sirius XM deemed such pre-'72
performances excludable pursuant to the broader exclusion for revenues
recognized for the provision of ``[c]hannels, programming, products
and/or other services for which the performance of sound recordings
and/or the making of Ephemeral Recordings is exempt from any license
requirement . . . .'' 37 CFR 382.11 (2008) (emphasis added); see Sirius
XM Initial Submission at 18 (describing ``core precept'' that Sirius XM
should not pay for non-statutory activities).
SoundExchange disagrees, arguing that as Sirius XM never packaged
or marketed separately performances of pre-'72 recordings, revenues
generated on account of those performances do not fall within the
regulatory exclusions from Gross Revenues. SoundExchange Memorandum of
Law at 4-5. Additionally, SoundExchange points to the ``the avoidance
of doubt'' clause noting it does not identify pre-'72 recordings as
excludable. Finally, SoundExchange asserts that it would be absurd to
construe the regulatory word ``programming,'' or any of the other
excluded categories, as embracing the ``performance of sound
recordings,'' as the regulation at issue already uses the phrase
``performance of sound recordings.'' Id. at 5.
Addressing SoundExchange's first and last assertions, the Judges
find that the language of the paragraph (3)(vi)(D) exclusion clearly
embraces revenue properly attributable to the performance of pre-'72
recordings. Contrary to SoundExchange's argument, the word
``programming'' is not redundant of the phrase ``performance of sound
recordings.'' In ordinary parlance, broadcast music programming
consists of the aggregation of sound recordings played pursuant to a
sequence selected by the broadcaster. In the 2006 SDARS I proceeding,
XM's Executive Vice President for programming, Eric Logan, testified
that the ``fundamental value proposition'' for XM was that it
aggregated a ``diverse variety of programming'' into a single ``170-
channel platform . . . .'' Sirius XM Ex. 20 (Direct Testimony of Eric
Logan on behalf of XM Satellite Radio Inc., SDARS I ]] 2, 12, 14 (Jan.
17, 2007). The word ``programming'' as used in the regulations should
be read to include programming across a satellite platform and within
or across channels, consisting of both older music, such as pre-'72
recordings, and relatively more contemporary music, i.e., music that
falls within the collection of post-'72 recordings.
The Judges reject SoundExchange's assertion that the final words of
the regulation, ``for the avoidance of doubt'', preclude an exclusion
of revenue from pre-'72 recordings. In paragraph (3)(vi)(D) of the
Gross Revenues definition, the phrase ``for the avoidance of doubt''
follows immediately after the phrase ``is separately licensed,
including by a statutory license . . . .'' The string of four items
that follows is comprised of ``separately licensed uses.'' Thus, the
syntax of the paragraph makes it clear that the ``for the avoidance of
doubt'' clause does not address, and therefore does not prohibit
exclusions for, performances that are ``exempt from any license
requirement,'' such as performances of pre-'72 recordings.\31\
---------------------------------------------------------------------------
\31\ The Judges interpret ``exempt from any license
requirement'' in this regulation to refer to licensing under the
federal Copyright Act. The Judges do not assume that this regulation
refers to any ``license requirement'' that may exist under any other
body of law.
---------------------------------------------------------------------------
The Judges also discount SoundExchange's argument that an
interpretation of ``programming, products, and/or other services'' as
embracing ``the performance of sound recordings'' would yield a result
that is linguistically ``nonsensical.'' SoundExchange Memorandum of Law
at 5. Quite the contrary, substituting ``the performance of sound
recordings'' for ``programming, products, and/or other services'' in
this manner would cause the regulation to be understood as excluding
revenue from ``the performance of sound recordings . . . for which the
performance of sound recordings and/or the making of ephemeral
recordings is exempt from any license requirement . . . .'' That
interpretation plainly is not ``nonsensical.''
Finally, the Judges conclude that it would be anomalous to require
Sirius XM to pay for pre-'72 recordings under a federal compulsory
license when, by the unambiguous statutory language in section 301 of
the Copyright Act, those recordings are not subject to federal
copyright protection. Further, it seems implausible to the Judges that
the parties did not understand, or that they could reasonably have
failed to understand, that the language ``exempt from any license
requirement'' included pre-'72 sound recordings. Indeed, it is not
clear exactly what other sound recordings that phrase would cover
except for pre-'72 sound recordings.
(b) Sirius XM's Estimate of Revenue Attributable to Pre-'72 Recordings
During the course of the SDARS I rate period, Sirius XM appears to
have used two different methods to estimate revenue attributable to its
performance of pre-'72 recordings. According to the evidence before the
Judges relating to the referred questions, [REDACTED] \32\ Declaration
of Catherine Brooker ] 23 (Brooker Decl.).\33\ [REDACTED] Id. ] 24.
[[Page 56733]]
SoundExchange does not dispute Ms. Brooker's description of the two
ways in which Sirius XM applied the pre-'72 exclusion. See
SoundExchange Initial Submission ]] 12-13.
---------------------------------------------------------------------------
\32\ All redactions in this publication were proposed by the
participants and approved by the Judges. None were made by the
Office of the Federal Register.
\33\ Ms. Brooker is Vice President of Corporate Finance for
Sirius XM. It is unclear to the Judges whether Ms. Brooker's
reference to the period [REDACTED] includes the entire 2007-08 pre-
merger period.
---------------------------------------------------------------------------
2. The Upcharge for Premier Service: Paragraph (3)(vi)(B) Revenue
Exclusion
During the SDARS I period, Sirius XM offered (under different names
before and after the merger of Sirius and XM) both a Base subscription
package that included channels performing broadcasts of sound
recordings covered by the statutory license, and a Premier subscription
package that included the Basic package plus premium channels that did
not make use of sound recordings subject to the statutory license.\34\
Brooker Decl. ] 13; see Declaration of Brian S. Wood ]] 8-10 (Wood
Decl.).\35\ At all times, Sirius XM offered the Basic package as a
stand-alone product. The parties acknowledge that subscription revenue
paid for the Basic package is part of the Gross Revenues royalty base.
---------------------------------------------------------------------------
\34\ The Basic package also includes non-music programming, but
the value of those non-music channels is not relevant to the present
issues.
\35\ Mr. Wood is a Sirius XM Consultant and former Senior
Advisor for Sales and Operations to Sirius XM's President.
---------------------------------------------------------------------------
Sirius XM did not offer the additional channels included in the
Premier package as a separate, standalone product. Rather, Sirius XM
customers could obtain those Premier additional talk and other non-
music channels as part of a package that included all channels in the
Basic package. Sirius XM treated the Premier package as a service
``offered for a separate charge'' and thus excludable under paragraph
(3)(vi)(B) of the regulatory definition of Gross Revenues.\36\
---------------------------------------------------------------------------
\36\ The regulatory language on which Sirius XM relies to
justify this Upcharge exclusion states that ``Gross Revenues'' shall
exclude ``revenues recognized by licensee for the provision of . . .
channels, programming, products and/or other services offered for a
separate charge where such channels use only incidental performances
of sound recordings.'' 37 CFR 382.11, paragraph (3)(vi)(B) of the
definition of ``Gross Revenues'' (emphasis added).
---------------------------------------------------------------------------
SoundExchange challenges Sirius XM's exclusion asserting it is not
supported by the text of the regulation, in that Sirius XM did not
offer the Premier channels ``for a separate charge'' as required by the
regulation. SoundExchange Memorandum of Law at 18-19. SoundExchange
also notes that Sirius XM regularly invoiced and billed customers a
combined price rather than a separate price for the basic and premium
components of the Premier package. Id. at 21 (and record citations
therein). Further, SoundExchange points out that, when marketing the
premium package, Sirius XM did not ``give recipients the opportunity to
purchase just the premium channels,'' nor did it ``identify a price for
the premium channels.'' Id. (and record citations therein).
Sirius XM does not deny that it did not consistently call out the
``additional upcharge'' on marketing materials or customer bills.
However, Sirius XM contends that its communications with customers
``left no doubt that all subscribers whether existing subscribers
looking to upgrade or new subscribers deciding which combination of
content they preferred'' were presented with information making it
clear that ``for $4.04 more,'' they could ``obtain[ ] the additional
premium channels.'' Sirius XM Rebuttal Submission at 13. As explained
by Brian Wood, Sirius XM's consultant and former employee, it was
perfectly plain that the premium package represented a charge for the
basic package, plus the additional charge for the additional premium
channels. Wood Decl. ]] 13-18; see Sirius XM Initial Submission at 9-
11, 16.
The Judges find and conclude that the language in the revenue
exclusion described in paragraph (3)(vi)(B) did not permit Sirius XM to
exclude from the Gross Revenues royalty base the price difference,
i.e., the Upcharge, between the Premier package and the Basic package.
Construction of a regulation ``must begin with the words in the
regulation and their plain meaning.'' Pfizer v. Heckler, 735 F.2d 1502,
1507 (D.C. Cir. 1984); see also Freeman v. Dep't of the Interior, 37 F.
Supp. 3d 313, 331 (D.D.C. 2014). In the present case, the plain
language of the regulation disallows this revenue exclusion. Sirius XM
did not offer the premium channels ``for a separate charge.'' Sirius
XM's use of a bundled price is inconsistent with the regulatory
requirement that premium channels must be priced at a ``separate
charge.'' In ordinary usage, the adjective ``separate'' is defined as:
``detached, disconnected, or disjoined; unconnected; distinct; unique;
being or standing apart; distant or dispersed; existing or maintained
independently; individual or particular.'' http://www.dictionary.com/browse/separate (last visited January 3, 2017). The Judges can find no
portion of this definition that applies to the bundled subscription
charge at which Sirius XM priced its Premier package. Indeed, a
``bundled'' charge is the antithesis of a separate charge. See http://www.thesaurus.com/browse/bundled?s=t (classifying ``separate'' as an
antonym of ``bundle'') (last visited January 3, 2017). Thesaurus
entries, like dictionary definitions, are valuable sources for the
ascertainment of the meaning of statutory and regulatory words and
phrases. See, e.g., McLaughlin v. Richland Shoe Co., 486 U.S. 128, 133
(1988) (relying on thesaurus as aid in statutory interpretation).
The Judges recognize that dictionary definitions and thesaurus
entries are not necessarily dispositive as to the meaning of statutory
(or regulatory) language. See, e.g., Yates v. U.S., __ U.S. __ , 135 S.
Ct. 1074, 1081-82 (2015) (``the plainness or ambiguity of statutory
language is determined not only by reference to the language itself,
but as well by the specific context in which that language is used, and
the broader context of the statute as a whole.'') (citation omitted).
Accordingly, in ascertaining the meaning of the ``separate charge''
requirement, the Judges also look to the context in which the
``separate charge'' provision was adopted. That contextual analysis
explains why the SDARS I regulations distinguish a ``separate charge''
from other charges when classifying revenue to be included in or
excluded from the royalty base.
First, the Judges consider the express language in the SDARS I
Determination regarding this ``separate charge'' issue as it relates to
a premium service--the precise issue here.
[T]he SDARS definition of ``gross revenues'' excludes monies
attributable to premium channels of nonmusic programming that are
offered for a charge separate from the general subscription charge
for the service. The separate fee generated for such nonmusic
premium channels is not closely related to the value of the sound
recording performance rights at issue in this proceeding. Therefore,
this proposed exclusion serves to more clearly delineate the
revenues related to the value of the sound recording performance
rights at issue in this proceeding.
SDARS I, 73 FR at 4087 (emphasis added).
Second, the SDARS I Determination also noted that the ``separate
charge'' exclusion from Gross Revenues was designed to ``enhance
business flexibility'' in a manner that offset the flexibility foregone
by the Judges' rejection of a ``per play metric.'' Id. at 4086. In
reaching this conclusion, the Judges again made reference to use of a
separate charge for a premium nonmusic service:
The SDARS argue that a ``per play'' rate provides the SDARS with
more business flexibility because it allows them to respond to any
substantial increases in fees by
[[Page 56734]]
economizing on the plays of sound recordings so as to reduce their
royalty costs. While the general proposition of enhancing business
flexibility is usually advantageous (at least to the party obtaining
such flexibility) . . . the same flexibility may be achieved by
other means. . . .
For example, in light of the definition of ``gross revenues''
herein below in this determination, the SDARS could offer wholly
nonmusic programming as an additional, separately priced premium
channel/service without having the revenues from such a premium
channel/service become subject to the royalty rate and, thereby,
achieve the desired flexibility of offering more lucrative nonmusic
programming without sharing the revenues from that programming with
the suppliers of sound recording inputs.
Id. at 4086 and n.20 (emphasis added; citations omitted). The Judges
thus deemed the ``separate charge'' to be necessary in order for the
revenue-based royalty structure to offer the analogous flexibility
benefit of a per-play metric--specifically with regard to a nonmusic
premium package.
The Sirius XM interpretation of the ``separate charge'' requirement
to include its Upcharge for the Premier subscription package does not
relate to the benign and appropriate ``flexibility'' benefit of
permitting Sirius XM to perform fewer royalty-bearing sound recordings
in order to minimize royalty costs. Rather, the bundle of royalty-
bearing and premium non-royalty-bearing channels in a single price
introduces an economically indeterminate and self-serving
``flexibility'' that simply confuses the issue as to which portion of
the entire subscription price reflects which type of channel.
Sirius XM's Upcharge methodology is ``economically indeterminate''
because it ignores the fundamental economic reason why downstream
sellers such as Sirius XM decide to bundle products within one offering
price--to maximize revenue from the sale of both products.\37\ As
SoundExchange notes, in the record Sirius XM candidly acknowledged that
the opportunity to increase total revenues was the raison d'etre for
offering the Premier channels only in a bundle with the Basic channels.
See SoundExchange Initial Submission ]] 56-57, 65 (and record citations
therein).\38\ When this pricing/revenue bundling phenomenon exists, a
seller who owes revenue-based royalties to the provider of only one of
the bundled inputs has created an indeterminate revenue base, absent
some additional data or information from which to identify or
reasonably estimate the revenues attributable to each item in the
bundle. The price difference between the bundle and an unbundled item
fails to reflect the revenue attributable to each item. Rather, that
price difference is necessarily severed from the calculation of revenue
attributable to each item.
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\37\ More precisely, Sirius XM engaged in ``mixed bundling,'' by
which ``consumers get to buy the bundle or instead purchase one or
more of the products separately.'' C. Thomas and S. C. Maurice,
Managerial Economics: Foundations of Business Analysis and Strategy
at 609 (11th ed. 2013). In contrast to ``pure bundling,'' by which
products are only available for purchase as a bundle, economists
believe that ``mixed bundling'' is the more profitable method of
bundling products. See H. Varian, Price Discrimination, Sec. 2.6
(in R. Schmalensee and R. Willig, 1 Handbook of Industrial
Organization, Ch. 10 (Elsevier 1989).
\38\ Despite admitting that it does not know how consumers would
react to ``unbundling,'' Sirius XM asserts self-servingly and
without evidentiary support that separate pricing of the premium
package for $4 would diminish subscriptions to and revenues from the
basic package. See SoundExchange Initial Submission ] 56;
SoundExchange Ex. A.204 (citing Frear Dep. 12:10-22).
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SoundExchange's expert, Dr. Lys, cogently explained why the bundled
price fails to satisfy the economic purpose of the regulatory
``separate charge'' requirement:
First, [e]stimating the standalone value of incremental products
as the difference between the bundled price and the standalone price
. . . inappropriately assigns all of that premium or discount to the
incremental products.
Second, there would be no reason to bundle the incremental
content of the premium package if in fact [its] value . . . was
[merely] the difference between the selling price of the [Premier]
and [Basic] [packages]. In other words, if that were the case,
Sirius XM could simply offer the incremental content as a standalone
subscription. The fact that [it] did not do so is prima facie
evidence that the value of the incremental content is not simply the
difference between the [Premier] and [Basic] packages.
Third, the implied value of the same incremental good can vary
dramatically depending upon which offered bundle is used determine
the incremental value.
Lys Expert Report ] 82. In short ``[t]he price differential between two
bundles set by a profit-maximizing firm . . . need not equate to the
price that the incremental goods would command on a standalone basis.''
Id. at ] 85.\39\
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\39\ A party that relies on a bundle of values to support or
oppose a proposed statutory rate should introduce competent and
persuasive evidence of the separate values of the constituent parts
of the bundle.
---------------------------------------------------------------------------
Sirius XM made no attempt to rebut Professor Lys's economic point
regarding bundling and the concomitant indeterminacy in allocating
revenue as between or among the bundled items. Rather, its expert, Mr.
Wills, attempted to present an analogy which only served to underscore
Dr. Lys's analysis. Specifically, Mr. Wills focused instead on a
singular ``reasonable buyer.'' Wills Expert Rebuttal Report at 13.
However, the essence of the bundling process is to segregate buyers
into heterogeneous sub-classes of buyers, each of which is comprised of
``reasonable'' buyers with a different--not singular--WTP.
Moreover, Mr. Wills's point that ``when additional features are
available at additional cost . . . the reasonable buyer can do the
simple math to compute the cost differential, and decide whether the
additional features are worth the additional cost'' misses the economic
point. Id. In any market transaction (and regardless of whether the
market is monopolized, competitive or somewhere in-between), some
consumers have a WTP greater than the market price for a bundle of
products or a bundle of product characteristics, as compared with their
WTP if the products were offered separately. If the seller cannot
engage in bundling (or some other form of price discrimination)
consumers with a WTP above the market-clearing price realize the
benefit of the ``consumer surplus'' described supra. The consumer
surplus is value foregone by the seller. By bundling, the seller
captures some of that consumer surplus. See, e.g., W. Adams and J.
Yellen, ``Commodity Bundling and the Burden of Monopoly,'' 90 Q.J.
Econ. 475, 476 (1976) (profitability of bundling stems ``from its
ability to sort customers into groups with different reservation price
characteristics, and hence to extract consumer surplus.'').\40\
---------------------------------------------------------------------------
\40\ Mr. Wills also pays lip service to the correct accounting
principle of ``faithful representation,'' that links accounting form
to economic substance: ``Faithful representation means that
financial information represents the substance of an economic
phenomenon rather than merely represent its legal form. Representing
a legal form that differs from the economic substance of the
underlying economic phenomenon could not result in faithful
representation.'' Wills Rebuttal Report at 14 and n.27 (quoting FASB
Statement of Financial Accounting Concepts No. 8, September 2010).
However, by ignoring the economic substance of bundled pricing, Mr.
Wills's analysis essentially does the opposite--placing form over
economic substance--allowing accounting principles to obscure the
principles relating to the economics of bundling.
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Third, the Judges find guidance in the Rehearing Order in SDARS I.
In their Initial Determination, the Judges approved a Gross Revenues
exclusion that covered revenues attributable to ``data services.''
SoundExchange moved for rehearing on this issue, arguing ``there is no
way to determine the value [data services] contribute to the overall
subscription price'' and thus ``how much revenue should be deducted
from the revenue base'' because data services ``are not separately
priced,'' and
[[Page 56735]]
predicting that ``[t]he parties almost certainly will not agree on the
value of such services.'' SoundExchange Motion for Rehearing at 7 (Dec.
18, 2007) (emphasis added). In response, Sirius XM asserted that
SoundExchange offered nothing but ``speculation'' that Sirius XM ``will
not properly recognize revenues for the provision of data services . .
. .'' Response . . . to SoundExchange Motion for Rehearing at 10 n. 8
(Jan. 4, 2008).
Although the Judges styled their decision as an ``Order Denying
Motion for Rehearing,'' they in fact modified their Initial
Determination to clarify that only data services offered for a
``separate charge'' could be excluded from the revenue base. The Judges
accomplished this by adding the ``separate charge'' language that they
had included in the paragraph (3)(vi)(B) exclusion, the language on
which Sirius XM relies now to justify its single, bundled charge for
its Premier package (i.e., Basic + additional channels). Citing that
language in paragraph (3)(vi)(B) of the Gross Revenues definition, the
Judges stated that ``to avoid any doubt as might be suggested by
SoundExchange's arguments, we hereby clarify that subsection (3)(vi)(A)
of the definition of Gross Revenues at Sec. 382.11 Definitions,
dealing with data services also does not contemplate an exclusion of
revenues from such data services, where such data services are not
offered for a separate charge from the basic subscription product's
revenues. . . . The phrase `offered for a separate charge' will be
added to the regulatory language of subsection (3)(vi)(A) . . . .''
Rehearing Order at 4-5 and n.5. Thus, the SDARS I Judges clearly
understood that a failure by Sirius XM to set separate charges for
bundled services that included services both in the royalty base and
outside the royalty base would be contrary to the regulatory scheme,
rendering the royalty base indeterminate.
Consistent with the Judges' reliance on the ``separate charge''
language in the paragraph (3)(vi)(B) exclusion to clarify and amend the
paragraph (3)(vi)(A) exclusion, the Judges now conclude that Sirius
XM's combined charge for the Premier package is inconsistent with the
plain meaning of the paragraph (3)(vi)(B) exclusion and with the
purpose of the ``separate charge'' requirement, viz., to clearly
distinguish between revenue included in the royalty base and revenue
excluded from the royalty base.\41\
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\41\ By contrast, the absence of a ``separate charge''
requirement for pre-`72 sound recordings was reasonable. The Sirius
XM business model without dispute had always integrated pre-`72
recordings with other recordings across its channel lineup for a
single Basic subscription price. Thus, it would be impractical and
unreasonable to require Sirius XM to parse out a ``separate charge''
for pre-`72 recordings. Rather, Sirius XM attempted to fashion a
reasonable alternative approach to estimating the pre-`72 revenue
exclusion [REDACTED].
---------------------------------------------------------------------------
The Judges thus conclude that the Sirius XM Premier package is not
a service offered for a separate charge. Consequently any revenues
Sirius XM excluded from its Gross Revenues royalty base attributable to
the incremental Upcharge for the channels in the Premier package were
improper.
Conclusion
Based on the foregoing findings and reasoning, the Judges answer
the District Court by concluding that Sirius XM properly interpreted
the revenue exclusion to apply to pre-`72 sound recordings. Given the
limitations on the Judges' jurisdiction, they defer to the District
Court to determine whether Sirius XM developed a consistent,
transparent, reasonable methodology for valuing those exclusions. The
Judges also conclude that Sirius XM was incorrect to claim a revenue
exclusion based upon its Premier package upcharge, as that Premier
package was not a service offered for a separate charge. The Judges'
responses to the District Court are based upon that reasoning.
The Judges issued the Amended Decision to the parties in interest
on September 11, 2017. This published Amended Decision redacts
confidential information that is subject to a protective order in the
proceeding. The Register of Copyrights reviewed this ruling and found
no legal error.
So ordered.
Dated: November 8, 2017.
Suzanne M. Barnett,
Chief Copyright Royalty Judge.
Jesse M. Feder,
Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
Approved by:
Carla D. Hayden,
Librarian of Congress.
[FR Doc. 2017-25816 Filed 11-29-17; 8:45 am]
BILLING CODE 1410-72-P