[Federal Register Volume 90, Number 6 (Friday, January 10, 2025)]
[Rules and Regulations]
[Pages 1884-1893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-31779]
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LIBRARY OF CONGRESS
Copyright Royalty Board
37 CFR Part 384
[Docket No. 2012-1 CRB Business Establishments II; Docket No. 2007-1
CRB DTRA-BE]
Ruling on Regulatory Interpretation for Business Establishment
Services
AGENCY: Copyright Royalty Board, Library of Congress.
ACTION: Ruling on regulatory interpretation.
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SUMMARY: The Copyright Royalty Judges publish their ruling on
regulatory interpretation in a matter that was referred to them by the
United States District Court for the District of Columbia. The
regulation at issue is the definition of ``Gross Proceeds'' in the
rates and terms set forth through settlements in the BES I and BES II
proceedings in 37 CFR 384.3(a), which is used when calculating royalty
payments paid to SoundExchange, a collective for copyright owners, in
relation to digital transmissions of sound recordings pursuant to the
statutory license in 17 U.S.C. 112.
DATES: January 10, 2025
ADDRESSES: The ruling is posted in eCRB at https://app.crb.gov/. For
access to the docket, go to eCRB, the Copyright Royalty Board's
electronic filing and case management system, at https://app.crb.gov/,
and search for docket numbers 2012-1 CRB Business Establishments II and
2007-1 CRB DTRA-BES.
FOR FURTHER INFORMATION CONTACT: Anita Brown, CRB Program Specialist,
at (202) 707-7658 or [email protected].
SUPPLEMENTARY INFORMATION:
Ruling on Regulatory Interpretation Referred by the United States
District Court for the District of Columbia
Background
On February 9, 2022, SoundExchange submitted a motion \1\ to the
Copyright Royalty Judges (Judges) to reopen certain proceedings
addressing determinations of royalty rates and terms under the 17
U.S.C. 112 license for making ephemeral copies of sound recordings for
transmission by a Business Establishment Service (BES) in three
proceedings, BES I, BES II, and BES III.\2\
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\1\ Motion of SoundExchange, Inc. to Reopen Business
Establishment Service Rate Proceedings for the Limited Purpose of
Interpreting Regulations on Referral from the U.S. District Court
for the District of Columbia (February 9, 2022) (eCRB no. 26146)
(Motion).
\2\ Docket Nos. 2007-1 CRB DTRA-BE (2009-2013) (``BES I''),
2012-1 CRB Business Establishments II (2014-2018) (``BES II''), and
17-CRB-0001-BER (2019-2023) (``BES III'').
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SoundExchange's request arose from litigation before the U.S.
District Court for the District of Columbia (District Court) in which
SoundExchange alleged that Music Choice had failed to pay royalties due
under 17 U.S.C. 112 for the license to reproduce and transmit ephemeral
copies of sound recordings to business establishments. See
SoundExchange, Inc. v. Music Choice, No. 19-999 (RBW) (D.D.C. Dec. 20,
2021) (District Court Action). The District Court determined it was
appropriate to refer a matter of regulatory interpretation regarding 37
CFR 384.3(a) to the Judges under the doctrine of primary jurisdiction
and found that the Judges have continuing jurisdiction to clarify the
BES regulations, even though those regulations were originally
formulated by the Copyright Arbitration Royalty Panel (CARP), a rate
setting body that preceded the Copyright Royalty Board (Board). See
District Court Action, Memorandum Opinion at 9-10 (Dec. 20, 2021)
(Memorandum Opinion) (attached to the Motion as Exhibit B) (citing
Report of the Copyright Arbitration Royalty Panel to the Librarian of
Congress, Rate Setting for Digital Performance Right in Sound
Recordings and Ephemeral Recordings, Docket No. 2000-9 CARP DTRA 1 & 2
at B-7 (Feb. 20, 2002) (Web I CARP Report)).
[[Page 1885]]
The underlying dispute revolves around the definition of ``Gross
Proceeds'' in the rates and terms set forth through settlements in the
BES I and BES II proceedings in 37 CFR 384.3(a). Id. at 4-5.\3\ ``Music
Choice asserts that `its ``Gross Proceeds'' are only an allocated
portion of its actual proceeds corresponding to music channels offered
solely as part of its BES service.''' Id. at 6-7. SoundExchange asserts
that ```Music Choice must pay BES statutory royalties on fees and
payments it receives from providing music channels used in its BES
service, even if Music Choice also provides such channels as part of a
different service.''' Id. at 7.
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\3\ Despite the fact that the regulations at issue were not
drafted by Copyright Royalty Judges, but instead are the result of
settlements by the settling proceeding participants, which the
Judges are generally compelled, under 17 U.S.C. 801(b)(7)(a), to
adopt, the Judges find that the relevant procedural history of these
and predecessor proceedings does provide adequate basis for referral
by the District Court under the doctrine of primary jurisdiction and
the finding that the Judges have continuing jurisdiction. See Final
rule, Determination of Rates and Terms for Business Establishment
Services, Docket No. 2007-1 CRB DTRA-BE, 73 FR 16199 (Mar. 27, 2008)
(BES I Determination) and Final rule, Determination of Rates and
Terms for Business Establishment Services, Docket No. 2012-1 CRB
Business Establishments II, 78 FR 66276, 66277 (Nov. 5, 2013) (BES
II Determination), citing 17 U.S.C. 801(b)(7)(a).
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Stated differently, the question is whether 37 CFR 384.3(a)
requires BES providers to calculate royalties using their gross
proceeds derived from the use of all licensed ephemeral copies used for
the operation of the BES, or whether a BES may calculate royalties
using their gross proceeds derived from the use of only those licensed
ephemeral copies used for the ``sole purpose'' of the operation of the
BES.
The Memorandum Opinion stated that ``[a]s a preliminary matter, the
Court notes that the Board's definition of `Gross Proceeds' in 37 CFR
384.3(a)(2) is `ambiguous and do[es] not, on [its] face, make clear
whether [Music Choice's] approaches were permissible under the
regulations.' '' Id. at 9 n.2.
On March 22, 2022, after considering the Motion, Music Choice's
response \4\ and SoundExchange's reply,\5\ the Judges found that the
claims to be addressed by the District Court only relate to time
periods addressed by the BES I and BES II determinations and thus
ordered the reopening of those two proceedings. The Judges ordered
opening and reply briefing for the limited purpose of addressing the
meaning of ``Gross Proceeds'' as defined in 37 CFR 384.3(a).\6\
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\4\ Music Choice's Response in Opposition to SoundExchange's
Motion to Reopen Business Establishment Service Rate Proceedings
(Feb. 23, 2022) (eCRB no. 26201).
\5\ SoundExchange's Reply in Support of its Motion to Reopen
Business Establishment Service Rate Proceedings (Mar. 2, 2022) (eCRB
no. 26246).
\6\ Order Reopening Two Proceedings and Scheduling Briefing
(Mar. 22, 2022) (eCRB no. 26360) (``Reopening Order''). The Judges
observe that the Register of Copyrights has previously opined that
the Judges have jurisdiction to clarify regulations that the Judges
have adopted. See, Register's Memorandum Opinion on a Novel Question
of Law (Apr. 8, 2015) (Addressing the re-opened SDARS I proceeding
and questions referred from the U.S. District Court for the District
of Columbia).
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The relevant provision as set forth in the BES I determination
states:
Sec. 384.3(a)
For the making of any number of Ephemeral Recordings in the
operation of a service pursuant to the limitation on exclusive
rights specified by 17 U.S.C. 114(d)(1)(C)(iv), a Licensee shall pay
10% of such Licensee's ``Gross Proceeds'' derived from the use in
such service of musical programs that are attributable to
copyrighted recordings. ``Gross Proceeds'' as used in this section
means all fees and payments, including those made in kind, received
from any source before, during or after the License Period that are
derived from the use of copyrighted sound recordings during the
License Period pursuant to 17 U.S.C. 112(e) for the sole purpose of
facilitating a transmission to the public of a performance of a
sound recording under the limitation on exclusive rights specified
in 17 U.S.C. 114(d)(1)(C)(iv). The attribution of Gross Proceeds to
copyrighted recordings may be made on the basis of:
(1) For classical programs, the proportion that the playing time
of copyrighted classical recordings bears to the total playing time
of all classical recordings in the program, and
(2) For all other programs, the proportion that the number of
copyrighted recordings bears to the total number of all recordings
in the program.
Final rule, Determination of Rates and Terms for Business Establishment
Services, Docket No. 2007-1 CRB DTRA-BE, 73 FR 16199, 16200 (Mar. 27,
2008) (BES I Determination).
The relevant provision as set forth in the BES II determination
states:
Sec. 384.3(a)
For the making of any number of Ephemeral Recordings in the
operation of a Business Establishment Service, a Licensee shall pay
12.5% of such Licensee's ``Gross Proceeds'' derived from the use in
such service of musical programs that are attributable to
copyrighted recordings. ``Gross Proceeds'' as used in this section
means all fees and payments, including those made in kind, received
from any source before, during or after the License Period that are
derived from the use of copyrighted sound recordings during the
License Period pursuant to 17 U.S.C. 112(e) for the sole purpose of
facilitating a transmission to the public of a performance of a
sound recording under the limitation on exclusive rights specified
in 17 U.S.C. 114(d)(1)(C)(iv). The attribution of Gross Proceeds to
copyrighted recordings may be made on the basis of:
(1) For classical programs, the proportion that the playing time
of copyrighted classical recordings bears to the total playing time
of all classical recordings in the program, and
(2) For all other programs, the proportion that the number of
copyrighted recordings bears to the total number of all recordings
in the program.
Final rule, Determination of Rates and Terms for Business Establishment
Services, Docket No. 2012-1 CRB Business Establishments II, 78 FR
66276, 66277 (Nov. 5, 2013) (BES II Determination).
Summary of Arguments
Music Choice puts forth the initial arguments that (a) the plain
meaning of the ``gross proceeds'' definition only requires royalty
payments from revenue attributable to copies made solely to facilitate
a BES transmission; (b) the plain meaning of the definition of gross
proceeds is confirmed by the unique nature of the BES license and the
Judges' prior rulings; and (c) in the absence of a specific methodology
in the regulations for apportioning revenues derived from copies made
for the sole purpose of facilitating a BES transmission, a BES provider
is entitled to use a reasonable methodology. See generally, Music
Choice Opening Brief (eCRB no. 26631).
Music Choice urges the Judges to apply basic principles of
regulatory interpretation, including that when a regulation is
unambiguous, one should not look beyond the text of the regulation
itself unless the plain meaning of the regulation would lead to an
absurd result (Plain Meaning Rule and Absurdity Doctrine). Id. at 24.
Music Choice adds that the regulation explicitly calls for the
inclusion of only those revenues that are derived from copies of sound
recordings that are made ``for the sole purpose of facilitating a
transmission to the public of a performance of a sound recording.'' 37
CFR 384.3(a)(2). Music Choice asserts that the ``sole purpose''
language in the definition must place some limitation on the revenues
that are to be included in ``Gross Proceeds'' or else the ``sole
purpose'' language would be superfluous--a result that is at odds with
long-settled cannons of regulatory and statutory interpretation (Rule
Against Surplusage). Id. at 24-26 (citing e.g. U.S. v. Butler, 297 U.S.
1, 65 (1936), Lowe v. SEC, 472 U.S. 181, 207 n.53 (1985) (``[W]e must
give effect to every word that Congress used in the statute.''), and
Gustafson v. Alloyd Co., 513 U.S. 561, 577 (1995) (``the presence
[[Page 1886]]
of limiting language in [the statute] requires a narrow
construction.'').
Music Choice posits that even if one were to conclude that there
was some ambiguity in the definition of Gross Proceeds, or that it was,
for some other reason, appropriate to look to other evidence, such
evidence only confirms that the limitation imposed by the ``for the
sole purpose'' language serves valid economic and copyright policy
purposes, and therefore that limitation must be given its full effect.
In this regard, Music Choice points to its conception that the right to
make ephemeral copies has no independent value separate and apart from
the performance right. Id. at 27-28. Music Choice also refers to
various statements urging copyright and economic policy positions
calling for an outright exemption for the rights covered by the 112
license at issue. Id. at 29.
Music Choice then pointed to several statements by the Judges, made
in the context of determinations involving different statutory
licenses, urging that ``it is almost axiomatic'' that revenues
unrelated to the particular statutory license at issue ``should not be
included in the revenue base'' used to calculate royalties for a
license where the royalty is calculated as a percentage of revenue. Id.
at 29-31 (citing Final rule and order, Determination of Royalty Rates
and Terms for Making and Distributing Phonorecords (Phonorecords III)
(Feb. 5, 2019), 84 FR 1918, 1961; Final rule and order, Determination
of Rates and Terms for Preexisting Subscription Services and Satellite
Digital Audio Radio Services (PSS/Satellite II), Docket No. 2011-1 CRB
PSS/Satellite II, 78 FR 23054, 23096 (Apr. 17, 2013) (excluding
``monies received by Licensee's carriers from others and not accounted
for by Licensee's carriers to Licensee, for the provision of hardware
by anyone and used in connection with the programming service'' from
the definition of ``Gross Revenues.'')).\7\
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\7\ Music Choice also noted that in the SDARS II determination
the Judges decided that a downward adjustment to the royalties owed
was appropriate to account for the performance of any directly
licensed sound recordings as well as for the performance of any pre-
1972 sound recordings which, at the time, were ``not licensed under
the statutory royalty regime.'' 78 FR 23072.
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Music Choice then urges the Judges to go beyond the scope of the
re-opened proceedings (provide guidance regarding the meaning of the
``Gross Proceeds'' definition) and provide guidance regarding the
standard that should be used to evaluate the approach that a BES
provider has taken to apportion its revenues. Music Choice argues the
Judges should find that where a regulatory royalty formula at issue
does not provide a specific approach for allocating revenues between
those included in Gross Proceeds and those excluded, a
``reasonableness'' standard should be applied. In making this request
Music Choice notes that it would be inappropriate to provide such
guidance if doing so required any fact-finding. Id. at 34-35.
SoundExchange puts forth the initial arguments that (a) the ``gross
proceeds'' definition is ambiguous, (b) Music Choice's proposed
interpretation of 37 CFR 384.3(a)(2) creates incoherence with 37 CFR
384.3(a)(1), (c) Music Choice's interpretation of 37 CFR 384.3(a)
produces absurd results, and (d) Music Choice's interpretation of 37
CFR 384.3(a) is inconsistent with past Determinations concerning that
provision. See generally, SoundExchange's Opening Legal Brief
Concerning the Meaning of 37 CFR 384.3(a) (eCRB no. 26639).
SoundExchange recounts the past proceedings for setting of rates
and terms for BES, noting that BES rates and terms have been litigated
in a ratemaking proceeding only once, in the first CARP proceeding
after enactment of the DMCA. Id. at 7 (citing Web I CARP Report at 111;
Final order, Designation as a Preexisting Subscription Service, 71 FR
64639, 64640-41 (Nov. 3, 2006)). SoundExchange notes that subsequent
statutory royalty rates and terms for BES were settled in 2003, 2007,
2012, and 2018, using essentially the same wording in the relevant
regulations. Id. at 12-14 (citing Final rule, Digital Performance Right
in Sound Recordings and Ephemeral Recordings, 69 FR 5693 (Feb. 6,
2004); BES I Determination, 73 FR 16199; BES II Determination, 78 FR
66276; Final rule, Determination of Royalty Rates and Terms for Making
Ephemeral Copies of Sound Recordings for Transmission to Business
Establishments (BES III), 83 FR 60362 (Nov. 26, 2018)).
Regarding the one fully litigated determination of rates and terms
for BES, SoundExchange observes that the CARP adopted as benchmarks
existing direct license agreements for BES. Id. at 9 (citing Web I CARP
Report at 121-23). Additionally, SoundExchange notes that the CARP
relied upon benchmark agreements not only for the rates but for the
terms of the statutory license. Id.
SoundExchange notes that the Librarian of Congress reviewed the Web
I CARP Report and that the Librarian disagreed with the CARP's
conclusions about BES rates in one respect relevant to this re-opened
proceeding, namely the regulations regarding gross proceeds,
specifically the inclusion of in-kind payments. Id. at 9-11.\8\
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\8\ The relevant law at the time, section 802(f) of the
Copyright Act directed that the Librarian shall adopt the report of
the CARP, ``unless the Librarian finds that the determination is
arbitrary or contrary to the applicable provisions of this title.''
See Determination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings and Ephemeral Recordings; Final rule
and order, Determination of Reasonable Rates and Terms for the
Digital Performance of Sound Recordings and Ephemeral Recordings, 67
FR 45240, 45242 (July 8, 2002) (citing 17 U.S.C. 802(f) (2002) (DTRA
Determination)).
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SoundExchange argues that the relevant provision at issue is
ambiguous. Id. at 20-24. In doing so, it cites to the District Court
Opinion. SoundExchange also points to linguistic and interpretive
challenges in the regulatory text. SoundExchange focuses specific
attention to the word ``including'' and to the principle of regulatory
interpretation known as the ``Presumption of Nonexclusive `Include'.''
Id. at 22 (citing Am. Hosp. Ass'n v. Azar, 983 F.3d 528, 534 (D.C. Cir.
2020) (quoting Puerto Rico Mar. Shipping Auth. v. Interstate Com.
Comm'n, 645 F.2d 1102, 1112 n.26 (D.C. Cir. 1981) (it is ``hornbook law
that the word `including' indicates that the specified list . . . that
follows is illustrative, not exclusive.'')). SoundExchange asserts that
the regulation is ambiguous as to whether the lengthy matter that
follows the word ``including'' in paragraph (a)(2) is: (a) a list of
illustrative examples; (b) just one illustrative example; or (c) one or
more illustrative examples plus some words that relate back to the
``all fees and payments'' at the beginning of the definition. Id. at
22-23. SoundExchange also focuses on the two instances of the phrase
``derived from'' arguing that both must be given effect, if possible.
Id. at 24-25.
SoundExchange argues that these challenges within 37 CFR 384.3(a)
render the regulation capable of numerous interpretations, which cannot
all be right. It then offers two interpretations, which it views as
being plausible.
Under the first of SoundExchange's proposed interpretations, the
relevant regulation can be parsed as follows:
all fees and payments
including those made in kind, received from any source before,
during or after the License Period that are derived from the use of
copyrighted sound recordings during the License Period pursuant to
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission
to the public of a performance of a sound recording under the
limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv). 37 CFR 384.3(a)(2).
[[Page 1887]]
Read this way, the clauses following ``including those'' are not meant
to be exhaustive. SoundExchange argues that neither the CARP nor the
Librarian intended to include within ``all fees and payments'' only
``in kind'' revenue. It then asserts that for the same reason and under
the same logic, the language does not limit ``all fees and payments''
to only those derived from the use of ephemeral copies for the ``sole
purpose'' of BES transmissions. Id at 22-23.
Under the second of SoundExchange's proposed interpretations, the
relevant regulation can be parsed as follows:
all fees and payments
including those made in kind, received from any source before,
during or after the License Period that are derived from the use of
copyrighted sound recordings during the License Period pursuant to
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission
to the public of a performance of a sound recording under the
limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv).
37 CFR 384.3(a)(2). Read this way, the regulation means that ``all''
``fees and payments'' are included, and then goes on to specify what
kinds of ``in kind'' consideration count as well--those that come from
``any source,'' before or after the license period, provided that the
consideration was offered ``for the sole purpose'' of facilitating a
BES. Id. at 23-24.
While offering the two interpretations, SoundExchange also
maintains that other perhaps superior interpretations exist. Id. at 22-
24. It argues that in light of the apparent ambiguity, the Judges may
look elsewhere in the regulatory scheme to determine the proper
interpretation. It urges that here the Judges can and should resolve
ambiguities in the text of 37 CFR 384.3(a) by examining the history of
the regulation and the expressed intent of the regulation's drafters.
Id. at 24.
SoundExchange next argues that Music Choice's proposed
interpretation creates incoherence. SoundExchange states that the
alleged limitation by which ``all fees and payments'' ``derived from
the use of'' ephemeral copies of sound recordings, is limited to only
those copies that are used ``for the sole purpose of facilitating a
transmission'' through a BES is inconsistent with the preceding
sentence's statement in the regulation indicating that a BES provider
must pay a percentage of its Gross Proceeds ``derived from the use in
[a BES] of musical programs that are attributable to recordings subject
to protection under title 17, United States Code.'' Id. at 23-24
(citing 37 CFR 384.3(a)(2) (July 8, 2019)).\9\ SoundExchange argues
that such an interpretation violates the ``endlessly reiterated
principle of statutory construction . . . that all words in a statute
are to be assigned meaning, and that nothing therein is to be construed
as surplusage.'' Id. at 25. SoundExchange then argues that its two
proposed interpretations of the regulation are internally consistent,
avoid any obvious redundancy or surplusage and give better effect to
the clear intent of the regulation's drafters, as evidenced by the CARP
proceeding record. Id. at 26.
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\9\ The Judges note that SoundExchange is citing to the BES III
regulation, which, while structurally and substantively similar, is
slightly different from the regulations in BES I and BES II, which
are at issue in this proceeding.
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SoundExchange also argues that Music Choice's proposed
interpretation produces absurd results, namely that if Music Choice's
interpretation of the word ``solely'' were correct, then the only
copies for which it would owe royalties are those used in either its
BES or its Preexisting Subscription Service (PSS), but not in both. The
practical result would then be that Music Choice could deliver both a
BES and a PSS with a high proportion of dual-use copies, most of the
copies made by Music Choice would not generate any BES or PSS
royalties, and Music Choice would pay less in statutory royalties when
it used and profited off copies more. Id. at 27.
SoundExchange asserts that Music Choice's proposed interpretation
is inconsistent with the Web I CARP Decision and the Librarian's review
of that decision. Id. at 28. SoundExchange observes that the CARP set a
blanket rate structure, as opposed to setting rates for separate sets
of rights in multiple mini-licenses for the making of different kinds
of ephemeral copies. SoundExchange argues that the CARP expressly
decided not to allow BES providers to pick and choose license coverage
for different types of ephemeral recordings, or to pay based on usage,
approaches that the CARP referred to as ``subdivid[ing] this package of
rights into multiple mini-licenses for the making of different kinds of
ephemeral copies.'' Id. at 29-30 (citing Web I CARP Report at 119).
SoundExchange also argues that the benchmark agreements required
payment of royalties based on a licensee's gross proceeds, and not
based on a portion of gross proceeds reflecting the extent of the
licensee's usage. Id. at 31-32. SoundExchange also notes that the CARP
specifically rejected any deductions from gross proceeds, because in
``most'' agreements, ``there are no deductions from gross proceeds.''
Id. at 33 (citing Web I CARP Report at 125). SoundExchange argues that
the CARP determined that there should be no deductions from gross
proceeds, and that therefore Music Choice's proposed interpretation is
contrary to the benchmark agreements embraced by the CARP. Id.
SoundExchange then addresses the Librarian's review and
modification to the CARP recommendations. SoundExchange notes that the
Librarian largely affirmed the CARP's decision concerning BES rates. It
argues that the Librarian disagreed with the CARP's conclusions about
BES rates in only one respect relevant to this proceeding, namely the
specificity of the regulations as to whether gross proceeds include in-
kind payments. SoundExchange states that the Librarian decided ``to
expand on the CARP's approach and adopt a definition of `gross
proceeds' which clarified that `gross proceeds' shall include all fees
and payments from any source, including those made in kind, derived
from the use of copyrighted sound recordings to facilitate the
transmission of the sound recording pursuant to the section 112
license.'' Id. at 33-34 (citing Final rule and order, Determination of
Reasonable Rates and Terms for the Digital Performance of Sound
Recordings and Ephemeral Recordings, 67 FR 45260, 45268 (July 8, 2002)
(DTRA Determination). SoundExchange argues that the stated purpose of
the Librarian's new language was to expand rather than contract the
CARP's approach, to capture in-kind payments. In SoundExchange's view,
it would be contrary to the Librarian's reasoned decision to attribute
to the word ``solely'' the effect of drastically refiguring the CARP's
decision. Id. at 34.
Music Choice offers reply arguments that (a) any attempt to find
ambiguity regarding the meaning of gross proceeds do not withstand
scrutiny; (b) the plain meaning of the definition of gross proceeds set
forth by Music Choice does not produce absurd results; (c)
SoundExchange's proposed reading of the definition of gross proceeds is
at odds with its own discussion of cannons of regulatory
interpretation; and (d) flawed fact-finding and analysis from the CARP
proceeding are irrelevant, but in any event are not inconsistent with
the plain meaning of gross proceeds. See generally, Music Choice Reply
Brief (eCRB no. 26791).
Music Choice offers that SoundExchange is incorrect when it argues
that Music Choice's interpretation of Gross Proceeds would indicate
``the only copies for which it
[[Page 1888]]
would owe royalties are those used in either its BES or its PSS, but
not in both.'' Id. at 9. Music Choice notes that the PSS and BES
regulations are separate and distinct and that the regulations
applicable to PSS and BES are not analogous. Id. at 10. Music Choice
argues that neither the word ``solely'' in the PSS regulation, nor the
rest of the Gross Revenues definition, allows a PSS to make the sort of
``absurd'' carve-out that SoundExchange is suggesting. Id. at 10-11.
Music Choice argues that SoundExchange's proposed interpretations
do not provide any plausible meaning for the ``sole purpose'' limiting
language. It maintains that SoundExchange's interpretations largely
reads out the ``sole purpose'' limiting language. However, Music Choice
allows that SoundExchange offers the view that the ``sole purpose''
language is applicable only to ``in kind'' consideration, and that the
``sole purpose'' language does not apply to any other form of
consideration. But Music Choice argues that this interpretation from
SoundExchange is internally inconsistent, stating that if ``all fees
and payments'' must be included, then it cannot also be the case that
only a subset of ``in kind'' consideration (those ``offered `for the
sole purpose' of facilitating a BES transmission'') must be included.
Id. at 11-12.
Music Choice asserts that SoundExchange's interpretation is not
sensical, positing that under SoundExchange's interpretation the ```for
the sole purpose' of facilitating a BES transmission'' language was
meant to refer to payments, and not ephemeral copies. Music Choice
maintains that payments cannot ``facilitate'' a transmission. Id. at
12.
Music Choice argues that SoundExchange's interpretation renders
meaningless 37 CFR 384.3(c), which addresses ephemeral recordings other
than those governed by 384.3(a). Music Choice reasons that if a BES
provider is required to pay for all ephemeral copies, whether made
solely to facilitate a transmission by a BES or not, then all copies
made by a BES would be covered by section 384.3(a) and there would be
no copies left for section 384.3(c) to address. Id. at 13.
Music Choice suggests that the Judges' Order Reopening Two
Proceedings and Scheduling Briefing, as well as sound practice for
referrals from a District Court, indicate that it would be
inappropriate for the Judges to draw any factual conclusions from these
statements from Music Choice's Answer in the District Court proceeding.
It adds that it would be inappropriate for the Judges to make factual
findings regarding the manner and extent to which Music Choice actually
makes various types of channels or intermediate copies in connection
with its BES. Id. at 14-20.
Music Choice then intimates that the Judges should not make factual
determinations about the record of the CARP proceeding. Id. at 20-24.
Music Choice suggests that the record in the CARP proceeding was too
dated, narrow and sparse to provide useful guidance in this proceeding.
Id. at 21. Music Choice then adds that it is possible that the
evidentiary records between the CARP and other proceedings may be
sufficient justifications for the Judges to come to different
conclusions than those reached by the CARP and Librarian. Id. at 21-23.
Music Choice further attacks reliance on the CARP proceeding by
suggesting that it was rife with legal errors, and that the analysis
within that determination can no longer withstand scrutiny. It argues
that the benchmarking analysis is insufficient in comparison to more
recent proceedings. Id. at 26-30. Music Choice then revisits its
assertion that the CARP proceeding does not consider ephemeral copies
in a proper manner consistent with the policy views of Music Choice and
others. Id. at 30-35. Music Choice goes on to suggest that legal
interpretations now suggest that buffer copies are now per se not
legally recognizable copies or use of them is per se fair use. Id.
Music Choice asserts that a blanket license may allow deductions
from the revenue pool to which a percent of revenue royalty rate is
applied. Id. at 36-37. Music Choice adds that the benchmarks used by
the CARP were unreliable, and non-comparable to its BES, and included
vastly different rights. Id. at 37-38.
In its Reply Brief, SoundExchange asserts that Music Choice's
policy-based arguments against statutory recognition of ephemeral
copies are misplaced. Id. at 3-12. It adds that similar policy-based
arguments as to the value of ephemeral copies are misplaced.
SoundExchange's Reply Brief Concerning the Meaning of 37 CFR 384.3(a)
at 12-13. (eCRB no. 26794).
SoundExchange reiterates its arguments that the ``gross proceeds''
definition is ambiguous. Id. at 17-20. It adds that the Judges should
interpret the ambiguous provisions based on its context and its
drafters' intent. Id. at 20-22.
SoundExchange urges the Judges not to place undue weight on the
rates and terms for different licenses nor on the structure of such
regulations for different licenses. Instead, it again urges the Judges
to look to the intent of the drafters of the provision at issue. Id. at
23-26.
SoundExchange then challenges Music Choice's suggestion that the
Judges should wade into addressing the propriety of a licensee relying
on a ```reasonableness''' standard that might allow a BES provider to
apportion revenues in a way that makes sense for their particular
circumstances. Id. at 27-31.
Analysis
A. Regulatory Analysis
Several of the arguments put forward by Music Choice proceed from
the position that the language of 37 CFR 384.3(a) is unambiguous, in
contrast to the finding of the District Court that the provision ``is
``ambiguous and do[es] not, on [its] face, make clear whether [Music
Choice's] approaches were permissible under the regulations.''
Memorandum Opinion at 9 n.2. The Judges do not take issue her with the
District Court's finding of ambiguity, which is also persuasively
asserted by SoundExchange. Furthermore, the Judges note that the
parties have put forward various plausible interpretations of the
provision, which is consistent with the District Court's finding of
ambiguity. Based on the entirety of the record, including the briefing
received in response to the Reopening Order as well as the record of
the underlying proceedings, the Judges find that the relevant language
of 37 CFR 384.3(a) is at least arguably ambiguous. Based on the
entirety of that record, the Judges analysis and findings clarify this
apparent ambiguity.
The Judges find that resolution of the parties' policy-based
arguments regarding the provisions of the 112 license and the value of
ephemeral copies is largely unnecessary with regard to the referred
question.\10\ The Judges can, and do, find it sufficient to address the
referred question in light of the regulations in the relevant
proceedings and the statute, as set forth by Congress, without
influence of policy positions for alternative statutory provisions.\11\
---------------------------------------------------------------------------
\10\ Although the Judges find it unnecessary to also address the
parties' policy-based arguments, the Judges do find it instructive
to address the parties' incomplete and incorrect economic arguments
on which they rely in their attempts to buttress their legal and
policy arguments. The Judges address those arguments infra.
\11\ The Judges note that the Librarian's review of the Web I
CARP Report clarified:
During the proceeding, the Services argued that these
`ephemeral' copies have no economic value apart from the value of
the performance they facilitate. Webcasters Petition at 67;
Broadcasters Petition at 50. In support of this position, the
Services cite with approval a Copyright Office Report which stated
that the Office found no rationale for `the imposition of a royalty
obligation under a statutory license to make copies that have no
independent economic value, and are made solely to enable another
use that is permitted under a separate license.''
Web I CARP Report at 98 citing U.S. Copyright Office, DMCA
Section 104 Report at 114 n.434 (August 2001).
The Panel also contended that experts on both sides took this
view. Webcasters Petition at 66 citing Jaffe W.D.T. 52-54; Tr. at
6556; Tr. at 2632 (Nagle). Had there been nothing more, the Panel
might have agreed with the Services and adopted the Office's
position. In construing the statute, however, the Panel found that
Congress did not share the Copyright Office's view. Instead, the
Panel found that Congress required that a rate be set for the making
of ephemeral copies in accordance with the willing buyer/willing
seller standard. Report at 98-99.'' 67 FR 45261 (footnote omitted).
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[[Page 1889]]
Confronted with an apparent ambiguous regulation, the Judges are
informed by the arguments by Music Choice and SoundExchange regarding
regulatory interpretation, as well as the history of and analysis
underlying the regulations at issue from the CARP proceeding.
The Judges find that Music Choice is incorrect in arguing that the
CARP findings and analysis from the CARP proceeding are irrelevant.\12\
As the Court accurately observed: ``The original formulation of ``Gross
Proceeds'' was determined by a Copyright Arbitration Royalty Panel
(``CARP'') in a 2002 royalty-rate setting proceeding.'' Memorandum
Opinion at 3. The Judges observe that relevant provisions in the CARP
determination are substantively identical to the language set forth in
BES I and BES II, which form the basis for Music Choice's asserted
exclusion from gross proceeds.\13\ The Judges logically look to the
CARP proceeding's analysis and findings to address the referred
question. As suggested by the Court, the CARP proceeding findings are
essential to understand the basis for, and the meaning of, the language
in the BES I and BES II rates and terms.
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\12\ Furthermore, the Judges decline to second guess the
evidentiary and legal conclusions within the CARP proceeding.
\13\ Relevant language from each determination states:
CARP--``for the sole purpose of facilitating a transmission to
the public of a performance of a sound recording under the
limitation on the exclusive rights specified in section
114(d)(1)(c)(iv).'' DTRA Determination, 67 FR at 45268.
BES I--``for the sole purpose of facilitating a transmission to
the public of a performance of a sound recording under the
limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv.).'' BES I Determination, 73 FR at 16200.
BES II--``for the sole purpose of facilitating a transmission to
the public of a performance of a sound recording under the
limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv).'' BES II Determination, 78 FR 66277.
---------------------------------------------------------------------------
The CARP determination of BES rates and terms adopted as benchmarks
certain direct license agreements for BES. Web I CARP Report at 121-23.
The CARP noted that the benchmark agreements generally called for a
royalty payment that was a stated percentage ``of gross proceeds
derived by the background music company from the licensed service.''
Id. at 124. The CARP noted that in most of the benchmark agreements it
considered, there are no deductions from gross proceeds. Id. at 125.
The CARP determined that the royalty should simply be 10% ``of the
Licensee's annual gross proceeds derived from the use in such broadcast
service of the musical programs which are attributable to copyrighted
recordings.'' Id. at B-7.\14\
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\14\ The Web I CARP Report would have set forth the BES rate as
follows:
For the making of unlimited numbers of ephemeral recordings in
the operation of broadcast services pursuant to the Business
Establishment exemption contained in 17 U.S.C. 114(d)(l)(C)(iv), a
Business Establishment Service shall pay a Sec. 112(e) ephemeral
recording royalty equal to ten percent (10%) of the Licensee's
annual gross proceeds derived from the use in such broadcast service
of the musical programs which are attributable to copyrighted
recordings. The attribution of gross proceeds to copyrighted
recordings shall be made on the basis of:
(i) for classical programs, the proportion that the playing time
of copyrighted classical recordings bears to the total playing time
of all classical recordings in the program, and
(ii) for all other programs, the proportion that the number of
copyrighted recordings bears to the total number of all recordings
in the program.
---------------------------------------------------------------------------
The Librarian of Congress, upon and through recommendations of the
Register of Copyrights, reviewed the CARP's decision. See DTRA
Determination, 67 FR at 45240. The Librarian rejected the argument
advanced by a licensee in that proceeding that it was arbitrary for the
CARP to set a rate for a blanket license covering all ephemeral copies
used to provide a BES. Id. at 45263. The Librarian found it
``consistent with the purpose of the section 112 license'' for CARP to
have set a Section 112(e) rate for a blanket license of ``all the
rights necessary'' for a BES. Id. The Librarian also affirmed the
CARP's reliance on existing BES direct license agreements as
benchmarks, finding the CARP's adoption of a 10% rate based on those
agreements to be ``well-founded and supported by the record.'' Id. at
45243.
The Librarian took issue with aspects of the CARP's regulatory
language regarding gross proceeds, finding that it ``does not
necessarily appear to capture in-kind payments of goods, free
advertising or other similar payments for use of the license.'' Id. at
45268. The Librarian decided ``to expand on the CARP's approach and
adopt a definition of `gross proceeds' which clarifies that `gross
proceeds' shall include all fees and payments from any source,
including those made in kind, derived from the use of copyrighted sound
recordings to facilitate the transmission of the sound recording
pursuant to the section 112 license. Id. (citing RIAA Exhibit No. 60A
DR \15\).
---------------------------------------------------------------------------
\15\ See Transcript, 2000-9 CARP DTRA 1&2 (WEB 1998-2002
(consolidated)) (eCRB no.7947 pp 242-267).
---------------------------------------------------------------------------
The Librarian added the following definition for ``gross proceeds''
to the final rule:
``Gross Proceeds'' as used in this section means all fees and
payments, including those made in kind, received from any source
before, during or after the License Period that are derived from the
use of copyrighted sound recordings during the License Period
pursuant to 17 U.S.C. 112(e) for the sole purpose of facilitating a
transmission to the public of a performance of a sound recording
under the limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv).
See generally, DTRA Determination, 67 FR at 45240.
The proposed benchmark agreement that the Librarian looked to in
support of this clarification regarding gross proceeds, RIAA Exhibit
No. 60A DR, itself includes a notable exclusion from gross proceeds. An
exclusion in the cited benchmark agreement targets a specific type of
in-kind payment, namely in-kind payments [REDACTED]. RIAA Exhibit No.
60A DR.
The Librarian's decision to adopt the aforementioned regulatory
definition of ``gross proceeds'' did not specifically address the
addition of the language ``for the sole purpose of facilitating a
transmission to the public of a performance of a sound recording under
the limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv)'' but the decision to adopt that specific language
appears to incorporate exclusions from certain in-kind payments that
may reasonably approximate the exclusions for in-kind payments found in
RIAA Exhibit No. 60A DR. Interpretation of this exclusion as an
approximation of exclusions for in-kind payments in the benchmark
agreements is supported by the Librarian's finding that it would be
unwise to include even an illustrative list of what specific types of
revenues should be considered in the calculation of gross proceeds.
DTRA Determination, 67 FR at 45268. The Library also stated its intent
to adhere to the revenue streams contemplated by the CARP and
[[Page 1890]]
the relied upon benchmark agreements. Id.
The expansive exclusion posited by Music Choice does not closely
adhere to the revenue streams contemplated by the CARP and the
Librarian and reflected in the relied upon benchmark agreements. As
previously stated, the CARP noted that in most of the benchmark
agreements it considered, there are no deductions from gross proceeds.
Web I CARP Report at 125. The agreements with deductions from gross
proceeds include only narrow deductions. See, e.g. RIAA Exhibit No. 60A
DR.
In light of these findings by the CARP and the Librarian, and
considering the entirety of the record, the Judges find that the
Librarian's gross proceeds definition intended a narrow exception for a
limited scope of in-kind payments, which are narrow to a degree
corresponding to those in the benchmark agreements. Specifically, the
Judges find that the meaning of ``Gross Proceeds'' as defined in 37 CFR
384.3(a) is that ``all'' ``fees and payments'' are included, and that
following the words ``including those'' the definition then specifies/
limits what kinds of ``in kind'' consideration count as well--those
that come from ``any source,'' before or after the license period,
provided that such in-kind consideration was offered ``for the sole
purpose'' of facilitating a BES. That is, the second interpretation
offered by SoundExchange is the correct one, under which the relevant
regulation are to be read as follows:
all fees and payments
including those made in kind, received from any source before,
during or after the License Period that are derived from the use of
copyrighted sound recordings during the License Period pursuant to
17 U.S.C. 112(e) for the sole purpose of facilitating a transmission
to the public of a performance of a sound recording under the
limitation on exclusive rights specified in 17 U.S.C.
114(d)(1)(C)(iv).\16\
---------------------------------------------------------------------------
\16\ This relevant regulatory text is identical across BES I and
BES II. The corresponding regulatory text from the underlying Web I
CARP proceeding is substantively and structurally identical.
Read this way, the regulation means that ``all'' ``fees and
---------------------------------------------------------------------------
payments'' are included,
and then goes on to specify what kinds of ``in kind'' consideration
count as well--those that come from ``any source,'' before or after the
license period, provided that the consideration was offered ``for the
sole purpose'' of facilitating a BES.
In addition to reflecting an appropriately narrow scope of an
exception approximating those in the benchmark agreements, the Judges
agree with SoundExchange that this interpretation follows and complies
with relevant canons of interpretation.
This proper interpretation adheres to the presumption of the non-
inclusive ``include'' whereby the word ``include'' indicates that the
specified items that follow are illustrative and not exclusive. See Am
Hosp. Assoc. v. Azar, 983 F.3d 528, 534 (D.C. Cir. 2020). In this case,
that which follows ``include'' are those payments made ``in-kind''
albeit only if those in-kind payments are derived from the use of
copyrighted sound recordings during the License Period pursuant to 17
U.S.C. 112(e) for the sole purpose of facilitating a transmission to
the public of a performance of a sound recording under the limitation
on exclusive rights specified in 17 U.S.C. 114(d)(1)(C)(iv). In
adhering to this approach to the word ``including'' as well as the
language which follows, the regulation is not ungrammatical.
This proper interpretation is not in tension with the rule against
surplusage. See Qi-Zhuo v. Meissner, 70 F.3d 136, 139 (D.C. Cir. 1995).
The ``for the sole purpose'' limitation has specific and effective
meaning. Additionally, the proper interpretation does not create
surplusage with regard to section 384.3(c), regarding ``other royalty
rates and terms'', because the limitation within the definition of
gross proceeds in 384.3(a) is an economic limitation on the scope of
the term gross proceeds, and not a limitation on the scope of rights
applicable to Licensees or particular types of ephemeral recordings,
such as ephemeral recordings made under different licenses.
This proper interpretation is not nonsensical. Contrary to Music
Choice's assertions, it is those in-kind payments derived from the use
of copyrighted sound recordings which are subject to the ``for the sole
purpose'' limitation. The proper interpretation does not indicate that
payments facilitate a transmission. Rather, it is the use of sound
recordings that facilitates a transmission.
This proper interpretation is not internally inconsistent, as it is
accepted that specific provisions, here those regarding in-kind
payments, do not govern the general, here a general statement of
inclusiveness regarding fees and payments. See Nitro-Lift Techs.,
L.L.C. v. Howard, 568 U.S. 17, 21 (2012) (addressing the interpretive
principle generalia specialibus non derogant). This proper
interpretation is consistent in that the specific does not govern the
general with regard to the scope of fees and payments within gross
proceeds as well as subset of in-kind proceeds, and with regard to the
term ``derived from'' used to apply generally as well as specifically
with regard to certain in-kind payments.
This proper interpretation does not produce absurd results, as it
adheres to the economic intent of the CARP and the Librarian and is
consistent with the narrow exclusions from gross proceeds in the
relevant relied upon benchmark agreements. This interpretation is also
supported by the Judges' economic analysis of the BES license.
B. Economic Analysis
The Parties' Economic Arguments Fail to Clearly Capture the Legal and
Economic Value of the Section 112 Ephemeral License Applicable to a
BES--Value Which Supports the Judges' Construction of the Gross
Proceeds Definition
The foregoing regulatory analysis is sufficient to make clear that
the drafters of the disputed regulatory language did not intend to
allow a BES to use its PSS ephemeral license to effectuate plays at
business establishments by a BES without a separate ephemeral license
and the payment of the section 112 royalties. To buttress that legal
statutory argument, it is instructive to demonstrate the economic
unreasonableness of Music Choice's position.
Music Choice relies on the fact that, when a section 114 service,
such as a PSS, requires both the section 114 performance license and
the section 112 ephemeral license, the Judges, SoundExchange and other
licensees, have traditionally assigned a carved-out 5% of the section
114 performance license royalty as attributable to the ephemeral
license. This, Music Choice maintains, is an acknowledgement of the
absence of any actual value in the ephemeral license. See e.g. Music
Choice Opening Brief at 16-20.
By contrast, SoundExchange argues that the ephemeral right under
section 112 has inherent and independent economic value. See, e.g.,
SoundExchange Reply Brief at 13. Thus, SoundExchange argues that the
consensual carve-out of the section 112 ephemeral royalty from the
section 114 royalty is irrelevant. SoundExchange Reply Brief at 15.
Both of these arguments miss the mark. More particularly,
SoundExchange's argument is incomplete. That is, although SoundExchange
is correct in that the ephemeral license has value, provided it can and
must be used in order to operate a music service, that value is either
an independent value or a joint
[[Page 1891]]
(perfect complement) value, depending on whether one is evaluating the
BES license, on the one hand, or the noninteractive license, on the
other.
By contrast, Music Choice's position is not simply incomplete, but
rather clearly incorrect. Music Choice asserts that because
SoundExchange and others (including the CRB Judges) have noted the
absence of any independent value in the section 112 ephemeral license
in other statutory licensing contexts, it therefore has no stand-alone
value in the BES context. Relying on this assertion, Music Choice
argues that its statutory duty to pay any royalties under the section
112 ephemeral license is economically inappropriate. See, e.g., Music
Choice Opening Brief at 16-20. Music Choice seeks to utilize this
economic argument as justification for the indication that its BES
royalty obligation should be zero for sound recordings played on its
PSS service for which it has already utilized a section 112 ephemeral
license. As explained infra, in this regard, Music Choice conflates the
concepts of ``no independent value'' and ``no value.'' For Services
that by Law Must Utilize the Sections 112 and 114 Licenses, these Two
Licenses are ``Perfect Complements.''
Economists define `` `[p]erfect complements' [as] goods that are
always consumed together in fixed proportions . . . A nice example is
that of right and left shoes. . . . Having only one out of a pair of
shoes doesn't do the consumer a bit of good.'' H. Varian, Intermediate
Microeconomics: A Modern Approach 40 (8th ed. 2010). Thus, a customer
purchasing a pair of shoes for $80 would be indifferent to any
allocation of that $80 as between the left and right shoe (which is why
it is obviously efficient that the shoes are priced as a pair).\17\
---------------------------------------------------------------------------
\17\ One of the Judges previously taught an intermediate
microeconomics course, in which he utilized this ``pair of shoes
example.'' After class, one of the students came up to him, raised
one pantleg and explained that his left foot had been blown off in
Afghanistan by an IED while he was serving in combat in the United
States military. (The Judge was appropriately chagrined, but the
student/former soldier was quite understanding.) The student's
economic point was that when he bought shoes, even though he needed
just one shoe out of a pair, he had to pay the for the complete
pair, despite the fact that the left shoe provided him no value.
This anecdote has analogous economic meaning in the context of the
single-license BES context, discussed herein, because the value of
the two combined perfect complements was the same as the value of
only one of the items when the other had no actual value.
---------------------------------------------------------------------------
In similar fashion, a noninteractive service cannot operate its
service unless it possesses both the ephemeral and the performance
licenses for sound recordings. As the Judges have noted, when two
licensed rights are perfect complements, the licensees are indifferent
as to how much they pay for each individual license, and instead are
focused on the total cost of the two licenses. See Final rule and
order, Determination of Royalty Rates and Terms for Ephemeral Recording
and Webcasting Digital Performance of Sound Recordings, Docket No. 14-
CRB-0001-WR (2016-2020), 78 FR 26316 (May 2, 2016) (Web IV
Determination) (``willing buyers and willing sellers would prefer that
the rates for the [Sections 112 and 114] licenses be bundled and . . .
would be agnostic with respect to the allocation of those rates to the
Section 112 and 114 license holders,'' allowing for ``the minimum fee
for the Section 112 license [to be] subsumed under the minimum fee for
the Section 114 license, 5% of which shall be allocable to the Section
112 license holders, with the remaining 95% allocated to the Section
114 license holders.''), aff'd SoundExchange, Inc. v. Copyright Royalty
Bd., 904 F.3d 41 (D.C. Cir. 2016).
However, in the context of a BES service, this perfect
complementarity is non-existent; indeed, there is no complementarity at
all. The BES service by law is not required to obtain a section 114
performance license to transmit sound recordings, but is required to
obtain the section 112 ephemeral license to do so.
The foregoing point is actually a subset of a larger point made
clear in scholarly literature integrating economics and law. A claimed
``property right'' only has exchange or asset value to its claimant if
it is protected by law. For tangible and intangible resources to
generate such economic value that can be appropriated by private
actors, the resources must be ``excludable,'' i.e., the possessor need
be able to invoke the law to prevent someone else from misappropriating
his or her resource or seek compensation for its taking. See, e.g., G.
Hodgson, Much of the ``Economics of Property Rights'' Devalues Property
and Legal Rights,11 J. Inst. Econ. 683, 684 (2015) (``The term
`property' should be reserved for cases of institutionalized possession
with legal mechanisms of adjudication and enforcement. Property
involves acknowledged rights granted by legitimate legal
authority.'').\18\ For example, what value would one's car have if
anyone could simply steal it without legal consequence or remedy? \19\
Legal authority is in accord. See U.S. v. Willow River Power Co., 324
US 499, 502 (1945) (Jackson, R., J.) (``[N]ot all economic interests
are `property rights'; . . . We cannot start the process of decision by
calling such a claim as we have here a `property right' [that] is
really the question to be answered. Such economic uses are rights only
when they are legally protected interests.'')
---------------------------------------------------------------------------
\18\ Cf. Y. Barzel, What are ``Property Rights', and Why do they
Matter? A Comment on Hodgson's Article, 11 J. Inst. Econ. 719 (2015)
(distinguishing between ``legal'' and ``economic'' conceptions of
property rights, but acknowledging that ``[w]hen legal rights are
granted and enforced, it enhances the corresponding economic
rights,'' even though the law might not provide the most efficient
or complete protection of a claim of rightful possession and
property) (emphasis added); see generally R. Posner, Economic
Analysis of Law at 34, 529 (6th ed. 2003) ((``It is no surprise that
property rights are less extensive in primitive societies than in
advanced societies where there is an ``increase[ ] in the ratio of
the benefits of property rights to their costs . . . '' ``[T]he . .
. question [of] what allocation of resources . . . maximize[s]
efficiency . . . is given to the legal system to decide in
situations where the costs of a market determination would exceed
those of a legal determination.'')
\19\ A music industry analogy is instructive in the context of
intellectual property goods. There was no adequate ability to
sufficiently police, prevent and remedy piracy that diminished the
economic return to the owners of sound recording copyrights. In the
absence of such protections, the private economic value of music
copyrights as property rights was significantly diminished. See
Phonorecords III, Final Determination 84 FR 1918, 1978 (Feb. 5,
2019) (Strickler, J. dissenting) (``When piracy is uncontrolled,
copies of sound recordings . . . resemble pure public goods [which]
ha[ve] a zero marginal production cost (formally, they are `non-
rivalrous in consumption)' [and] the provider of the public good
cannot prevent consumption of the good by non-payers (formally,
`non-excludability'). See Nicholson & Snyder, supra, at 679
(subsequent history omitted)); see also N. Tyler, Music Piracy and
Diminishing Revenues: How Compulsory Licensing for Interactive
Webcasters Can Lead the Recording Industry Back to Prominence, 161
U. Pa. L. Rev. 2101, 2108 (June 2013) (``the labels abandoned
[their] litigation strategy because of the high costs, the lack of a
significant deterrent effect on the general public, and the
judgment-proof status of many of the named defendants.'').
---------------------------------------------------------------------------
Thus, a necessary element for protecting the intellectual property
right of sound recording copyright owners is a legal regime that both
acknowledges that right and prohibits infringement, regardless of which
license is designated as representing that right and is enforced by
law. In the present BES context, via the statutory compulsory license,
Congress has elected to acknowledge that right by attaching it to the
section 112 ephemeral right only, and to enforce that right by
requiring a BES to pay royalties as set by the Judges.\20\
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\20\ As a matter of law and economics, the statutory and
compulsory license provides a ``liability'' right as opposed to a
``property'' right, in that the payment of royalties is sufficient
for a BES to utilize sound recordings, without first obtaining the
consent of the owner of the sound recording copyright. (By contrast,
the performances of sound recording by an interactive (``on-
demand'') streaming service, which are unregulated and subject to
market forces, are ``property'' rights, in that the streaming
service can be enjoined from transmitting these performances unless
it has obtained a license to do so, typically in exchange for the
service's agreement to pay royalties to the copyright owners.)
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[[Page 1892]]
Accordingly, a BES's obligation under the section 112 ephemeral
license, as opposed to the section 114 performance license, as a
condition for performing sound recordings, does not affect the economic
value of the required licensing.
The foregoing analysis undermines Music Choice's attempt to
narrowly construe the ``gross proceeds'' definition on economic
grounds. That is, there is insufficient economic predicate to support
Music Choice's reliance on legislative history, statutory construction,
regulatory rulings and judicial precedents as bases for limiting
``gross proceeds'' in the manner Music Choice proposes.
So, in our Title 17 context, under section 114, the ephemeral right
and the performance right are perfect complements in the legal and the
economic sense, in that neither has any value independent of the other.
This is why SoundExchange is on record in previous non-BES proceedings
as acknowledging that--in those contexts--the ephemeral license has no
``independent'' value. Thus, a licensee would be disinterested in how
the total royalty is legally allocated as between the ephemeral and the
performance license.
Pursuant to this analysis, the word ``solely'' cannot rationally be
construed as disconnected from the fact that the ephemeral license is
the only license that allows for a BES to legally generate ``Gross
Proceeds.'' Music Choice is simply trying to unfairly obtain a ``free
ride'' on the use of the copyrighted sound recordings. The fact that
Music Choice's use of the ephemeral license also allows it to generate
further proceeds when used to operate a PSS does not negate this
fundamental point.\21\
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\21\ Indeed, this is an example of an ``absurd'' result that
Music Choice's statutory interpretation argument would permit if
followed.
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Music Choice's Attempt to Obtain a ``Free Ride'' on the Statutory
Ephemeral License it Obtained for its PSS--by Extending its Reach to
Music Choice's BES--is Economically Meritless
As noted supra, Music Choice's legal argument, if adopted, would
allow it to `free ride'' on the statutory ephemeral license applicable
to its PSS service. That is, although the section 112 PSS ephemeral
license was established in a separate proceeding pursuant to economic
analyses unrelated to the BES statutory license, there was insufficient
evidence adduced to account for the value added by the of that
ephemeral license to facilitate a BES.\22\ Moreover, because the
section 112 ephemeral license is a perfect complement to the section
114 performance license for a PSS, the ephemeral license could be--and
was--set as a percentage (5%) of the section 114 license. Final rule
and order, Determination of Rates and Terms for Preexisting
Subscription Services and Satellite Digital Audio Radio Services,
Docket No. 2011-1 CRB PSS/Satellite II, 78 FR 23054, 23056 (Apr. 17,
2013) (SDARS II Final Determination); see also 37 CFR 382.12(b). That
is, as long as the total royalty rate was supported by the evidence,
the apportionment of the royalty as between the section 112 and 114
licenses was economically irrelevant, as discussed supra. Thus, there
was insufficient economic evidence proffered in the PSS actions to
establish an independent value for the PSS section 112 license. (As
explained supra, the absence of an independent value for one of two
perfect complements, does not mean that either has no value.)
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\22\ See SDARS II Final Determination 78 FR 23054. Indeed, the
SDARS regulations have expressly excluded from PSS `Gross
Revenues'', inter alia, ``[r]evenues recognized by the licensee for
the provision of . . . [c]hannels, [and]programming, products . . .
for which . . . the making of Ephemeral Recordings . . . is
separately licensed, including by a statutory license and, for the
avoidance of doubt . . . transmissions to business establishments.''
37 CFR 382.11 (Definitions . . . Gross Revenues (3)(vi)((D).
Clearly, no revenue, and no value, attributable to the sound
recordings transmitted through a BES has been included in the PSS
royalty base.
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Of course, it cannot be disputed that, legally, the ephemeral
license which a BES must obtain has economic value. That is, but for
the existence of the section 112 license, a BES would not be able to
operate, absent a separate license such as a direct license. And, as
explained supra, the sound recording copyright owner's legal right is
what ensures and generates the economic value in the BES license.
Music Choice's statutory argument boils down--economically--to the
claim that the section 112 ephemeral license it obtained in the PSS
proceedings adds no value to Music Choice in the BES context--or at
least no value for which Music Choice must compensate sound recording
copyright owners--for sound recordings also played on Music Choice's
PSS service. This ``free rider'' argument ignores the relevant
economics of the matter, as discussed below.
The economic context of Music Choice's argument lies in what
economists recognize as involving the concept of ``economies of
scope.'' Succinctly stated, ``economies of scope'' are cost savings
realized by a firm that can utilize one of its inputs to produce two
inputs. See R. Pindyck & D. Rubinfeld, Microeconomics at 258 (8th ed.
2013).\23\ More particularly, ``economies of scope'' will exist when,
inter alia, a firm's two products are closely linked to one another,
and are produced ``from the joint use of inputs . . . .'' Id.
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\23\ ``Economies of scope'' should be distinguished from
``economies of scale,'' in that the latter refers to diminishing
average unit costs for a single product produced by a firm.
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Before considering the actual statutory context, for pedagogical
purposes, consider a hypothetical market-based scenario, i.e., absent
statutorily required compulsory licensing. Music Choice would be
required to obtain licensing rights--whether bundled or separate--to
allow it to operate both its PSS subscription service and its BES. In
this market scenario, Music Choice would need to negotiate with the
sound recording copyright owners. As a matter of basic economics,
bargaining and price-setting, the copyright owners would need to
estimate Music Choice's willingness to pay (``WTP'') for the inputs,
i.e., the licensing rights to the sound recordings. Applying the
economic axiom that businesses seek to maximize profits \24\ in the
negotiations the copyright owners would not ignore the value added to
Music Choice by a business establishment service when proposing a
license. This point not only follows from the axiomatic microeconomic
assumption of profit maximization, but also from the concept of
``derived demand,'' which holds that the ``upstream demand . . . for .
. . sound recordings . . . known as `factors' of production or `inputs'
. . . [is] derived from the downstream demand of listeners . . . and
users . . . .'' Phonorecords III Determination, 84 FR at 1977
(Strickler, J. dissenting) (subsequent history omitted).'' See also
Phonorecords III Final Determination after Remand, Appx. A (Initial
Ruling and Order after Remand at 111 (restating the foregoing and
adding: ``[D]emand for the factor is derived from the downstream firm's
output choice''). Here, the downstream distribution firm is Music
Choice, and its ``output
[[Page 1893]]
choice'' requires use of licenses as factors of production to
facilitate its (1) its PSS transmissions and (2) its BES transmissions.
Thus, a copyright owner would rationally estimate the downstream demand
for noninteractive and business establishment services, and incorporate
each separate demand into the royalty it would seek for each respective
license.\25\
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\24\ See Varian, supra at 357 (identifying ``profit maximization
as an economic ``axiom''); C.E. Ferguson & S.C. Maurice, Economic
Analysis 234 (It is a ``fundamental assumption . . . that
entrepreneurs try to maximize profits'') 234.
\25\ Additionally, the copyright owners would want to estimate
the separate opportunity costs of licensing to the PSS and to the
BES, i.e., whether licensing to each would be likely to cause
listeners to leave a different royalty-bearing service that
generated higher revenues. In this context, a licensor would not
provide the BES license gratis to a licensee who paid separately for
the PSS license--especially if a stand-alone BES would pay a market-
based royalty for the BES license.
One wrinkle in this otherwise standard economic point is that
additional (marginal) digital copies of a sound recording are
essentially zero. Basic economics provides that in a competitive
market for a private good, price will equal marginal cost, but at a
marginal cost of zero, price cannot equal zero, or else the
copyright owners would not recover their significant fixed costs and
earn a profit. Thus, for a licensor of sound recording copyrights,
ascertaining the demand from various distribution channels is needed
to generate a schedule of royalty rates. (As the Judges have noted
on prior occasions, the sound recording copyright owners are
``complementary oligopolists,'' which affords them substantial
market power beyond that of ordinary competing oligopolists, but
that complication is not relevant to the present discussion.)
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Although the foregoing textbook analysis applies to a world which
does not include statutory compulsory licenses, that distinction
neither negates nor alters the applicability of this analysis in the
present context where statutory compulsory licensing exists. This is so
because the PSS and BES royalty standards applicable during the BES I
and BES rate periods (2009-2013 and 2014-2018, respectively) and the
BES royalty standards themselves invoke the economics of the
hypothetical unregulated market--before considering any potential
adjustments.
More particularly, the PSS rate determinations which applied during
these BES rate proceeding periods were largely the product of the SDARS
I and SDARS II proceedings, respectively.\26\ In these proceedings, the
Judges approach was first to identify marketplace benchmarks between
willing sellers (licensors) and willing buyers (licensees), and then
consider whether adjustments to these market-based rates is needed to
achieve one or more of the four ``objectives'' listed in section
801(b)(1). See SDARS II Final Determination, 78 FR at 23054-56,
(explaining that the Judges ``evaluat[ed] the evidence to determine . .
. reasonable royalty rates based on market benchmarks'' . . . as a
``useful starting point,'' before weighing the four statutory
objectives ``required by 17 U.S.C. 801(b) . . . .''). And although the
PSS rates established via settlement, see Final rule and order,
Determination of Rates and Terms for Preexisting Subscription Services
and Satellite Digital Audio Radio Services, Docket No. 2006-1 CRB
DSTRA, 73, 4080, 4081 & n.8 (Jan. 24, 2008) (SDARS I Final
Determination), in the companion SDARS rate case which was adjudicated
under the same section 801(b)(1) rate standard, the Judges likewise
determined that ``comparable marketplace royalty rates are ``a good
starting point'' before separately considering the four section
801(b)(1) factors). Id. at 4088. Thus, marketplace economics were part
and parcel of the Judge's section 801(b)(1) rate analysis, and
marketplace conduct includes the fundamental assumption that licensors
seek to maximize their profits, and, as explained supra, would not
simply give away their licensing rights to a BES/PSS service merely
because it had already provided that service a PSS license for separate
royalty payments.
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\26\ The PSS rates were set (as is customary) in the same
proceedings that established the SDARS rates, which is why the
Determinations are identified as ``SDARS I'' and ``SDARS II.''
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In the BES context, the applicability of market forces is
statutorily prescribed (rather than inferred by the Judges, as in the
section 801(b)(1) proceedings discussed supra). That is, for a BES
service to access copyrighted sound recordings, it must utilize the
section 112 ephemeral license and pay royalty rates ``that most clearly
represent the fees that would have been negotiated in the marketplace
between a willing buyer [i.e., licensee] and a willing seller [i.e.,
licensor].'' 17 U.S.C. 112(e)(4). Accordingly, any rational profit-
maximizing licensor of a BES license in the marketplace--for the
reasons set forth supra--would seek the highest royalty it could obtain
by estimating the maximum WTP of the potential licensee with which it
is bargaining \27\--and certainly would not irrationally provide the
BES license for free merely because that potential licensee would like
to appropriate for itself the entire value of the ``economies of
scope'' it could realize by using its PSS license for its BES service.
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\27\ If the market for licenses was competitive and price
discrimination was absent, the licensor might be compelled by market
forces to accept a royalty rate lower than the licensee's maximum
WTP, providing that licensee with what economists term a ``consumer
surplus.'' On the other hand, if the sound recording licensor had
complementary oligopoly power in the BES market, the Judges might
need to adjust downward a marketplace benchmark rate to adjust for
that specific market-power. See e.g., Web IV Determination, 81 FR at
26344; Phonorecords III 84 FR at 1953 (subsequent history omitted);
Web V 86 FR at 59478. However, those potential adjustments do not
impact the analysis in the text supra, which applies the axiomatic
assumption of ``profit maximization'' to the economic analysis of
any market structure.
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Conclusion
Based on the entirety of the record as well as the foregoing
findings and reasoning, the Judges answer the District Court by
concluding that 37 CFR 384.3(a) directs Business Establishment Service
providers to calculate royalties using their gross proceeds derived
from all fees and payments for the use of all licensed ephemeral copies
used for the operation of the Business Establishment Service, except
that in-kind payments must only be included in gross proceeds when such
in-kind payments are derived from the use of copyrighted sound
recordings during the licensing period pursuant to 17 U.S.C. 112(e) for
the sole purpose of facilitating a transmission to the public of a
performance of a sound recording under the limitation on exclusive
rights specified in 17 U.S.C. 114(d)(1)(C)(iv).\28\
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\28\ Having addressed the referred question regarding the
meaning of the ``Gross Proceeds'' definition, the Judges decline to
go beyond the scope of the re-opened proceedings or the directive in
the Court's Memorandum Opinion. The Judges did not request briefing
on the standard that should be used to evaluate the approach that a
BES provider has taken to apportion its revenues, and therefore do
not address that matter.
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The Judges issue this decision to the parties in restricted format.
The Judges will separately order the participants in the proceedings to
confer and jointly file a notice of proposed redactions, if any are
needed, no later than December 20, 2024.
So ordered.
David P. Shaw,
Chief Copyright Royalty Judge.
David R. Strickler,
Copyright Royalty Judge.
Steve Ruwe,
Copyright Royalty Judge.
Dated: December 4, 2024.
The Judges issued this Ruling on Regulatory Interpretation to the
parties in interest on December 4, 2024. This publication of the Ruling
on Regulatory Interpretation redacts confidential information that is
subject to a protective order in the proceedings.
Dated: December 31, 2024.
David P. Shaw,
Chief Copyright Royalty Judge.
[FR Doc. 2024-31779 Filed 1-8-25; 8:45 am]
BILLING CODE P