Intercollegiate Broadcast System, Inc. v. Copyright Royalty Board

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 19, 2009 Decided July 10, 2009

Reissued August 7, 2009

No. 07-1123

INTERCOLLEGIATE BROADCAST SYSTEM, INCORPORATED, A

RHODE ISLAND NON-PROFIT CORPORATION AND HARVARD

RADIO BROADCASTING COMPANY, INC., A MASSACHUSETTS

ELEEMOSYNARY CORPORATION,

APPELLANTS

v.

COPYRIGHT ROYALTY BOARD, LIBRARY OF CONGRESS,

APPELLEE

SOUNDEXCHANGE, INC.,

INTERVENOR

Consolidated with 07-1168, 07-1172, 07-1174, 07-1177,

07-1178

Appeals of an Order

of the Copyright Royalty Board

Kenneth D. Freundlich argued the cause for appellant

Royalty Logic, LLC. With him on the briefs was William B.

Colitre.

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Christopher J. Wright and David D. Oxenford argued the

causes for appellants Commercial Webcasters and Small

Commercial Webcasters. With them on the briefs were

Jonathan Massey and Kenneth L. Steinthal. Joseph C.

Cavender, Fernando R. Laguarda, and Ronald G. London

entered appearances.

Bruce G. Joseph argued the cause for appellants

Noncommercial Broadcasters. With him on the briefs were Seth

D. Greenstein, Robert S. Schwartz, Karyn K. Ablin, William

Malone, James R. Hobson, and Matthew Schettenhelm.

Mark R. Freeman, Attorney, U.S. Department of Justice,

argued the cause for appellee. With him on the briefs were

Gregory G. Katsas, Assistant Attorney General, and Scott R.

McIntosh and Sarang Vijay Damle, Attorneys. Anthony A.

Yang, Attorney, entered an appearance.

Paul M. Smith argued the cause for intervenor

SoundExchange, Inc. With him on the briefs were Thomas J.

Perrelli, David A. Handzo, and Craig A. Cowie.

Before: SENTELLE, Chief Judge, and ROGERS and GRIFFITH,

Circuit Judges.

Opinion for the Court filed PER CURIAM.

PER CURIAM: Appellants seek review of a final

determination of the Copyright Royalty Judges, setting rates and

terms relating to webcasting. See Digital Performance Right in

Sound Recordings and Ephemeral Recordings (“Order”), 72

Fed. Reg. 24,084 (May 1, 2007). Webcasting is the process of

transmitting sound recordings over the Internet. This case

consolidates five separate appeals. A group of “commercial

webcaster” appellants led by the Digital Media Association

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(“DiMA”) argues that the rates for commercial webcasters set

by the Judges were unreasonable and that the absence of a cap

on minimum fees paid per licensee was arbitrary and capricious.

Several “small commercial webcaster” appellants argue that the

Judges’ refusal to permit them to pay royalties as a percentage

of revenues was arbitrary and capricious. “Noncommercial

broadcaster” appellants—including the Collegiate Broadcasters,

Inc., Intercollegiate Broadcasting System, Inc., and the National

Religious Broadcasters Noncommercial Music License

Committee—argue that the Judges set unreasonable rates for

noncommercial webcasters, that they established a $500

minimum fee per station without substantial evidence, and that

they improperly deferred consideration of record-keeping

requirements to a later proceeding. Appellant Royalty Logic,

Inc., a contender to serve as the clearinghouse (or “collective”)

for royalty payments, argues that the Judges exceeded their

statutory authority by naming SoundExchange, Inc. the sole

royalty collective.1 Respondent Copyright Royalty Board

defends the Judges’ determination. (The Board is “the

institutional entity in the Library of Congress that . . . house[s]”

the Judges. 37 C.F.R. § 301.1.) SoundExchange intervened to

defend the Judges’ determination.

Months after the briefing schedule had been set, Royalty

Logic moved to file supplementary briefs on the issue of

whether the appointment of the Copyright Royalty Judges

violated the Appointments Clause of the Constitution of the

1

Another group of appellants, including Bonneville International

Corp. and National Religious Broadcaster Music License Committee,

joined by intervenor National Association of Broadcasters, also filed

briefs in this case. Before oral argument, this court granted the

appellants’ motion for voluntary dismissal and granted the

intervenor’s request to be dismissed as a party. Order Dismissing

Case No. 07-1179 (D.C. Cir. Feb. 27, 2009).

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United States. A motions panel of this court granted the motion

“without prejudice to the merits panel deciding whether or not

to consider” the issue, and set a supplemental briefing schedule,

soliciting briefs from Royalty Logic, the Board, and

SoundExchange. Royalty Logic argued that the Judges’

appointment violated the Constitution. SoundExchange and the

Board argued it did not, and argued further that Royalty Logic

had forfeited consideration of the issue by not raising it in initial

briefing before this court. We hold that Royalty Logic has

forfeited the Appointments Clause issue. We vacate the $500

minimum fee for both noncommercials and commercials, and

remand those portions of the determination for reconsideration

by the Copyright Royalty Judges. In all other respects, we

affirm the determination.

I. Background

A. Statutory Background

Recorded music may be protected by two copyrights. One

copyright protects the “musical work” written by a composer

and usually owned by a music publisher. The other protects the

“sound recording” and is owned by the producer of the sound

recording. See 17 U.S.C. §§ 101-102. The copyright owners of

musical works, but not those of sound recordings, have long

enjoyed exclusive rights to public performances of their works.

Id. § 106(4). The practical effect of this scheme is that when

radio stations play a song, they must pay a royalty to the musical

work owner but not the sound recording owner. See id.

§§ 106(4), 114(a).

In 1995, Congress passed the Digital Performance Right in

Sound Recordings Act, Pub. L. No. 104-39, granting the owners

of sound recordings an exclusive right in performance “by

means of a digital audio transmission.” 17 U.S.C. § 106(6); see

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Beethoven.com LLC v. Librarian of Cong., 394 F.3d 939, 942

(D.C. Cir. 2005). The Digital Millennium Copyright Act of

1998, Pub. L. No. 105-304, “created a statutory license in

performances by webcast,” to serve Internet broadcasters and to

provide a means of paying copyright owners. Beethoven.com,

394 F.3d at 942; see 17 U.S.C. § 114(d)(2), (f)(2). To govern

the broadcast of sound recordings, Congress also created a

licensing scheme for so-called “ephemeral” recordings, “the

temporary copies necessary to facilitate the transmission of

sound recordings during internet broadcasting.” Beethoven.com,

394 F.3d at 942-43; see 17 U.S.C. § 112(e)(4).

Congress has delegated authority to set rates for these rights

and licenses under several statutory schemes. The most recent,

passed in 2005, directed the Librarian of Congress to appoint

three Copyright Royalty Judges who serve staggered, six-year

terms. See 17 U.S.C. § 801, et seq. These Judges conduct

complex, adversarial proceedings, described in 17 U.S.C. § 803

and 37 C.F.R. § 351, et seq., and ultimately set “reasonable rates

and terms” for royalty payments from digital performances. 17

U.S.C. § 114(f).

In delegating authority, Congress required the Judges to

follow certain statutory guidelines. The schedule of rates and

terms must “distinguish among the different types of eligible

nonsubscription transmission services then in operation and

shall include a minimum fee for each such type of service.” Id.

§ 114(f)(2)(B). Rates should “most clearly represent the rates

and terms that would have been negotiated in the marketplace

between a willing buyer and a willing seller.” Id. “In

determining such rates and terms,” the Judges must “base [their]

decision on economic, competitive and programming

information presented by the parties.” Id. Specifically, they

must consider whether “the service may substitute for or may

promote the sales of phonorecords” or otherwise affect the

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“copyright owner’s other streams of revenue.” Id.

§ 114(f)(2)(B)(i). The Judges must also consider “the relative

roles of the copyright owner and the transmitting entity” with

respect to “relative creative contribution, technological

contribution, capital investment, cost, and risk.” Id.

§ 114(f)(2)(B)(ii). Finally, “[i]n establishing such rates and

terms,” the Judges “may consider the rates and terms for

comparable types of digital audio transmission services and

comparable circumstances under voluntary license agreements

described in subparagraph (A).” Id. § 114(f)(2)(B). Identical

statutory language applies to “reasonable rates and terms” for

ephemeral recordings. Id. § 112(e).

B. This Proceeding

The rates and terms for webcasting are established

according to a webcasting statutory license. See 17 U.S.C.

§ 112(e)(4); id. § 114(d)(2), (f)(2). If parties can agree, rates

and terms of a license may be set through voluntary negotiation.

Id. § 114(f)(3). For all parties that do not agree, the Copyright

Royalty Judges conduct adversarial proceedings and issue a

determination. Id. § 803. The resulting rate changes are

retroactive. Id. § 803(d)(2).

This case represents such an adversarial proceeding. The

Judges received notices from 28 parties of their intention to

submit written direct statements at the start of the process, and

another five submitted written direct statements after a final

attempt at negotiation failed. Order, 72 Fed. Reg. at 24,084.

Following discovery, the participants presented testimony from

a total of 39 witnesses. Id. at 24,084-85. Additional written

rebuttal statements were then admitted, followed by more

discovery. Id. at 24,085. At the end of this second discovery

period, participants presented rebuttal testimony from 27

witnesses, and the record was closed. Id. In addition to the

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written statements, the Judges “heard 48 days of testimony,

which filled 13,288 pages of transcript, and 192 exhibits were

admitted.” Id. Following the evidentiary phase of the

proceeding, the participants filed proposed findings of fact and

conclusions of law with responses three days later. Id. A week

passed before closing arguments, when the matter was submitted

to the Judges. Id.

The Judges’ initial determination set rates and terms for

digital performances and related ephemeral recordings, and

determined other details of the statutory licenses for commercial

and noncommercial webcasters. Specifically, it designated per

play rates for commercial webcasters that will increase gradually

over the covered period—from January 1, 2006 through

December 31, 2010. Id. at 24,084, 24,096. It also charged all

webcasters a $500 annual minimum fee to cover administrative

costs, recoupable against usage charges. Id. at 24,096. For

noncommercial broadcasters, this minimum fee covers 159,140

aggregate tuning hours (“ATH,” which is the total number of

hours of programming multiplied by the number of listeners per

hour). For any month in which a noncommercial broadcaster’s

ATH exceeds this threshold, it must pay the same per-

performance rates as the commercial webcasters for the excess

ATH. Id. at 24,100. The Judges’ initial determination set terms

for the payment of royalties, including the method of

aggregating payments through SoundExchange as a collective;

set late payment fees; and provided for the form of account

statements, audits, and payment verification. Id. at 24,102-09.

Finally, the Judges decided to leave record-keeping regulations

unchanged, but left open the possibility of their modification in

a future rulemaking. Id. at 24,109-10.

Following the initial determination, many of the participants

filed motions for rehearing, along with written arguments and

responses at the request of the Judges. Id. at 24,085 & n.2. The

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Judges denied these motions, but modified the determination in

one important respect: they added an option for commercial

webcasters to pay based on ATH for 2006 and 2007 rather than

per play. Id. at 24,086. Their final determination was published

May 1, 2007. Id. at 24,084.

Most of the parties appealed to this court, which has

jurisdiction under 17 U.S.C. § 803(d)(1). We have power to

modify, vacate, or remand any portion of the Judges’

determination. Id. § 803(d)(3). We vacate the $500 minimum

fee for noncommercials and for commercials, remand those

portions of the determination for reconsideration by the Judges,

and otherwise affirm the determination.

II. Analysis

We review determinations of the Judges under the familiar

standard of the Administrative Procedure Act (“APA”). 17

U.S.C. § 803(d)(3); see 5 U.S.C. § 706. Under the APA, we

uphold the results of adversarial agency proceedings unless they

are arbitrary, capricious, contrary to law, or not supported by

substantial evidence. See 5 U.S.C. § 706(2). Review of

administratively determined rates is “particularly deferential”

because of their “highly technical” nature. E. Ky. Power Coop.

v. FERC, 489 F.3d 1299, 1306 (D.C. Cir. 2007) (quotation

omitted).

A. Appointments Clause Challenge

Before reviewing the substance of the Judges’

determination, we must address a question raised about the

tribunal itself. Nearly a year after appealing the Judges’ order,

and almost three months after filing its opening brief, Royalty

Logic submitted a supplemental brief in which it argued for the

first time that the manner in which the Copyright Royalty Judges

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are appointed violates the Appointments Clause of the United

States Constitution. This court allowed the filing “without

prejudice to the merits panel deciding whether or not to consider

the Appointments Clause issue” and directed the Board and

SoundExchange to file responsive supplemental briefs. Supp.

Briefing Order (D.C. Cir. May 30, 2008).

“[T]he Congress may by Law vest the Appointment of

. . . inferior Officers”—a category that all parties agree includes

the Judges—“in the President alone, in the Courts of Law, or in

the Heads of Departments.” U.S. CONST. art. II, § 2, cl. 2.

Congress has entrusted the appointment of the Judges to the

Librarian of Congress. See 17 U.S.C. § 801(a) (“The Librarian

shall appoint 3 full-time Copyright Royalty Judges . . . after

consultation with the Register of Copyrights.”). The Librarian,

of course, is neither the President nor a court of law. Royalty

Logic argues that he is also not a “Head of Department,”

maintaining that under Freytag v. Commissioner, 501 U.S. 868

(1990), only the heads of cabinet-level departments within the

executive branch qualify. According to Royalty Logic, the

Library of Congress is within the legislative branch. The

government and SoundExchange dispute both points. They note

that the Library serves several executive functions and that the

Librarian is subject to appointment and removal by the

President. They also reject the reading of Freytag that limits

“Departments” to those at the cabinet level.

We need not resolve the dispute. As appellees point out,

Royalty Logic has forfeited its argument by failing to raise it in

its opening brief. See Sw. Airlines Co. v. Transp. Sec. Admin.,

554 F.3d 1065, 1072 (D.C. Cir. 2009). It is certainly within our

power to consider Royalty Logic’s challenge. The Freytag

petitioners failed to object to the special trial judge’s

appointment, raising their constitutional argument for the first

time on appeal. But the Court emphasized that its consideration

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of the untimely objection was an exercise of discretion, and that

only in “rare cases” is it proper to do so. Freytag, 501 U.S. at

879; see also id. at 893 (Scalia, J., concurring) (noting that the

majority did not accept petitioners’ argument that Appointments

Clause challenges cannot be forfeited).

This is not the rare case that compels us to exercise our

discretion to consider an untimely argument. An Appointments

Clause challenge is “nonjurisdictional,” id. at 878 (majority

opinion), and thus not subject to the axiom that jurisdiction may

not be waived, see NetworkIP, LLC v. FCC, 548 F.3d 116, 120

(D.C. Cir. 2008). And Royalty Logic has not given us any

reason to depart from our normal forfeiture rule. It offers no

justification for its delay. At oral argument, Royalty Logic’s

counsel explained that the issue simply had not occurred to him

until, several months after filing his opening brief, he was

“reading the cases . . . and particularly Freytag,” and concluded

that “this was a foundational and structural issue.” Oral Arg.

Rec. at 1:35-55. But these cases were not new. Freytag was

decided over eighteen years ago, and the most recent case cited

in Royalty Logic’s supplemental brief dates from 2003. See

Royalty Logic Supp. Br. ii-iii. We have cautioned litigants that

“[s]upplemental briefs do not provide an opportunity to convert

review of an agency order into a broadbased . . . constitutional

attack,” and that we will not consider a supplemental brief that

is “nothing more than a poorly disguised attempt to file a second

main brief to advance arguments overlooked in [the party’s] first

main brief.” Plaquemines Port, Harbor & Terminal Dist. v.

Fed. Mar. Comm’n, 838 F.2d 536, 551 (D.C. Cir. 1988).

Nothing in the supplemental briefing (which was allowed

without prejudice to the decision we have now made to hold

Royalty Logic to its forfeiture) persuades us otherwise. To the

contrary, the briefs’ incomplete treatment of the Appointments

Clause issue underscores our decision. For example, the parties

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failed to cite or discuss the effect of our statements, in other

contexts, that the Library of Congress is not part of the executive

branch. See, e.g., Wash. Legal Found. v. U.S. Sentencing

Comm’n, 17 F.3d 1446, 1449 (D.C. Cir. 1994) (noting that the

Library “is exempt from the APA because its provisions do not

apply to ‘the Congress’—that is, the legislative branch”); Judd

v. Billington, 838 F.2d 103, 105 (D.C. Cir. 1988) (former

Library employee could not bring claim under Rehabilitation

Act because that statute “applies only to employees in the

executive branch”). The absence of the webcasters’ views

compounds the problem. Were we to decide the constitutional

question without thorough, considered briefing from all

interested parties, we would run “the risk of an improvident or

ill-advised opinion on the legal issues tendered,” McBride v.

Merrell Dow & Pharm., Inc., 800 F.2d 1208, 1211 (D.C. Cir.

1986) (refusing to decide issue not raised until reply brief).

Finally, the potential for far-reaching consequences

counsels against resolving the Appointments Clause question on

this record. The Librarian of Congress appoints not only the

Copyright Royalty Judges but also the Register of Copyrights.

See 17 U.S.C. § 701(a). To hold that the Librarian is not the

head of a department within the meaning of the Appointments

Clause would invalidate the Judges’ determinations and call into

question the status of every registered American copyright. We

decline to resolve this “important question[] of far-reaching

significance,” Carducci v. Regan, 714 F.2d 171, 177 (D.C. Cir.

1983), on the basis of hasty, inadequate, and untimely briefing.

B. Commercial Webcasters’ Challenges

1. Competitive Market Requirement

The Judges are required to determine royalty rates that

“most clearly represent the rates and terms that would have been

12

negotiated in the marketplace between a willing buyer and a

willing seller.” 17 U.S.C. § 114(f)(2)(B). The commercial

webcasters argue that an earlier decision by the Librarian,

“affirmed” by this court, requires the Judges to base rates on a

perfectly competitive market. See Determination of Reasonable

Rates and Terms for the Digital Performance of Sound

Recordings and Ephemeral Recordings (“Webcaster I”), 67

Fed. Reg. 45,240, 45,244-45 (July 8, 2002) (“Because of the

diversity among the buyers and the sellers, the [Copyright

Arbitration Royalty Panel] noted that one would expect ‘a range

of negotiated rates,’ and so interpreted the statutory standard as

‘the rates to which, absent special circumstances, most willing

buyers and willing sellers would agree’ in a competitive

marketplace.”). This claim fails for two reasons. First, the

dictum from the prior decision calling for a competitive

benchmark does not require rates to be based on a perfectly

competitive market. Second, our having “affirmed” Webcaster

I in Beethoven.com lends no additional weight to the commercial

webcasters’ argument. Far from endorsing a competitive (or

perfectly competitive) standard, we specifically refused to

“examine the correctness of the Librarian’s decision” regarding

competitiveness. Beethoven.com, 394 F.3d at 952 (emphasis

added). Because of the “exceptionally deferential” review

undertaken in that case, our having affirmed the decision of the

Librarian cannot be taken to bind the Judges today. Id. The

statute speaks only of a “willing buyer and a willing seller.”

This is the standard the Judges were to apply in evaluating

whether a market benchmark was an appropriate model on

which to base their own rate determinations.

The statute does not require that the market assumed by the

Judges achieve metaphysical perfection in competitiveness. The

Judges, not this court, bear the initial responsibility for

interpreting the statute. Applying the lessons of Chevron U.S.A.

Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837

13

(1984), we can only assess the reasonableness of the Judges’

interpretation of the inherent ambiguity in the statute’s mandate.

Appellants have pointed to nothing in the Judges’ interpretation

to establish unreasonableness.

2. Royalty Rates

The Judges set a per play royalty rate to be paid by

commercial webcasters. This rate will increase, once a year,

from $0.0008 per play in 2006 to $0.0019 per play in 2010. See

Order, 72 Fed. Reg. at 24,096. The rate schedule was based on

the testimony of SoundExchange’s expert economist Michael

Pelcovits, who modeled his estimates on “the market for

interactive webcasting covering the digital performance of

sound recordings.” Id. at 24,092. Interactive

webcasting—which is not within the scope of the statutory

license—allows a listener to access “particular sound

recording[s]” on request or a program of sound recordings

“specifically created for the recipient.” 17 U.S.C. § 114(j)(7).

By contrast, the non-interactive webcasting at issue in this

determination does not allow the same degree of user

customization. Therefore Dr. Pelcovits proposed, and the

Judges adopted, an “interactivity adjustment” by which to

decrease the interactive rates. See Order, 72 Fed. Reg. at

24,092-94. Dr. Pelcovits calculated the adjustment through a

process called hedonic regression, a statistical method that tries

to isolate the value of a particular variable in a complex set of

data. In this case, Dr. Pelcovits tried to isolate the value of

interactive service, which he used to reduce his final estimates.

The commercial webcasters argue that the market for

interactive music services—used by Dr. Pelcovits in his model,

which was generally adopted by the Judges—was insufficiently

competitive. They claim that the market for interactive music

is different than the market for “passive,” non-interactive

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webcasting because an interactive music service is not viable

unless it can provide music from each of the four major record

labels. The commercial webcasters argue that subscribers to

interactive webcasting services “expect” access to recordings

from all four major labels “in exchange for [the] significant

monthly payment” that is a condition of their subscription.

Commercial Op. Br. 26. Assuming this asymmetry of consumer

demand, they conclude that the Judges should not have produced

webcasting rates by looking to interactive music rates. To

provide music from each major record label, an interactive

music service must reach agreement with each major record

label independently. According to the commercial webcasters,

this competitive dynamic gives record labels disproportionate

bargaining power. Any one record label could block an entire

service, so each in turn can negotiate higher rates. By looking

to this market, they argue, the Judges provided better terms to

the copyright owners than they would have earned in the

marketplace.

Commercial webcasters presented this argument to the

Judges, supported by the testimony of their expert witness,

economist Adam Jaffe. The Judges considered the argument

and found it to be “largely unsubstantiated.” Id. at 24,093.

They further noted that “there was testimony that directly

contradict[ed] any suggested generalization that the repertoires

of all four major[ record labels] are necessary as a prerequisite

prior to undertaking the operation of a consumer music service

in the various digital music service markets.” Id. at 24,093 n.24.

The Judges cited evidence that “Yahoo! was able to operate its

custom radio channels without” one of those record labels “for

two years,” even though the record label accounted for “nearly

one-third of the market in terms of repertoire.” Id. They

summarized their assessment of Dr. Jaffe’s testimony by calling

his “concerns that the benchmark market [wa]s not sufficiently

competitive . . . little more than the theoretical speculations of

15

an academic offering a quick outline of possible criticisms

without carefully considering the applicable facts or alternative

explanations.” Id. at 24,093. The Judges assessed Dr. Jaffe’s

testimony and pointed to contrary evidence in the record.

Having evaluated the arguments on both sides, we hold that it

was not unreasonable for the Judges to base their webcasting

rates in part on the market for interactive music.2

2

Appellants also contend that rejection of the NPR Agreement was

inappropriate because § 114(f)(2)(B) prohibits the Judges from

considering agreements for interactive services. Noncommercials

Reply Br. 4-5; Bonneville Reply Br. 7-8. Section 114(f)(2)(B) invites

the Judges to consider comparable “voluntary license agreements

described in subparagraph (A).” 17 U.S.C. § 114(f)(2)(B).

Subparagraph (A) in turn identifies “public performances of sound

recordings by means of eligible nonsubscription transmission services

and new subscription services specified by subsection (d)(2).” Id.

§ 114(f)(2)(A). Subsection (d)(2) states that “performance[s] of a

sound recording . . . shall be subject to statutory licensing, in

accordance with subsection (f) if [among other things] the

transmission is not part of an interactive service.” Id.

§ 114(d)(2)(A)(I). Therefore, the argument goes, Section

114(f)(2)(B) prohibited consideration of the interactive benchmark

that the Judges ultimately adopted.

This argument comes too late. Appearing for the first time in the

reply briefs to this court, see Students Against Genocide v. Dep’t of

State, 257 F.3d 828, 835 (D.C. Cir. 2001), this argument was not

presented to the Judges by any party involved in this litigation and

may not be presented for the first time on appeal, 37 C.F.R.

§ 351.14(b); see also United Transp. Union v. Surface Transp. Bd.,

114 F.3d 1242, 1244-45 (D.C. Cir. 1997). The Bonneville appellants

(who were dismissed voluntarily from this appeal) maintained that this

argument was presented to the Judges in the DiMA and Member

Companies Joint Proposed Findings of Fact ¶¶ 88, 90, 115 n.23.

However, although the three cited paragraphs referred to the

interactive benchmark and argued that it was “not comparable” to the

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The standard of review applicable in ratemaking cases is

highly deferential. See E. Ky. Power Coop., 489 F.3d at 1306.

The deferential standard of review extends to our consideration

of arguments by the commercial webcasters about whether a

voluntary agreement could be considered “comparable” to the

ratesetting the Judges were undertaking. See 17 U.S.C.

§ 114(f)(2)(B). When setting rates and terms, “the Copyright

Royalty Judges may consider the rates and terms for comparable

types of digital audio transmission services and comparable

circumstances under voluntary license agreements.” 17 U.S.C.

§ 114(f)(2)(B) (emphasis added). The commercial webcasters

argue that the Judges committed reversible error by failing to

consider a 2003 voluntary agreement between record companies

and satellite digital audio services. Nothing in the statute

requires the Judges to consider any comparable agreements, let

alone particular agreements. It is generally within the discretion

of the Judges to assess evidence of an agreement’s

comparability and to decide whether to look to its rates and

terms for guidance. We therefore affirm the Judges’ decision

not to consider the 2003 agreement when setting rates for

webcasting.

Apart from the objections to the Judges’ assessment of the

market and voluntary agreements, the commercial webcasters

also dispute the hedonic regression analysis used by Dr.

Pelcovits to reduce the rates. In a later determination, setting

licenses at issue because it covered “rights beyond those granted by

the statutory license,” id. ¶ 90, none suggested that the Act bars the

Judges from considering the interactive benchmarks as a matter of

law, much less for the complex statutory construction arguments

outlined in the reply briefs to this court. The paragraphs instead stated

that the interactive benchmark was irrelevant because it was too

dissimilar from the statutory license at issue, not because the statute

precluded the Judges from considering it at all.

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rates and terms for satellite radio subscription services, the

Judges credited a study with an interactivity adjustment much

greater than the interactivity adjustment Dr. Pelcovits used in

this determination. See Determination of Rates and Terms for

Preexisting Subscription Services and Satellite Digital Audio

Radio Services (“SDARS”), 73 Fed. Reg. 4080 (Jan. 24, 2008).

If the Judges had used the SDARS adjustment, the final rates

would have been two-thirds smaller. Commercial webcasters

contend that this was arbitrary. This argument fails for two

reasons. First and most obviously, the Judges are not bound by

future agency action. The suggestion defies logic. The Judges

must “act . . . on the basis of a written record [and] prior

determinations and interpretations of . . . the Copyright Royalty

Judges.” 17 U.S.C. § 803(a)(1). They are not required to act on

the basis of future determinations of the Copyright Royalty

Judges. Failure to conform with subsequent agency action

cannot be a basis for a finding of arbitrariness. See Tesoro Ref.

& Mktg. Co. v. FERC, 552 F.3d 868, 873-74 (D.C. Cir. 2009)

(rejecting futility argument based on subsequent agency action).

Second, even if the Judges were so bound, their determination

in SDARS specifically criticized the interactivity adjustment,

saying it “might well be improved through a hedonic regression

analysis.” See 73 Fed. Reg. at 4093. The Judges’ “failure” to

use a similarly inexact adjustment for webcasting was not

arbitrary or otherwise contrary to law.

Finally, the commercial webcasters argue for setting aside

the Judges’ proposed rates because they are “crushing and

disproportionate.” Commercial Op. Br. 38. The APA permits

us to set aside agency action that is “arbitrary, capricious, an

abuse of discretion, or otherwise not in accordance with law.”

5 U.S.C. § 706(2)(A). This they have not shown.

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3. Percentage-of-Revenue Rates

The Judges adopted a per-performance usage fee structure

for all commercial webcasters. Small commercial webcasters

object to this uniform solution, seeking instead to pay a

percentage of their revenues. The Judges rejected such an

argument because they found “no evidence in the record about

how [to] delineate between small webcasters and large

webcasters” and noted that “none of the small commercial

webcasters . . . provided helpful evidence about what demarcates

a ‘small’ commercial webcaster from other webcasters at any

given point in time.” Order, 72 Fed. Reg. at 24,089 & n.9. The

small commercial webcasters now argue that the definition of

“small commercial webcaster” is irrelevant because the

percentage-of-revenue approach would apply only to those

webcasters that elected to pay a percentage of total gross

revenue. The Board and SoundExchange say that this revised

argument, which they claim was first raised at rehearing, is

waived. See 37 C.F.R. § 351.14(b) (“A party waives any

objection to a provision in the determination unless the

provision conflicts with a proposed finding of fact or conclusion

of law filed by the party.”). We assume without deciding that

the small commercial webcasters’ initial proposal, combined

with the references to “gross revenue” they made during the

proceedings, are sufficient to avoid waiver.

Regardless, their objection fails on the merits. The Judges’

determination spelled out five reasons they favored payments

based on performances rather than webcaster revenue:

(1) performances are more “directly tied to the nature of the

right being licensed”; (2) it is difficult to calculate revenue; (3) it

is difficult to define revenue unambiguously; (4) “auditing and

enforcement” would be more difficult; and (5) payments might

not increase with increased usage of copyrights. Id. at 24,089-

90.

19

An opt-in regime charging a fraction of total gross revenue

would address only two of the Judges’ five concerns. It might

remove some of the difficulty in calculating and defining

revenue, because total gross revenue includes all money

received by a webcaster. But it would not address the other

problems raised by the Judges: that total gross revenue is not

directly tied to the right being licensed; that auditing and

enforcement would be difficult; and that usage might increase

without a corresponding increase in royalty payments. In an

attempt to address these problems, the small commercial

webcasters point to the Judges’ subsequent adoption of a

“percentage-of-revenue royalty in the SDARS [(i.e., satellite

radio)] proceeding.” Commercial Op. Br. 47. Because the

Judges adopted it for satellite radio, they argue, the Judges

should have adopted it for webcasting. Beyond the ordinary

problem of trying to hold an agency to action it takes in a

subsequent proceeding, see supra Part II.B.2, the Judges were

explicitly reluctant to adopt that approach in the satellite radio

proceeding:

Because we have no true per performance fee proposal

before us nor sufficient information from evidence of

record to accurately transform any of the parties’

proposals into a true per performance fee proposal, the

Copyright Royalty Judges conclude that a revenue-based

fee structure for the SDARS is the most appropriate fee

structure applicable to these licensees.

SDARS, 73 Fed. Reg. at 4085. The Judges therefore appear

committed to applying per-performance royalties for

commercial services, and deviated from that preference for

satellite-radio licensing only because the parties presented them

with no better options.

20

Finally, it was not error for the Judges to reject the small

commercial webcasters’ pleas that paying per performance

would wreck their inefficient business models. The Judges

made clear they could not “guarantee a profitable business to

every market entrant.” Order, 72 Fed. Reg. at 24,088 n.8. The

Judges are not required to preserve the business of every

participant in a market. They are required to set rates and terms

that “most clearly represent the rates and terms that would have

been negotiated in the marketplace between a willing buyer and

a willing seller.” 17 U.S.C. § 114(f)(2)(B). If small commercial

webcasters cannot pay the same rate as other willing buyers and

still earn a profit, then the Judges are not required to

accommodate them.

4. Minimum Annual Fee

In addition to setting royalty rates—to be paid by

webcasters to the owners of sound recording copyrights—the

statute requires there to be “a minimum fee for each . . . type of

service” provided. 17 U.S.C. § 114(f)(2)(B). These fees are

paid by licensees, like the webcasters, to the collective, to cover

“administrative costs of the copyright owners in administering

the license.” Webcaster I, 67 Fed. Reg. at 45,262. The Judges

found “reasonable” “a minimum fee of an annual non-

refundable, but recoupable $500 minimum per channel or station

payable in advance.” Order, 72 Fed. Reg. at 24,097.

Commercial webcasters object to the “per channel or

station” phraseology for its failure to set a cap on the number of

minimum fees a licensee could be required to pay. In particular,

they fear that some of their business models might be deemed to

contain thousands or tens of thousands of “channels,” making

the combined fees prohibitively expensive. Anticipating such an

interpretation, DiMA and SoundExchange agreed to cap

minimum fees at $50,000 per year per licensee in 2007.

21

(Voluntary negotiation by affected parties is “given effect in lieu

of any . . . determination by” the Judges. 17 U.S.C. § 114(f)(3).)

Because some parties have not contracted around this provision,

the issue is not moot and we have power to reach it.

The Board argues that the commercial webcasters waived

their right to make any objection to the minimum fees because

they did not raise it before the Judges. See 37 C.F.R.

§ 351.14(b). But even if the commercial webcasters failed to

specifically object to the omission of a fee cap, they objected to

SoundExchange’s proposal, which included no fee cap. See

DiMA and Radio Broadcasters Proposed Findings of Fact and

Conclusions of Law ¶¶ 257-258. They also endorsed a 2003

agreement between SoundExchange and DiMA that contained

a fee cap (the “2003 Voluntary Agreement”). See DiMA,

America Online, Inc., and Yahoo!, Inc. Proposed Findings of

Fact and Conclusions of Law ¶¶ 35-38. These proposals

“conflict[]” with the Judges’ determination, which lacks any

provision relating to a cap on the number of minimum fees that

any licensee may be required to pay. 37 C.F.R. § 351.14(b).

Therefore, the arguments were not waived.

On the merits, commercial webcasters raise several

objections. They argue the determination was an arbitrary

departure from Webcaster I, which contained a flat minimum fee

of $500 per licensee, without any possibility of raising it for

additional channels or stations. 67 Fed. Reg. at 45,262. They

also argue it was arbitrary for the Judges to fail to limit the

number of minimum fees that might be paid by a single licensee,

when they relied in part on the 2003 Voluntary Agreement,

which had such a limit. That agreement charged licensees “a

minimum fee of $2,500, or $500 per channel or station . . . ,

whichever is less,” per year. 37 C.F.R. § 262.3(d)(2). Finally,

they argue that without a cap, the accumulation of minimum

fees could become excessively burdensome.

22

The Judges are free to depart from precedent if they provide

reasoned explanations for their departures, and they discussed

minimum fees in their determination. See Order, 72 Fed. Reg.

at 24,096-97. But in only two footnotes do they appear aware of

the possibility of individual licensees paying more than $500.

See id. at 24,097 nn.38-39. Even in the Judges’ discussion of

“side channels”—which included an example of one licensee

being charged $1000, id. at 24,097 n.39—they do not seem to

anticipate the possibility of a webcaster paying hundreds of

thousands of dollars or more. The 2003 Voluntary Agreement

the Judges quoted, see id. at 24,097 n.38, capped minimum fees

at $2500 per licensee. Depending on future interpretations of

“channel or station,” the Judges’ determination might impose

enormous fees on some business models and tiny fees on others,

based on regulations that have not yet been defined. Such a

regime is arbitrary and does not appear to represent what “would

have been negotiated in the marketplace between a willing buyer

and a willing seller.” See 17 U.S.C. § 114(f)(2)(B).

Therefore we vacate the minimum fee provision for

commercial webcasters, and remand for the Judges to reconsider

this portion of their determination.

5. Late Fees

The Judges set a late fee of 1.5% of the royalty payment due

for that period, accruing monthly. See Order, 72 Fed. Reg. at

24,107. The commercial webcasters object, arguing that the

Judges should have considered “course of dealing” evidence

showing that “in practice, rates of such magnitude are very

rarely, if ever, imposed.” Commercial Op. Br. 41. The Judges

did, however, consider course of dealing evidence. See Order,

72 Fed. Reg. at 24,107. They considered it and were “not

persuaded that contracting parties’ ability to waive late fees

require[d] rejection of a higher late fee.” Id. They noted that

23

some contracts lacked discretion to grant waiver and observed

that “[w]hile waiving a late fee can promote good feelings in a

private agreement . . . , it has no bearing for a statutory license

where copyright owners and performers cannot . . . terminate

access to their works under the license.” Id. Therefore we

affirm the Judges’ determination with respect to late fees.

6. Confidential Information

Webcaster I, 67 Fed. Reg. at 45,275, codified at 37 C.F.R.

§ 261, entitled copyright owners to view certain confidential

information of the webcasters, but only as part of their

“statements of account . . . in aggregated form.” 37 C.F.R.

§ 261.5(c). The collective, which held the information, was

prohibited from using it for “any purpose other than royalty

collection and distribution and activities directly related

thereto.” Id. In the determination under review, the Judges

chose to expand access to non-aggregated statements of account,

though “limit[ing]” this right “to copyright owners and

performers, and their agents and representatives.” Order, 72

Fed. Reg. at 24,109.

The commercial webcasters object to this change, saying

the information is sensitive and pointing to several marketplace

agreements with confidentiality agreements similar to the prior

regime. The Judges reasonably rejected these arguments. As

they made clear in their determination, there was “no finding

that [disclosure of] the types of information contained in the

statements of account . . . would harm the business interests of

the reporting Services.” Id. at 24,108. The commercial

webcasters’ witness “did not articulate how the information

contained in the statements . . . could injure the competitiveness

of a Service, or otherwise negatively affect its operation.” Id.

The Judges also found that the existing confidentiality

arrangement negatively “impact[ed]” the copyright owners’

24

“substantive rights under the section 112 and 114 licenses.” Id.

Because we ask only whether the Judges acted reasonably based

on record evidence, we are easily satisfied that the Judges met

their burden on this point.

C. Noncommercial Broadcasters’ Challenges

The Judges set an annual noncommercial rate of $500 per

channel or station up to a monthly cap of 159,140 ATH.

Beyond this cap, the Judges ordered noncommercial

broadcasters (“noncommercials”) to pay the usage rate

applicable to the commercial webcasters. The Judges refused to

modify an interim order establishing record-keeping

requirements for all services, instead deferring a decision on this

issue to a future rulemaking.

Noncommercials contend this rate and cap constituted

reversible error because noncommercial broadcasting constitutes

a different type of service than commercial webcasting and the

Act required the Judges to treat different types of services

differently, see 17 U.S.C. § 114(f)(2)(B). Specifically,

noncommercials contend that the Judges arbitrarily: (1) rejected

a flat fee non-interactive non-subscription benchmark for

noncommercials in favor of a commercial interactive

subscription benchmark; (2) adopted an annual $500 per channel

or station minimum fee as necessary to cover SoundExchange’s

administrative costs; (3) adopted a use-based fee above a

listenership threshold, contrary to their mandate and without

evidentiary support; and (4) set the noncommercial usage fee

equal to the commercial usage fee without evidentiary support.

Noncommercials also contend the Judges erred in refusing to

adopt new record-keeping requirements. Although the Judges’

adoption of the $500 fee was unsupported by record evidence,

and we remand that issue, we conclude noncommercials’ other

contentions are unpersuasive.

25

1. Rejection of Noncommercials’ Proposed Benchmarks

In determining the noncommercial rates, the Judges

rejected, as benchmarks, two proposals offered by

noncommercials: (1) rates loosely based on an NPR-

SoundExchange Agreement covering licenses under Sections

112 and 114 of the Copyright Act for the term October 28, 1998

to December 31, 2004 (“NPR Agreement”) and (2) rates for

musical works paid by noncommercial radio stations for over-

the-air musical work performances under Section 118 of the Act.

At the outset, we note that the Judges did not, as

noncommercials contend, adopt SoundExchange’s commercial

interactive subscription benchmark for noncommercial

broadcasting. The Judges in fact rejected the proposed

benchmarks of both noncommercials and SoundExchange.

Order, 72 Fed. Reg. at 24,099. Although the Judges derived

rates above a listenership threshold from the rates applicable to

commercial webcasters, the Judges offered noncommercials a

huge discount over these rates in the form of a monthly 159,140

ATH allowance that would be covered by a minimum fee.

a. Rejection of the NPR Agreement as a Benchmark

Executed in 2001, the NPR Agreement provided that NPR

would pay SoundExchange a flat-fee lump sum for licenses over

a six-year period but did not specify the parties’ valuations of

any given year of the contract. At the time the agreement was

executed, NPR had 410 stations providing streaming content.

By the end of the NPR agreement period, NPR had 798 such

stations. The agreement was silent as to how stations beyond

the original 410 were to be handled.

The Judges rejected the NPR Agreement as a benchmark,

finding that it “[did] not provide clear evidence of a per station

rate that could be viewed as a proxy for one that a willing buyer

26

and a willing seller would negotiate today.” Order, 72 Fed. Reg.

at 24,098. The Judges gave four reasons. First, the agreement

provided for a “lump sum amount to cover the entire 74-month

term of the contract with no amount specified for different

years.” Id. The Judges noted that there was nothing in the

agreement or the record to indicate “the proper attribution of

payments for any given year.” The Judges declined

noncommercials’ invitation to arrive at this annual per station

rate by simply dividing the lump sum amount by the number of

years and number of stations covered, because such a proposal

accounted for neither the “time value of money in the latter

years of the [agreement]” nor “the erosion in the purchasing

power of the dollar since 2004.” Id. at 24,098-99. Second, the

proposal sought to divide the average yearly rate by 798 stations

(the number of NPR stations covered by the agreement in 2004),

but the Judges noted that the agreement covered only 410

stations when it was executed and that neither the contract nor

the record indicated “how additional stations beyond the 410

covered by the agreement were to be handled.” Id. at 24,098.

Depending on which figure was used, the two possible fees

would have been approximately one-half or double the amount

of the other. Id. Third, the Judges took issue with the fact that

nothing in the agreement or the record “indicate[d] the parties’

expectations as to levels of streaming.” Id. Fourth, the Judges

stated that “none of the final rate proposals of the

Noncommercial Webcasters would cover the minimum annual

fee determined for Commercial Webcasters.” Id. at 24,099.

In maintaining that this determination was arbitrary,

noncommercials object not simply to the Judges’ rejection of the

agreement as evidence of the appropriate rate, but to their failure

to adopt the agreement as the appropriate benchmark. See, e.g.,

Noncommercials Op. Br. 20. Congress invited the Judges to

consider voluntary marketplace agreements for comparable

types of digital audio transmission services and comparable

27

circumstances. 17 U.S.C. § 114(f)(2)(B). Noncommercials

contend that the NPR agreement was exactly the type of

agreement suggested by Congress, as it covered (1) “the same

rights at issue here,” (2) “the same activity: noninteractive

Internet simulcast streaming of radio broadcasts,” (3) “the same

seller: SoundExchange and its members,” and (4) “the same

buyer: NPR, one of the noncommercial broadcasters who

brought this appeal.” Noncommercials Op. Br. 17-18. For the

reasons that follow, however, the Judges’ decision to reject the

agreement as a benchmark was not arbitrary.

First, the Judges noted that the number of NPR stations

covered by the agreement seemed to have nearly doubled over

the course of the agreement, making it unclear which figure it

ought to use in calculating a benchmark. Second, given the

Judges’ dual concerns that flat fee structures “permit increasing

usage without increasing payment,” Order, 72 Fed. Reg. at

24,091, and that this benchmark was proposed to cover all

noncommercials, “irrespective of whether they were part of a

submarket in the marketplace for non-interactive webcasting

that was distinctly different from commercial non-interactive

webcasting,” id. at 24,098, the Judges could reasonably

conclude the agreement’s silence as to “the parties’ expectations

as to levels of streaming,” id., was relevant to their decision to

reject the agreement as a benchmark. Finally, the Judges’

statement that the agreement did not serve as a “proxy for one

that a willing buyer and a willing seller would negotiate today,”

id., evinces concern with the age of the agreement, especially in

light of their further emphasis that the lump sum payment

covered the period between 1998 and 2004. In addition to the

Judges’ concern that the proposal failed to account for the “time

value of money,” reference to the agreement’s 1998-2004

coverage dates highlights how outmoded the agreement was.

This time period began a little over seven years prior to the

Order’s January 1, 2006 applicability date and just a few months

28

short of nine years prior to the Order’s May 1, 2007 effective

date. The Judges might have been able to compensate for some

of these mathematical deficiencies in calculating a fee. But

another shortcoming—the lack of evidence that SoundExchange

valued each year of the agreement equally—prevented them

from making those adjustments in a rational way.

Noncommercials point out that the Judges adopted rates for

commercial webcasting that were based on an interactive

commercial subscription benchmark that required mathematical

adjustments to deduct the value added by interactivity even

though the benchmark was concededly “not . . . without any

warts.” Id. at 24,094. Consequently, noncommercials contend

that the Judges’ rejection of the NPR agreement as the

benchmark was arbitrary because “[a]gencies cannot ‘treat[]

type A cases differently from similarly situated type B cases.’”

Noncommercials Reply Br. 9 (quoting Indep. Petroleum Ass’n

v. Babbitt, 92 F.3d 1248, 1260 (D.C. Cir. 1996)). This

contention might have merit if the NPR Agreement and the

interactive subscriptions benchmark suffered from the same

shortcomings. However, the Judges rejected the NPR

Agreement for reasons independent of the mathematical

adjustments it required. Nevertheless, even if the required

mathematical adjustments were the only shortcomings of the

agreement, the Judges adopted the benchmark for commercial

webcasters based on the testimony of Dr. Michael Pelcovits,

SoundExchange’s expert, regarding the hedonic regression

analysis that he performed to quantify and deduct the value of

interactivity from the interactive commercial subscription

benchmark. By contrast, noncommercials presented no

evidence quantifying SoundExchange’s yearly valuation of the

NPR agreement, the time value of money, or the declining

purchasing power of the dollar. Because the Judges had no duty

to compensate for these shortcomings, the situations were not

“similarly situated” and any purported differences in treatment

29

were not arbitrary. Moreover, even if the Judges erred in

rejecting the NPR Agreement because the proposed fee would

not cover “the minimum annual fee determined for Commercial

Webcasters,” Order, 72 Fed. Reg. at 24,099, see infra Part

II.C.1.b, this was harmless error in light of the Judges’ other

independent reasons for rejecting the agreement. See PDK

Labs., Inc. v. U.S. Drug Enforcement Admin., 362 F.3d 786, 799

(D.C. Cir. 2004).

b. Rejection of the Musical Works Benchmark

In rejecting the rates paid by noncommericial radio stations

for over-the-air musical works performances under Section 118

of the Copyright Act as a benchmark, the Judges explained that

“the musical works benchmark proposed by [noncommercials]

is based on a very different marketplace characterized by

different sellers who are selling different rights.” Order, 72 Fed.

Reg. at 24,098. Further, the Judges found “ample evidence in

the record . . . to controvert the underlying premise of this

proposed benchmark that the market for sound recordings and

the market for musical works are necessarily equivalent.” Id.;

see SoundExchange Proposed Findings of Fact ¶¶ 486-495

(discussing evidence that in comparable markets musical works

publishers receive lower royalty rates than do owners of sound

recording rights).

Noncommercials do not dispute the Judges’ rationale for

rejecting this benchmark, but instead insist it was arbitrary for

the Judges not to justify rejecting reliance on the fee structure of

these agreements as evidence that a flat-fee structure, regardless

of usage, was appropriate for noncommercials. However,

because the Judges noted that these agreements were so different

from the rights at issue, representing “different sellers who are

selling different rights” of different value, the Judges did not act

arbitrarily by rejecting these agreements even for this limited

30

purpose. Moreover, the rates set by the Judges did establish a

flat-fee structure for the vast majority of noncommercial

broadcasters then before them. Order, 72 Fed. Reg. at 24,099-

100. The Judges estimated that the monthly 159,140 ATH

allowance would create, effectively, a flat-fee structure covering

approximately 80% of the NPR stations that streamed over the

web. Id. at 24,099-100. While this appeal was pending, NPR

was dismissed voluntarily from the case. Order No. 07-1123

(D.C. Cir. Mar. 18, 2009). Because NPR appears to have

represented the largest of the noncommercial broadcasters, see

Order, 72 Fed. Reg. at 24,099, the allowance may cover all the

broadcasting needs of the remaining noncommercials. For

instance, the National Religious Broadcasters Noncommercial

Music License Committee (“Noncommercial Religious

Broadcaster Committee”) stated that “listenership on

[Committee-represented stations] is typically small. CDR, [a

Committee-represented station], is representative of other

[Committee-represented] stations and averages a concurrent

online audience of just under 14 listeners.” Noncommercial

Religious Broadcasters Committee Proposed Findings of Fact ¶

6. Assuming thirty-one days in a month, this listenership level

would result in 10,416 ATH of streaming content, or only 6.5%

of the monthly ATH allowance.

2. Minimum Annual Fee

The Judges adopted an annual $500 per channel or station

minimum fee on the rationale that “certainly the bare minimum

that such services should have to pay is the administrative cost

of administering the license.” Order, 72 Fed. Reg. at 24,099.

The Judges set $500 as the fee amount based on their previous

conclusion that $500 was the appropriate minimum fee for

commercial webcasters and on the lack of record evidence “to

suggest that the submarket in which a Noncommercial

Webcaster may reside would yield a different administrative

31

cost to SoundExchange as compared to the administrative costs

associated with Commercial Webcasters.” Id. Furthermore, the

Judges stated that SoundExchange had made no distinction

between webcasters with regards to the $500 fee and relied on

Webcaster I for the notion that all webcasters should pay the

same minimum fee for the same license. Order, 72 Fed. Reg. at

24,099. Because there is no record evidence that $500

represented SoundExchange’s administrative cost per channel

or station, the Judges’ determination in this regard cannot be

sustained.

In discussing the appropriate minimum fee for commercial

webcasters, the Judges observed that they had “little evidence of

the administrative cost per licensee.” Id. They nevertheless set

$500 as the minimum fee for commercial webcasters because

SoundExchange proposed the amount, the amount was

“substantially lower” than the minimum fees proposed by the

various webcasters, id. at 24,096, and “SoundExchange must

[have] anticipate[d] that [$500] [would] cover its administrative

costs even in the absence of royalties,” id. Whatever merit this

approach may have for commercial webcasters, the Judges could

hardly apply it rationally to noncommercial broadcasters, some

of which proposed arrangements with minimum fees well below

$500. See, e.g., Noncommercial Religious Broadcasters

Proposed Findings of Fact ¶ 30. This is especially so given the

lack of evidence supporting SoundExchange’s administrative

costs. The most that can be inferred from SoundExchange’s

proposal is that its annual per channel or station administrative

costs do not exceed $500, not that they equal $500.

Additionally, noncommercials suggest there was record

evidence refuting the level of SoundExchange’s administrative

costs: the NPR Agreement, viewed most favorably to

SoundExchange, averages out to a per-year inflation-adjusted

rate significantly less than $500 and so undercuts the Judges’

view that a $500 minimum fee represented the lower bound of

32

SoundExchange’s administrative costs. The Judges offered no

reason for rejecting the agreement as evidence of

SoundExchange’s administrative costs.

The Board’s response on appeal misses the mark. It offers

that if there was a lack of evidence of SoundExchange’s

administrative costs, the fault lies with noncommercials, which

did not obtain discovery and introduce evidence to establish that

fact. But this approach is inconsistent with rational

decisionmaking, which requires more than an absence of

contrary evidence; it requires substantial evidence to support a

decision, see Natural Res. Def. Council, Inc. v. Herrington, 768

F.2d 1355, 1421 n.63 (D.C. Cir. 1985). Furthermore, because

SoundExchange did not base its minimum-fee proposal on

administrative costs, noncommercials could hardly challenge a

theory first presented in the Judges’ determination and not

advanced by any participant. In effect, noncommercials cannot

be faulted for failing to present “contrary” evidence of

administrative costs, because no evidence existed yet to counter.

In sum, it was arbitrary for the Judges, in the absence of

record evidence, to apply the $500 fee to noncommercials on the

theory that “the bare minimum” noncommercials should have to

pay is the “administrative cost of administering the license,” and

we remand the issue of the appropriate minimum fee for

noncommercials.

3. Adoption of a Use-Based Fee Above a Listenership

Threshold

Acknowledging that commercial and certain

noncommercial webcasters represent “two different segments of

the marketplace,” the Judges noted that “agreements produced

by the parties in this proceeding covering noncommercial

services typically structured payments as flat fees.” Order, 72

33

Fed. Reg. at 24,091 (citing the NPR Agreement). The Judges

also noted “the myriad of characteristics that [noncommercials]

claim set them apart from commercial broadcasters,” such as

non-profit status, different noncommercial mission, and

different sources of funding. Id. at 24,098. Nevertheless, the

Judges expressed concern that “flat fees do permit increasing

usage without increasing payment.” Id. Therefore, to account

for these competing considerations, the Judges adopted a flat,

per-station rate structure up to a specified cap coupled with a per

performance rate for usage exceeding the cap. Id. In imposing

the cap, the Judges relied on testimony from SoundExchange’s

economic expert, Dr. Erik Brynjolfsson, that as noncommercial

stations grow, they begin to compete with commercial stations

for listeners. Dr. Brynjolfsson opined that, beyond a certain

size, a cap is necessary in order “to reduce ‘the chance that small

noncommercial stations will cannibalize the webcasting market

more generally’ and thereby adversely affect the value of the

digital performance right in sound recordings.” Id. at 24,097

(quoting Brynjolfsson Written Rebuttal Testimony at 42). The

Judges agreed, concluding as a matter of “pure economic

rationale based on the willing buyer/willing seller standard,” that

the proliferation of a different price for noncommercials “must

include safeguards to assure that, as the submarket for

noncommercial webcasters that can be distinguished from

commercial webcasters evolves, it does not simply converge or

overlap with the submarket for commercial webcasters.” Id. at

24,097-98. The Judges explained that this “convergence” theory

approximates the circumstances “in which willing buyers and

willing sellers would have a meeting of the minds that would

result in a lower rate than the rate applicable to the general

commercial webcasting market.” Id. at 24,100.

Noncommercials contend that the record evidence and the

Judges’ reasoning demonstrate that the only appropriate fee

structure for noncommercials is a flat fee. However, Dr.

34

Brynjolfsson’s testimony provided evidence against a plain flat-

fee structure beyond a certain listenership threshold, and the

Judges’ decision to adopt a listenership threshold was rationally

based on Dr. Brynjolfsson’s testimony of how the willing

buyer/willing seller calculation would change as a

noncommercial broadcaster grew and competed with a

commercial webcaster for listeners. Also, the Judges did set a

flat fee structure for the vast majority of noncommercials, most

of which were not expected to exceed the specified cap.

Noncommercials also contend that the Judges legally erred

by substituting a theory of convergence for the willing

buyer/willing seller standard. As the Judges stated, however, it

relied on convergence as a proxy for what a willing buyer and

willing seller would negotiate in the marketplace. Id. at 24,100.

To the extent noncommercials suggest that this statement

constituted “lip service” to the statutory standard, as

“competition was the beginning and end of the Board’s inquiry,”

Noncommercials Op. Br. 26 n.8, this criticism is no criticism at

all because competition certainly would affect the actions of a

willing seller, as the Judges noted. Even assuming the Judges

should have “recognized noncommercial services’ unwillingness

to accept a commercial rate in a marketplace transaction,” id. 26,

the Judges did not set a “commercial rate” for the

noncommercials. It set a per-performance rate only above a

listenership threshold. Noncommercials are given a monthly

discount of 159,140 ATH on the commercial rate. Moreover,

that assertion, as do many others made by noncommercials,

speaks only to the willingness of the buyer to enter the

transaction and says nothing of the seller. The Judges, taking

both buyers and sellers into account, came to a reasonable

compromise between the two positions.

Noncommercials further contend the Judges arbitrarily

selected listenership levels as the measure of alleged

35

convergence. They maintain “[f]ocusing on listenership rather

than the standard Congress set is, by definition, arbitrary”

because “agency action is arbitrary if it ‘relied on factors which

Congress has not intended it to consider.’” Noncommercials

Op. Br. 28 (quoting Motor Vehicle Mfrs. Ass’n v. State Farm

Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983)). As the Judges

could rationally conclude that competition for listeners would be

a major factor affecting convergence, however, it was also

rational for them to conclude that competition could be assessed

by looking to listenership. The Judges did not “rel[y] on factors

which Congress has not intended it to consider,” State Farm,

463 U.S. at 43, for competition is relevant to the willing

buyer/willing seller standard. Still, noncommercials maintain

that the arbitrariness of setting 159,140 ATH as the convergence

point underscores the arbitrariness of using listenership to assess

convergence. Even assuming the Judges’ decision to set the

convergence point at 159,140 ATH was arbitrary, it would not

undermine their approach of using listenership to assess

convergence: miscalculating a convergence point does not

undermine the validity of a convergence approach any more

than an economics student who miscalculates the equilibrium

point on a demand curve undermines the notion that such a point

exists.

Finally, noncommercials contend the evidence upon which

the Judges relied to support convergence does not demonstrate

convergence. While noncommercials make several challenges

on this score, their “most fundamental[]” objection is that this

evidence “related to a few of the largest NPR stations.”

Noncommercials Op. Br. 29. The Judges explained, however,

that the “evidence of convergence in the record appears to apply

more clearly to the stations at the larger end of the range of NPR

station size,” Order, 72 Fed. Reg. at 24,099. Under these

circumstances, the Judges reasonably looked to evidence of the

largest NPR stations for evidence of convergence. Although

36

noncommercials protest that the Judges cited very little non-

NPR evidence in support of convergence, the Judges need not

have cited any non-NPR evidence to reach a rational result;

basing their determination on NPR evidence from large NPR

stations made logical sense because “without evidence relating

to the largest NPR stations, there would be very little evidence

of convergence at all,” Noncommercials Op. Br. 29. In other

words, this evidence constituted the most, if not only, relevant

evidence. To show this determination was arbitrary,

noncommercials had to demonstrate that the Judges

misconstrued the evidence of convergence or else failed to

consider important evidence that undermined their

understanding of the convergent effect. The most

noncommercials did, however, was to assert that the NPR

Agreement undermined the theory of convergence because the

agreement made no distinctions based on listenership. As noted,

however, the Judges rejected the NPR Agreement’s flat-fee

structure in favor of a structure that prohibited, beyond a

threshold, increasing usage without increasing payment. Also,

the ATH threshold imposed as a result of the adopted

convergence theory would appear to apply only to large NPR

stations, lending further support to the Judges’ use of and

reliance on evidence from the larger NPR stations.

Noncommercials thus fail to show the Judges’ determination in

this regard was arbitrary.

4. Adoption of a Noncommercial Usage Rate Above a

Listenership Threshold Equal to the Commercial Rate

Noncommercials contend that setting the noncommercial

usage fee equal to the commercial usage rate was arbitrary,

capricious, and without record support. But the rate structures

are not equal. While the prevailing rates for noncommercials

that exceed a listenership threshold are equal to those of

commercial webcasters, noncommercials’ contention attempts

37

to obfuscate the fact that they are given a 159,140 ATH discount

over the prevailing commercial rate. Because noncommercials

have made no objection that such an allowance is trivial, this

contention is unpersuasive. To the extent that noncommercials’

position is that the commercial rate itself is arbitrary, it lacks

merit. See supra Part II.B.2.

5. Record-Keeping Requirements

Although the parties introduced evidence as to record-

keeping requirements, the Judges deferred a determination to a

later rulemaking and left in place an interim rule. Order, 72

Fed. Reg. at 24,109-10. Although noncommercials challenge

this action as arbitrary and capricious, as they recognize, the

Judges have control of their docket. See 17 U.S.C. § 803(c)(3).

In declining to resolve the question in the current proceeding,

the Judges observed that the evidence presented “was vague and

unsubstantiated and went little beyond the assertion that there

are some costs associated with recordkeeping.” Order, 72 Fed.

Reg. at 24,109. The Judges noted there “would be ample

opportunity to again address the Services’ costs in a future

rulemaking. The ability to influence and adjust the costs of

recordkeeping is far more direct in that context than this rate

determination proceeding and is more properly handled there.”

Id. at 24,110. The Judges have statutory discretion to make this

determination and administrative discretion to control their own

docket. See Telecomms. Resellers Ass’n v. FCC, 141 F.3d 1193,

1196 (D.C. Cir. 1998) (citing GTE Serv. Corp. v. FCC, 782 F.2d

263, 273-74 (D.C. Cir. 1986)). Their exercise of this discretion

here was not arbitrary.

D. Royalty Logic’s Challenges

Finally, we address Royalty Logic’s challenges to the

substance of the Judges’ determination.

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1. Designation of a Single Collective

As discussed above, the Judges designated a single

organization—known as the “collective”—to receive royalties

from licensees and distribute payments to copyright owners,

performers, and any agents designated on their behalf to receive

such payments. The Judges selected SoundExchange, rather

than Royalty Logic, to serve this function. Royalty Logic argues

that the Judges’ designation of only one collective was contrary

to the statute.3 We disagree.

Royalty Logic relies principally on 17 U.S.C. § 114(e)(1),

which allows copyright owners and licensees, “in negotiating

statutory licenses,” to “designate common agents on a

nonexclusive basis to negotiate, agree to, pay, or receive

payments.” Royalty Logic contends that the statute confers on

copyright owners or their designated agents the right to receive

royalty payments directly from licensees. It also argues that

Congress’s use of the word “nonexclusive” to describe the

designated agents means that the Judges could not give a single

entity the exclusive ability to receive payments. But this statute

does not speak to the Judges’ authority. By its terms, it simply

exempts copyright owners and licensees from “any provision of

the antitrust laws” to allow them to designate common agents to

negotiate rates and terms under the statutory license that will

apply in lieu of the Judges’ decision. Id. Moreover, the statute

merely authorizes copyright owners to designate agents to

“receive” royalty payments; it does not mandate that those

3

In its reply brief, Royalty Logic argues that even if a single

collective is permissible, the Judges erred by selecting

SoundExchange to fill that role. Again, Royalty Logic has forfeited

this argument by failing to raise it in its opening brief. See Sw.

Airlines, 554 F.3d at 1072.

39

payments come directly from licensees rather than an

intermediary collective. Id.

Royalty Logic also argues that, by giving the Judges the

authority to set “terms of royalty payments,” id. § 114(f)(2)(A),

Congress meant them to determine only how and when

payments are made. But other provisions of the statutory

licensing scheme make clear that Congress contemplated a role

for the Judges in deciding who would actually receive royalty

payments. For example, in providing for the continuity of

royalty rates and terms while a motion for reconsideration is

pending before the Judges, the statute requires “the entity

designated by the Copyright Royalty Judges to which such

royalties are paid” to return any excess payments once the

motion is resolved. Id. § 803(c)(2)(E)(iii). Likewise, payments

to “the entity designated by the Copyright Royalty Judges” must

continue during the pendency of an appeal to this court, and that

entity must return excess payments following the conclusion of

the appeal. Id. § 803(d)(2)(C)(ii). Both provisions presuppose

that, in setting the rates and terms of the statutory license, the

Judges will “designate” a single “entity” to receive royalty

payments. Following the “fundamental canon of statutory

construction that the words of a statute must be read in their

context and with a view to their place in the overall statutory

scheme,” Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809

(1989), we cannot accept Royalty Logic’s unduly narrow

reading of the word “terms” in Section 114(f)(2)(A).

Thus, in selecting SoundExchange as the sole collective, the

Judges fulfilled Congress’s expectation that they would

designate a single entity to receive royalty payments from

licensees. And contrary to Royalty Logic’s argument, the

Judges have not deprived copyright owners of the right to select

their own receiving agents. Any copyright owner is free to

negotiate, on its own or through an agent, for a method of

40

payment that bypasses SoundExchange. But in the absence of

a privately negotiated agreement, the Judges may designate a

single entity to receive, process, and distribute royalty payments

under the statutory license.

2. Account Statements

Royalty Logic also challenges the Judges’ decision—made

in a separate proceeding—to limit it to inspecting licensees’

account statements at SoundExchange’s offices rather than

receiving the statements directly. See Notice and Recordkeeping

for Use of Sound Recordings Under Statutory License, 71 Fed.

Reg. 59,010, 59,019 (Oct. 6, 2006). That decision is not within

the scope of this appeal, and we have no authority to review it.

Royalty Logic could have asked the Judges to reconsider the

record-keeping rules during the proceeding on review. See 17

U.S.C. § 803(c)(3) (Judges, as part of any determination, “may

specify notice and recordkeeping requirements . . . that apply in

lieu of those that would otherwise apply”). But Royalty Logic

did not raise the record-keeping issue in this proceeding and

may not challenge it as part of this appeal.

III. Conclusion

For the reasons given above we vacate the $500 minimum

fee as arbitrary, capricious, and not supported by record

evidence, and remand that portion of the determination to the

Copyright Royalty Judges for further proceedings not

inconsistent with this opinion. All other portions of the

determination are affirmed.

So ordered.