Opinion

Music Choice v. CRB

970 F.3d 418

Court: Court of Appeals for the D.C. Circuit
Filed: Aug 18, 2020
Status: Published
Cited by: 1 cases
Authority: More cited than 45.5%

The opinion

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 20, 2020 Decided August 18, 2020

No. 19-1011

MUSIC CHOICE,

APPELLANT

APPELLEES

SOUNDEXCHANGE, INC.,

INTERVENOR

On Appeal from a Final Determination of the Copyright

Royalty Board and a Memorandum Opinion of the Register of

Copyrights

Paul M. Fakler argued the cause for appellant. With

him on the briefs was Kelsi Brown Corkran. Margaret

Wheeler-Frothingham entered an appearance.

Jennifer L. Utrecht, Attorney, U.S. Department of

Justice, argued the cause for appellees. With her on the brief

was Daniel Tenny, Attorney. Mark R. Freeman, Attorney,

entered an appearance.

Matthew S. Hellman argued the cause for intervenor.

With him on the brief were David A. Handzo, Emily L.

Chapuis, and Devi M. Rao.

Before: SRINIVASAN, Chief Judge, RAO, Circuit Judge,

and SILBERMAN, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge RAO.

RAO, Circuit Judge: The case raises the question of what

transmissions of digital music over the internet. Pursuant to the

Digital Millennium Copyright Act (“DMCA”), a lower

grandfathered royalty rate is paid by some music services that

were early providers of digital music transmissions. Music

Choice challenges a Final Determination of the Copyright

Royalty Board (“the Board”), which excludes Music Choice’s

internet transmissions from the grandfathered rate and also

adopts more stringent audit requirements.

We hold that the Board’s categorical exclusion of Music

Choice’s internet transmissions from the grandfathered rate

conflicts with the unambiguous language of the DMCA. Under

the DMCA, Music Choice’s internet transmissions are eligible

for the grandfathered rate to the extent they were part of its

service offering on July 31, 1998. The Board, however, retains

discretion to determine whether parts of Music Choice’s

current service offering, which includes mobile applications

and internet-exclusive channels, should be excluded from the

grandfathered rate. The Board also acted arbitrarily and

capriciously in altering the audit standards applicable to Music

Choice. Accordingly, we vacate the relevant parts of the Final

Determination and remand for the Board to determine if Music

Choice’s internet transmissions qualify for the grandfathered

rate and to reconsider the amended audit procedure.

Started in the late 1980s, Music Choice is a digital

broadcast music service that consists of several cable television

channels. These channels are often included with digital cable

television packages and now are also available to cable

subscribers over the internet. Prior to 1995, subscription music

services such as Music Choice did not have to “obtain a license

to publicly perform sound recordings because copyright

owners did not have an exclusive right to publicly perform their

work.” See SoundExchange, Inc. v. Muzak LLC, 854 F.3d 713,

714 (D.C. Cir. 2017). Amidst the growth of digital music

transmissions, Congress enacted the Digital Performance Right

in Sound Recordings Act of 1995 to grant copyright protections

to the digital transmissions of music and other recordings

protected by copyright. Pub. L. No. 104-39, 109 Stat. 336. This

regime, set out in Section 114 of the Copyright Act, in which

existing subscription music services, including Music Choice,

would be entitled to continue transmitting copyrighted works

in exchange for a royalty payment. Muzak, 854 F.3d at 714–15

& n.2. The amount and terms of such royalty payments were

determined by the Copyright Arbitration Royalty Panel

(“CARP”) based on a reasonable rate standard. See id.

Congress modified this regime in the Digital Millennium

pay royalty rates at a market-based standard.1 Pub. L. No. 105-

304, § 415(a), 112 Stat. 2860, 2896 (1998) (codified at 17

U.S.C. § 114(f)(2)(B)). The market-based standard generally

results in higher royalty rates for copyright holders. The

Rather than letting the market decide what a market-based rate

would be, the DMCA charged CARP with predicting what the

market-based rate would be.

DMCA, however, includes a grandfathering provision that

makes preexisting subscription-based services, such as Music

Choice, eligible to pay only “reasonable rates,” which

generally allow the service providers to pay lower royalty rates.

Muzak, 854 F.3d at 714–15. To be eligible for the

grandfathered rate, a service must qualify as a “preexisting

subscription service,” (hereinafter “preexisting service”)

defined as “a service that performs sound recordings by means

of noninteractive audio-only subscription digital audio

transmissions, which was in existence and was making such

transmissions to the public for a fee on or before July 31,

1998.” 17 U.S.C. § 114(j)(11). If a preexisting service’s

“subscription transmission” is made “in the same transmission

medium used by such service on July 31, 1998,” it is entitled

to the grandfathered royalty rate. 17 U.S.C. § 114(d)(2)(B)

(hereinafter the “unconditional grandfathered rate”). A

transmission made by a preexisting service in a different

transmission medium, or by a “new subscription service,” may

also be eligible for the grandfathered rate if it meets several

additional conditions and requirements. 17 U.S.C.

§ 114(d)(2)(C) (hereinafter the “conditional grandfathered

rate”).

To determine the royalty rate to be paid by a preexisting

service, the Copyright Royalty Board2 holds adversarial rule-

making proceedings every five years. Muzak, 854 F.3d at 715.

The copyright holders are represented in these proceedings by

SoundExchange, a nonprofit entity designated by regulation to

“obtain the royalties owed under the statutory licenses and to

The Copyright Royalty Board was created by the Copyright

Royalty and Distribution Reform Act of 2004 to conduct royalty

proceedings, thus replacing the Copyright Arbitration Royalty Panel.

Pub. L. No. 108-419, § 5, 118 Stat. 2341, 2363.

distribute them to performing artists and copyright holders.”3

Id.

In 2016, the Board commenced the proceeding under

review to establish preexisting service royalty rates for the

years 2018 to 2022. As relevant here, the proceeding concerned

the royalty rates Music Choice, the only remaining preexisting

service participating, must pay to copyright holders by way of

SoundExchange. Over the course of the proceeding, the Board

referred to the Register of Copyrights the legal question of

whether Music Choice’s internet transmissions qualify as a

preexisting service. 83 Fed. Reg. 65,210, 65,225–226 (Dec. 19,

2018) (citing 17 U.S.C. § 802(f)(1)(B)). The Register

determined that, as a matter of law, internet transmissions are

categorically excluded from the unconditional grandfathered

rate because the DMCA’s “legislative history makes clear that

Congress … intended to limit” the grandfathered rate to Music

Choice’s “offerings in the specific transmission media

affirmatively identified in the DMCA Conference Report:

‘cable’ or ‘satellite.’” 82 Fed. Reg. 59,652, 59,657 (Dec. 15,

2017) (citing H.R. Rep. No. 105-796, at 89 (1998)). The

guide the Board’s determination of whether Music Choice’s

internet transmissions qualify for the conditional grandfathered

rate. Id. at 59,658–659.

In the Final Determination setting rates for the 2018 to

2022 period, the Board applied the Register’s legal opinion and

The Digital Millennium Copyright Act instructs the Board to

designate a “nonprofit collective” to receive royalty payments from

music services and distribute them to copyright holders and artists.

17 U.S.C. § 114(g)(2), (3). The Board has designated

SoundExchange as the exclusive entity to collect and distribute

excluded Music Choice’s internet transmissions from the

unconditional grandfathered rate. 83 Fed. Reg. at 65,227. The

Board went on to apply the Register’s six-factor test to

determine that Music Choice’s internet transmissions are also

excluded from the conditional grandfathered rate “to the extent

they are available outside a subscriber’s residence,” such as

through mobile applications. Id. Because Music Choice’s

internet transmissions did not qualify for either grandfathered

rate, they would be subject to the higher market-based royalty

rate. Id.

In the Final Determination, the Board also amended the

audit procedures applicable to preexisting services such as

Music Choice. The longstanding regulatory standard allowed

preexisting services to satisfy in full any audit obligations by

employing independent auditors in accordance with “generally

accepted auditing standards.” Id. at 65,262, 65,268. The Board

amended this standard so that the independent audit would

provide a safe harbor only for claims “within the scope of the

audit,” which meant that SoundExchange would be “permitted

to round out the findings [of Music Choice’s independent

audit] with its own audit, limited to the points omitted from the

scope of the defensive audit.” Id. at 65,262. This auditing

change was long sought after by SoundExchange and

consistently opposed by Music Choice.

Music Choice appeals the Final Determination. This court

has exclusive jurisdiction over Copyright Royalty Board

determinations and any legal determinations the Register made

as part of the proceeding. See Muzak, 854 F.3d at 717–18; 17

U.S.C. § 803(d)(1). Such determinations may be appealed by

“any aggrieved participant in the proceeding … who fully

participated in the proceeding and who would be bound by the

determination.” 17 U.S.C. § 803(d)(1). Music Choice meets

these criteria. SoundExchange intervened to defend the

Board’s actions.

II.

Music Choice challenges three separate aspects of the

Board’s Final Determination. First, it argues that the Board

should not have referred to the Register the legal question

regarding whether internet transmissions could be included in

the grandfathered rate provision. Second, it challenges the

Board’s conclusion that Music Choice’s internet transmissions,

to the extent they are available outside a subscriber’s home, are

categorically excluded from the grandfathered rate. Third, it

challenges the Board’s alteration of the audit provision. We

review Copyright Royalty Board rate determinations under the

Administrative Procedure Act and must “uphold a ratemaking

determination unless it is arbitrary, capricious, contrary to law,

or not supported by substantial evidence.” Intercollegiate

Broad. Sys., Inc. v. CRB, 796 F.3d 111, 127 (D.C. Cir. 2015)

(quotation marks omitted); see also 5 U.S.C. § 706(2)(A).

Music Choice first contends that the Board erred by

referring the internet transmission issue to the Register for a

binding legal opinion. The Copyright Act requires the Board to

refer a “novel material question of substantive law” that “is

presented” in a royalty proceeding to the Register for a binding

opinion. 17 U.S.C. § 802(f)(1)(B)(i).4 Music Choice maintains

17 U.S.C. § 802(f)(1)(B)(i) states:

In any case in which a novel material question of

substantive law concerning an interpretation of

those provisions of this title that are the subject of

the proceeding is presented, the Copyright Royalty

Judges shall request a decision of the Register of

that a party must “present” a legal issue before the Board can

refer it to the Register and no party raised the legal issue in this

case. The government responds that the Board must, or at least

may, refer to the Register novel and material legal issues that

arise in a proceeding. Alternatively, the government argues that

the referral was proper even under Music Choice’s

interpretation because SoundExchange raised the internet

transmission issue during the proceeding.

Assuming arguendo that Music Choice’s interpretation of

the statute is correct, the Board’s referral to the Register was

proper because SoundExchange “presented” the internet

transmission issue in the royalty proceeding. Before the rate

proceeding concluded, SoundExchange argued that Music

Choice’s internet transmissions should be subjected to the

higher royalty rates applicable to new services rather than the

lower grandfathered rates accorded to Music Choice’s “core

PSS television-based service.” Music Choice specifically

responded to this argument in its reply to SoundExchange’s

filing and did not move to reopen the evidentiary record. Thus,

we have no occasion to resolve whether the Board may refer

novel legal questions on its own motion, because the issue in

this case was “presented” by a party, rather than the Board. Cf.

Copyrights, in writing, to resolve such novel

question. Reasonable provision shall be made for

comment on such request by the participants in the

proceeding, in such a way as to minimize

duplication and delay. … If such a decision is timely

delivered to the Copyright Royalty Judges, the

determinations embodied in the decision of the

questions of substantive law.

Settling Devotional Claimants v. CRB, 797 F.3d 1106, 1121

(D.C. Cir. 2015).

To counter this straightforward conclusion, Music Choice

takes out of context SoundExchange’s statement that it “does

not believe it is necessary to decide in this proceeding whether

or not Music Choice’s webcasts qualify as part of its

[preexisting service].” J.A. 127. Read within the context of

SoundExchange’s proposed conclusions of law, it is clear that

SoundExchange was advocating for Music Choice’s internet

transmissions to be treated differently from its television-based

service. By arguing that Music Choice should pay a higher rate

for its internet transmissions than its television transmissions,

SoundExchange fairly presented the issue the Board ultimately

referred to the Register.5 Moreover, contemporaneous

statements from the Board, the Register, SoundExchange, and

even Music Choice demonstrate that all parties understood the

Board referred the issue in response to SoundExchange’s

argument regarding different rates for internet transmissions.

See J.A. 143 (Board referral noting that “SoundExchange seeks

SoundExchange further argued: “Here, an Internet-based PSS

distributed to mobile apps over the internet is sufficiently different

from the core PSS television-based service that the Judges must

consider whether the value of the sound recording usage involved is

sufficiently reflected in a rate set with a television-based service in

mind.” J.A. 130–31. SoundExchange also noted that an expert

witness “found that the most reasonable way to value webcasting”

by Music Choice is to apply “the same statutory rates that would

apply to ancillary Internet streaming.” Id. at 131; see also id. at 130

(“Music Choice Should Pay Webcasting Rates For Its Webcasting.”).

Thus, SoundExchange proposed that the applicable webcasting rates

should apply to “any ancillary webcasting” that was part of a

preexisting service, rather than the lower rates that apply to

television-based transmissions of a preexisting service. Id. at 130–

31.

two separate royalty payments”); 82 Fed. Reg. at 59,654

(Register decision noting that the “referred questions arose in

this proceeding because SoundExchange, Inc., for the first

time, is seeking two separate royalty payments”); J.A. 117

(Music Choice’s reply to SoundExchange’s proposed findings

and conclusions noting that “[i]t is crucial to determine whether

Music Choice’s internet transmissions are part of its

[preexisting service]”).

Because SoundExchange raised the question of whether

internet transmissions should be included in the grandfathered

rate, that question was clearly “presented” in the royalty rate

proceeding. Accordingly, we hold the Board appropriately

referred this issue to the Register for a binding legal opinion.

We next examine Music Choice’s challenge to the

transmissions are categorically excluded from the

unconditional grandfathered rate. 82 Fed. Reg. at 59,657–660.

Music Choice questions this categorical exclusion and

maintains that its internet transmissions qualify for the

grandfathered rate under the plain meaning of the statute.

Because the text and structure of the DMCA directly contradict

the Register’s interpretation, we vacate the Register’s legal

opinion and the part of the Board’s Final Determination that

relies upon it.

Under the DMCA, a “subscription digital audio

transmission” “shall be subject” to the unconditional

grandfathered rate if it is (1) “made by a preexisting

subscription service,” and (2) offered “in the same transmission

medium used by such service on July 31, 1998.” 17 U.S.C.

§ 114(d)(2)(B). If a transmission meets both statutory elements,

the Board must determine the royalty in accordance with the

unconditional grandfathered rate. Contrary to the Register’s

conclusion, neither element categorically excludes internet

transmissions.

First, the DMCA’s definition of a preexisting subscription

service is broad enough to include internet transmissions that

were in fact occurring as of July 31, 1998, because it includes

any “service that performs sound recordings by means of

noninteractive audio-only subscription digital audio

transmissions, which was in existence and was making such

transmissions to the public for a fee on or before July 31,

1998.” 17 U.S.C. § 114(j)(11). We have held that the term

“service” in “preexisting subscription service” refers to both

the business entity making the transmissions (i.e., Music

Choice) and to the “program offering” the entity provides (i.e.,

the Music Choice digital audio service). Muzak, 854 F.3d at

715. Therefore, for a digital audio transmission to qualify as a

“preexisting subscription service,” first, it must be made by a

business entity that was in existence on or before July 31, 1998,

and second, the relevant “program offering” must have been in

existence on July 31, 1998.

Here, all agree that Music Choice fulfills the first prong.

The question is whether the word “service” in the DMCA

covers Music Choice’s program offerings transmitted via the

internet. The Register, relying on the legislative history of the

DMCA, concluded that it does not. But the plain language of

the DMCA grandfathers a covered entity’s program offerings

that were “in existence … on or before July 31, 1998.” 17

U.S.C. § 114(j)(11). It is undisputed that Music Choice had

been providing some digital audio transmissions over the

internet since 1996 and was still doing so on July 31, 1998.

Those internet transmissions that are part of the same “service”

fall within the scope of the DMCA’s preexisting service

definition. Therefore, the text of the DMCA precludes the

service” categorically excludes Music Choice’s internet

transmissions. Cf. Muzak, 854 F.3d at 716 (declining to impose

extra-textual conditions on the plain meaning of the DMCA’s

preexisting subscription service definition).6 As discussed

below, however, the Board retains discretion in determining the

extent to which Music Choice’s current internet offerings can

fairly be characterized as included in the service offering Music

Choice provided on July 31, 1998.

Second, the DMCA applies the unconditional

grandfathered rate to transmissions made “in the same

transmission medium.” 17 U.S.C. § 114(d)(2)(B). This

provision does not distinguish between different transmission

media, and there is no suggestion in the text that a

“transmission medium” excludes internet transmissions. The

“transmission medium” clause, like the preexisting service

definition, focuses on the actual preexisting entity and program

offering, not the manner of transmission. Thus, internet

transmissions “shall be subject” to the grandfathered rate if

they were “made by” a preexisting service on July 31, 1998. Id.

The structure of the DMCA’s grandfathered rate

provisions also bolsters this conclusion. In contrast to the

unconditional grandfathered rate provision, the conditional

grandfathered rate provision explicitly distinguishes between

In Muzak, we noted the term “preexisting subscription service” was

“dreadfully ambiguous” regarding the particular question under

review—“[d]oes ‘service’ refer only to the business entity, or does it

also include the original program offerings?” 854 F.3d at 714. As

discussed above, the statute is unambiguous regarding the precise

question under review in this case—do the terms “preexisting

subscription service” and “same transmission medium” preclude

internet transmissions even if they were offered by Music Choice on

July 31, 1998?

internet and other transmission media. Some of the conditions

to qualify for this rate apply to, or specifically exempt,

“satellite digital audio service,” 17 U.S.C. § 114(d)(2)(C)(v),

and “broadcast transmissions,” 17 U.S.C. § 114(d)(2)(C)(i),

(iii)(IV)(bb), (vii), others apply equally to cable or internet

transmissions, 17 U.S.C. § 114(d)(2)(C)(iv) (applying to a

“transmitting entity” that “offers transmissions of visual

images contemporaneously with transmissions of sound

recordings” as in a cable or internet transmission).7 By

specifying categories of transmission media, and including

internet alongside cable and satellite, the conditional

grandfathered rate provision demonstrates the general terms

“subscription service” and “transmission medium,” standing

alone, do not exclude internet transmissions.

Thus, within the DMCA, Congress knew how to

distinguish between types of transmission media and did so

explicitly in the conditional grandfathered rate provision. See

Allina Health Servs. v. Price, 863 F.3d 937, 944 (D.C. Cir.

2017) (“A material variation in terms suggests a variation in

meaning.”) (quotation marks and brackets omitted). By

contrast, the unconditional grandfathered rate provision does

The Register refers to this subsection to argue that the DMCA treats

issues regarding internet transmissions exclusively under the

conditional grandfathered rate provision. The Register’s conclusion,

however, turns not on the text of the statute, but instead on its

legislative history: “The rationale behind ... the new requirements in

[the conditional grandfathered rate provision], was to ‘address[]

unique programming and other issues raised by Internet

transmissions.’” 82 Fed. Reg. at 59,658 (quoting Staff of H. Comm.

on the Judiciary, 105th Cong., Section-By-Section Analysis of H.R.

2281, at 50). The legislative history, however, runs contrary to the

plain meaning of the conditional grandfathered rate provision, which

does not distinguish between cable, satellite, and internet

transmissions that were actually offered on July 31, 1998.

not distinguish between transmission media and therefore

cannot be read to exclude internet transmissions. Reading the

statute as a whole, the unconditional grandfathered rate

provision does not categorically exclude Music Choice’s

internet service offering to the extent it was available on July

31, 1998.

The Register reached a contrary conclusion only by

ignoring the text of the DMCA and focusing on its legislative

history. The Register emphasized that the legislative history

referred only to cable and satellite transmissions and thus

Congress did not intend to include internet transmissions in the

unconditional grandfathered rate. According to the Register,

“as a matter of law, it is irrelevant whether or not Music Choice

or another [preexisting service] entity, to some limited degree,

was making transmissions via a different medium than those

specified in the legislative history on July 31, 1998, such as the

internet.” 82 Fed. Reg. at 59,658 (emphasis added). Without

regard to the text of the statute, which makes no distinction

between transmission media, the Register determined that only

those transmission media identified in the DMCA Conference

Report would be entitled to the grandfathered rate.8 Id. at

In Muzak, we looked to legislative history to resolve an ambiguity

in the meaning of “service” as applied to the question presented in

that case, but ultimately noted that the DMCA Conference Report

was a particularly unreliable guide in interpreting Section 114’s

grandfathered rate provisions: “[F]or each point in the conference

report supporting SoundExchange, there can be found a

countervailing one in support of Muzak.” 854 F.3d at 717 n.11. So

too here. Compare H.R. Rept. No. 105-796, at 89 (identifying

“cable” and “satellite” as the protected transmission media), with id.

(“[I]f a cable subscription music service making transmissions on

July 31, 1998, were to offer the same music service through the

Internet, then such Internet service would be considered part of a

preexisting subscription service.”).

59,657 (requiring a subscription transmission to be made in

“the specific transmission media identified” in the DMCA

Conference Report to be eligible for the unconditional

grandfathered rate) (citing H.R. Rep. No. 105-796, at 89

(1998)). The statute, however, speaks to this precise issue and

precludes the Register’s interpretation. As we have explained,

the “preexisting subscription service” definition and the

unconditional grandfathered rate provision distinguish between

transmission media that were employed before July 31, 1998,

and those offered after that date. The text does not single out

internet transmissions for categorical exclusion from the

grandfathered rate. “By introducing a limitation not found in

the statute,” the Register “alter[ed], rather than …

interpret[ed]” the DMCA. Little Sisters of the Poor Saints Peter

& Paul Home v. Pennsylvania, 140 S. Ct. 2367, 2381 (2020).

Therefore, we vacate the Register’s legal opinion and the

part of the Board’s Final Determination applying this opinion

and remand to the Board to determine under the correct legal

standard whether Music Choice’s current service offering,

including its internet transmissions, qualifies for the

unconditional or conditional grandfathered rates. Because the

Final Determination categorically excluded internet

transmissions from the unconditional grandfathered rate, the

Board had no occasion to assess whether Music Choice’s

current internet service offerings, including its mobile

application and internet-exclusive channels, are a part of the

service offering Music Choice provided on July 31, 1998. The

Board cannot exclude from the unconditional grandfathered

rate internet transmissions that were actually part of Music

Choice’s service offering on July 31, 1998.9 On remand, the

For any internet transmissions that do not qualify for the

unconditional grandfathered rate, the Board retains discretion to

determine if they qualify for the conditional grandfathered rate or if

they should be excluded from both grandfathered rates. As noted

Board must determine the precise scope of Music Choice’s

service offering as it actually existed on July 31, 1998. While

on the record below it is undisputed that Music Choice was

making some internet transmissions at that date, there is a

question about whether those transmissions were available

outside the home. See 82 Fed. Reg. 59,660. Similarly, it has

been suggested that Music Choice’s internet-exclusive

above, the Board also held, based on the Register’s legal opinion,

that Music Choice’s internet transmissions do not qualify for the

conditional grandfathered rate “to the extent they are available

outside a subscriber’s residence.” 83 Fed. Reg. at 65,227. Because

we conclude that internet transmissions are not categorically

excluded from the unconditional grandfathered rate, we need not

consider Music Choice’s challenge to the Board’s application of the

grandfathered rate. Id. at 65,226–227.

On remand, if the Board concludes that a part of Music Choice’s

internet offering does not qualify for the unconditional grandfathered

rate, it must reconsider whether such transmissions qualify for the

conditional grandfathered rate. This analysis must focus on whether

the transmissions fit within the statute’s definition of “preexisting

subscription service,” 17 U.S.C. § 114(j)(11), and the criteria

enumerated in 17 U.S.C. § 114(d)(2)(C). Although we decline to

review the six-factor test the Register set out to assess whether a

transmission qualifies for the conditional grandfathered rate, we

emphasize that factfinding, to the extent it is needed, must be

conducted by the Board, and not the Register. See 17 U.S.C.

§ 802(f)(1)(A) (the Board “may consult with the Register of

Copyrights on any matter other than a question of fact”); 17 U.S.C.

§ 802(f)(1)(B)(i) (confining the Register to legal determinations).

We further emphasize that we do not seek to limit the Register’s

discretion in defining the legal parameters of a “preexisting

subscription service,” beyond what we have held above: the Register

may not exclude internet transmissions from the definition if such

internet transmissions were actually part of the preexisting service

offering on July 31, 1998.

channels and smartphone applications are not part of the

service offering Music Choice provided on the relevant date.

See CRB Br. 37–38. The Board must sort through these issues

on remand to determine which parts of Music Choice’s current

service offering are eligible for the grandfathered rate because

they were a part of Music Choice’s service on July 31, 1998.

Finally, we consider Music Choice’s challenge to the

Board’s amendment of royalty audit procedures. Pursuant to its

general authority to set royalty terms, 17 U.S.C. § 114(f)(1)(A),

the Board and its predecessor agency have promulgated royalty

audit procedures. Prior to the amendments at issue here, a

preexisting service like Music Choice could secure an

independent audit that would be treated as comprehensive and

dispositive as to all parties during the Board’s rate

determination proceedings. 37 C.F.R. § 382.7(e) (2013)

(establishing that an audit “performed in the ordinary course of

business according to generally accepted auditing standards by

an independent and Qualified Auditor, shall serve as an

acceptable verification procedure for all interested parties”).

The Final Determination amends this regulation to provide that

an independent audit will be determinative only as to the issues

within the scope of the audit, thus potentially allowing other

parties to conduct additional audits. 83 Fed. Reg. at 65,262,

65,268 (amending the provision so that independent audits

“shall serve as an acceptable verification procedure for all

parties with respect to the information that is within the scope

of the audit”) (emphasis added). The government and

SoundExchange argue that the Board’s amendment is not a

substantive change. We disagree.

The Board’s amendment makes a consequential revision

to the audit procedure. Prior to the revision, Music Choice’s

audit was treated as sufficient if conducted by an independent

auditor pursuant to generally accepted auditing standards.

Under the revision, SoundExchange is given permission to

conduct audits of any matter outside the “scope of the audit.”

Id. at 65,262. This alteration imposes a new condition on Music

Choice, by allowing additional audits beyond the independent

audit that was previously deemed an “acceptable verification

procedure.” 37 C.F.R. § 382.7(e) (2013). Although the

government and SoundExchange argue this is a clarification

rather than a change, the agency has long understood the audit

as a kind of safe harbor for preexisting services like Music

Choice. For instance, in 1997, when CARP and the Librarian

of Congress, the Board and Register’s predecessors, created the

defensive audit procedures, CARP stated that allowing the

preexisting services to conduct their own audits rather than

being subject to outside copyright owner audits would balance

the “fair opportunity to audit for copyright owners” against

“the burden and expense of auditing upon the Services.”

1997) (adopted 63 Fed. Reg. 25,394 (May 8, 1998)); see also

78 Fed. Reg. 23,054, 23,074 (Apr. 17, 2013). The Final

Determination alters this calculus by explicitly giving

SoundExchange the green light to “round out the findings with

its own audit, limited to the points omitted from the scope of

the defensive audit.” 83 Fed. Reg. at 65,262. Further supporting

the substantive nature of this change is Music Choice’s record

testimony—unacknowledged by the Board—that this change

would upset its reliance on the previous audit procedure. See

J.A. 80 (“Music Choice has availed itself of [the external

independent audit], and has expended significant resources in

doing so.”).

Having found that the Final Determination’s amendment

of the audit provision is a substantive change, we must

determine whether the Board “display[ed] awareness that it is

changing position” and demonstrated “good reasons for the

new policy.” FCC v. Fox Television Stations Inc., 556 U.S.

502, 515 (2009). The Board failed on both counts. The Final

Determination does not acknowledge the Board’s rejection of

a substantially identical proposal in its 2013 proceeding. There,

the parties presented similar arguments for the same change

and the Board rejected SoundExchange’s position because it

did not “adequately address[]” flaws pointed out by Music

Choice. 78 Fed. Reg. at 23,074. Specifically, the Board noted

that SoundExchange failed to rebut Music Choice’s argument

that the change would “permit SoundExchange to use auditors

that are employees or officers of a sound recording owner or

performing artists, the objectivity of which might be suspect.”

Id. The Board does not acknowledge this prior position, does

not point to any evidence that these concerns have been

ameliorated, and does not present any new reasons for adopting

the amended audit procedure that it previously rejected.

Moreover, the Board failed to address CARP’s initial reasoning

for instituting the defensive audit procedure, which sought to

balance the preexisting services’ burden and expense against

Board struck a different balance in favor of SoundExchange

without acknowledging or addressing the reasons for the policy

shift.

Moreover, the Board did not give reasons for amending the

audit provision, stating only that it can “see no reason not to”

make the change. 83 Fed. Reg. at 65,262. Yet an agency’s ipse

dixit cannot substitute for reasoned decisionmaking. This court

has rejected precisely this type of justification from the Board

in the past: “[R]ational decisionmaking … requires more than

an absence of contrary evidence; it requires substantial

evidence to support a decision.” Intercollegiate Broad. Sys. v.

CRB, 574 F.3d 748, 767 (D.C. Cir. 2009). The Board also failed

to respond to Music Choice’s reliance interests arising from the

previous audit standard—a matter Music Choice specifically

raised on the record during the proceeding. Cf. Encino

Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016) (“A

summary discussion may suffice in other circumstances, but

here—in particular because of decades of industry reliance on

the Department’s prior policy—the explanation fell short of the

agency’s duty to explain why it deemed it necessary to overrule

its previous position.”).

Perhaps the agency can justify its change in position, but

its scant explanation and casual disregard for its former

position do not satisfy the APA’s requirements for rational

decisionmaking. See Ramaprakash v. FAA, 346 F.3d 1121,

1124 (D.C. Cir. 2003) (“Agencies … must provide a reasoned

analysis indicating that prior policies and standards are being

deliberately changed, not casually ignored.”) (quotation marks

omitted). Accordingly, we vacate the revised audit provision as

arbitrary and capricious.

***

We vacate Part IV(D) and Part XI(A)(3)(g) of the Final

Determination and the Register of Copyright’s underlying legal

opinion. We remand for the Board to determine, in accordance

with this opinion, whether Music Choice’s internet

transmissions qualify for the grandfathered rate and to

reconsider the audit definition and provide a reasoned

explanation if the Board determines the revised definition is

justified.

So ordered.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.