Petition — Amusement & Music Operators Ass'n v. Copyright Royalty Tribunal

Supreme Court brief1982

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AMUSEMENT AND MUSIC OPERATORS ASSOCIATION,

Petitioner,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT

JONATHAN T. HOWE

One IBM Plaza

Chicago, Illinois 60611

(312) 222-9350

Counsel for Petitioner

Of Counsel:

BARRY SULLIVAN

ROBERT A. SCHUCKMAN

C. JOHN KOCH

JENNER & BLOCK

One IBM Plaza

Chicago, Illinois 60611

ne STATES LAW PRINTING CO., CHICAGO, ILLINOIS 60618 (312) 525-6581

QUESTIONS PRESENTED

1. Whether the Copyright Royalty Tribunal may law-

fully establish a compulsory copyright license fee for

coin-operated phonorecord players that is essentially a

monopoly price, when Congress explicitly denied full

monopoly protection for this copyright use under the

2. Whether the Copyright Royalty Tribunal may ig-

nore the collective financial condition and costs of copy-

right owners in establishing a compulsory copyright license

fee, which, under the Copyright Revision Act of 1976, 17

U.S.C. § 101 et seq., must afford a fair return“ to copy-

right owners?

3. Whether the Copyright Royalty Tribunal may law-

fully provide for automatic interim adjustments to an

existing compulsory copyright license fee, when the Copy-

right Revision Act of 1976, 17 U.S.C. § 101 et seq., pro-

vides that the Tribunal may adjust fees only once every

ten years?

THE PARTIES

Petitioner Amusement and Music Operators Association

is a national, nonprofit trade association of operators,

manufacturers, and distributors of coin-operated phono-

record players, commonly known as jukeboxes, and other

coin-operated amusement devices. Petitioner is incorpo-

rated in the State of Delaware and has no parent or affili-

ated corporation. Respondent Copyright Royalty Tribunal

is a federal administrative agency established by the Copy-

right Revision Act of 1976, 17 U.S.C. § 101 et seg. The

other parties who participated in the proceedings below

are: The American Society of Authors, Composers, and

Publishers; Broadcast Music, Inc.; and SESAC, Ine.

iii

TABLE OF CONTENTS

PAGE

t i

r AAS Sa ee Ae i

r . ae oe ee ae v

r . 1

A TTT 2

Statutes and Rules Involved 2

Statement of the Case 8 2

r RY BM A 2

. 3

Statutory Background 4

1 —— 4

Seventh Cireuit Review Proceedings 7

Reasons For Granting The Writ 10

I. The Tribunal’s Establishment Of What Is Es-

sentially A Monopoly Price For A Copyright

Use With Respect To Which Congress Explicit-

ly Denied Monopoly Protection Is Inconsistent

Both With The Act And With General Legal

Principles . 8 10

II. The Tribunal Violated The Act And General

Legal Prineiples By Refusing To Consider The

Financial Condition Of Copyright Owners, And

The Costs Incurred By Them, In Ascertaining

What Would Constitute A Fair Return Under

The Act 16

PAGE

III. The Tribunal Violated The Act And General

Principles Of Administrative Law By Estab-

lishing Automatic Interim Rate Adjustments

For The Periods Between Ratemaking Pro-

„ ˙ SE OS OE PERE SEE BES 20

IV. This Case Raises Important Issues Which

Should Be Decided By This Court 23

Conclusion 25

Appendix :

A—Opinion of the United States Court of Appeals

for the Seventh Cireuit sieges la

B—Final Rule of the Copyright Royalty

r 33a

C—The Tribunal’s Explanation of the Rule 35a

D—Relevant Provisions of the Copyright Revision

Dre 64a

TABLE OF AUTHORITIES

Cases

PAGE

American Textile Manufacturers Institute, Inc. v.

Donovan, 452 U.S. 490 (19817: 13

Baker v. Selden, 101 U.S. 99 (1880: 14

Celanese Chemical Co. v. United States, 632 F.2d 568

(5th Cir. 1980), cert. dismissed, 453 U.S. 950 (1981) 20

Consolidate’ Rail Corporation v. United States, 619

rene... EE ee 20

Fame Publishing Co., Inc. v. Alabama Custom Tape,

Ine., 507 F.2d 667 (5th Cir.), cert. denied, 423 US.

/ A 15

Granam v. John Deere Co. of Kansas City, 383 U.S. 1

(/ hienbasatahnaie 14

Hotchkiss v. Greenwood, 52 U.S. (11 How.) 248 (1851) 14

Interstate Commerce Commission v. New York, New

Haven and Hartford Railroad, 372 U.S. 744 (1963) . 19

Norbay Music, Inc. v. King Records, Inc., 290 F.2d

oon a ~

Permian Basin Area Rate n e (1968) 18, 19

Recording Industry Association of America v. Copy-

right Royalty Tribunal, 662 F.2d 1 (19817 .

Tenneco Oil Co. v. Federal Energy Regulatory Com-

mission, 571 F.2d 834 (5th Cir.), cert. dismissed,

r / Fs, NP et 19

Todamerica Musica, Ltda. v. Radio Corporation of

America, 171 F.2d 369 (2d Cir. 1949 15

White-Smith Music Publishing Co. v. Apollo Co., 209

19111 14

Wisconsin v. Federal Power Commission, 373 U.S.

/ / T 19

Statutes and Rules

17 U.S.C. § 1(e) (1976) (repealed) .................2,12

PAGE

17 U.S. C. § 101 et. % „ i, 1, 4, 10

17 U.S.C. § 106 8, 10, 11

17 U.S.C. §§ 107-110 ll

17 U.S.C. § 111 11

17 U.S.C. § 115 ....... 1

r 4,11

17 U.S.C. § 1160989) — at ’ 2,4

een. 4

17 U.S. C. § 118 1¹

17 U.S.C. § 118(b)(2) 14

17 U.S.C. § 118(b)(3)...... it 14

„ RR eee 2

ehh 5, 16

17 USC. § 801(b( y) 2.3, 20, 22

17 U.S.C. § 801(b)(1)(A) .... 15

17 U.S.C. § 801(b)(1)(B) . 5, 16

17 U.S.C. § BO1(D)(1)(C) eeeecocennes 16

17 U.S.C. § 801(b)(1)(A)-(D) ....... 4,12

17 U.S. C. § 801 (b) (0 h- — 16

17 U.S.C. § 801(b)(2)(A) 25 22

17 U.S.C. § 8040) 2, 4, 20

17 U.S.C. § 804(a) (2) 1 4

17 U.S. C. 804) (2) (0 „ 3

28 U.S.C. § 1254(1) . Yad SEP ea nee 2

37 C. F. R. § 306 (1981) . 1,2

45 Fed. Reg. 62 (1980) 4

vii

PAGE

46 Fed. Reg. (1981) :

884 1

896 22

. —2 ——— 19

1 ˙ SS AS 19

1 19

Other Authorities

N. Boorstyn, Copyright Law (19817777 12

H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. (1976) ... 21

R. Posner, Economic Analysis of Law (2d ed. 1977)..15, 17

Seltzer, Exemptions and Fair Use in Copyright: The

** Exclusive Rights Tensions in the New Copyright

Act, 24 Bull. of Copyright Soc. 215 (1977) 12

In the

Supreme Court of the United States

Ocrosger Term, 1981

No.

AMUSEMENT AND MUSIC OPERATORS ASSOCIATION,

Petitioner,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT

Petitioner Amusement and Music Operators Association

petitions for a writ of certiorari to review the judgment

of the United States Court of Appeals for the Seventh

Cireuit in this case.

The opinion of the court of appeals (App. A, infra,

la-32a) is reported at 676 F.2d 1144. The final rule of

the Copyright Royalty Tribunal (App. B, iafra, 33a-34a)

is published at 37 C.F.R. § 306 (1981). The Tribunal’s

explanation of the rule (App. C, infra, 35a-63a) is pub-

lished at 46 Fed. Reg. 884 (1981).

The judgment of the court of appeals was entered on

April 16, 1982. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1254(1).

STATUTES AND RULES INVOLVED

The relevant provisions of the Copyright Revision Act

of 1976, 17 U.S.C. § 101, et seq., are set forth in Appendix

D hereto. The Tribunal’s final rule, which is published at

37 C.F.R. § 306 (1981), is set forth in Appendix B hereto.

STATEMENT OF THE CASE

On January 5, 1981, the Copyright Royalty Tribunal

published a final rule adjusting the compulsory copyright

license fee for coin-operated phonorecord players, which

are commonly called ‘‘jukeboxes’’ (App. B, infra, Sa-

34a). Prior to 1976, when Congress enacted the Copyright

Revision Act, 17 U.S.C. § 101 et seg., the copyright laws

generally had exempted jukebox owners from paying copy-

right royalties for public performances of copyrighted

works on jukeboxes. See i7 U.S. C. § 1(e) (1976) (re-

pealed). In 1976, however, Congress determined that juke-

box owners should pay a compulsory copyright license fee

of $8.00 per jukebox per year, beginning in 1978. 17 U.S.C.

§ 116(b)(1). Congress also directed the Copyright Royalty

Tribunal, which was established under the 1976 Act (17

U.S. C. § Soi (a)), to begin rulemaking proceedings in

January 1980 to determine whether any adjustment to

the $8.00 statutory fee was required under the criteria set

forth in 17 U.S.C. § 801(b)(1). The Tribunal is authorized

to undertake similar rulemaking proceedings in 1990 and

at ten-year intervals thereafter. 17 U.S.C. § 804(a)

At the completion of its 1980 rulemaking proceedings,

the Tribunal concluded that the statutory fee should be

increased to $50.00 per jukebox per year. The Tribunal

found that the new fee should be phased-in, starting at

$25.00 for 1982 and 1983, and then rising to $50.00 for the

years 1984 1986 (App. B, infra, 33a). The Tri-

bunal also that the $50.00 fee should be adjusted

in 1987 to reflect pre-1987 changes in the Consumer Price

Index (App. B, infra, 34a). The Tribunal thus increased

the fee set by Congress by at least 525%, and perhaps

more, depending upon future increases in the Consumer

Price Index.

On April 16, 1982, the United States Court of Appeals

for the Seventh Circuit denied review of the Tribunal’s

rule (App. A, imfra, 32a). Thus, the Tribunal’s con-

struction of these provisions cannot be challenged again

for at least ten years, when new adjustment proceedings

may be held. 17 U.S. C. § 804(a)(2)(C).

The Parties

Petitioner Amusement and Musie Operators Associa-

tion (‘‘AMOA”’) is a national trade association of over

2100 operators, manufacturers, and distributors of juke-

boxes and other coin-operated amusement devices. Respon-

dent Copyright Royalty Tribunal is a federal administra-

tive agency which Congress established in 1976 ‘‘to make

determinations concerning [among other things} the ad-

_ justment of reasonable copyright royalty rates. 17 U.S.C.

§ 801(b}(1). The American Society of Authors, Com-

posers, and Publishers (‘‘ASCAP’’), Broadcast Music,

Ine. (BMI“), and SESAC, Inc. are three music per-

forming rights societies’’—private associations of com-

posers and artists—who participated in the rulemaking

proceedings at issue here.

Statutory Background

The Copyright Revision Act of 1976, 17 U.S.C. § 101

et geg., permits authors and composers to copyright most

songs and melodies (‘‘nondramatic musical works’’), but

does not invariably grant such persons an ebsolute right

either to preclude use of their property or to exact monop-

oly compensation for such use. Under the Act’s ‘‘com-

pulsory licensing scheme, such copyright owners are re-

quired to license their works to jukebox operators at a

price set by statute. 17 U.S.C. § 116. In particular, the

Act requires that each jukebox operator file an ap-

plication for a compulsory license with the Register of

Copyrights and deposit . a royalty fee for the cur-

rent calendar year of $8.00 for {each} phonorecord player.

17 U.S.C. § 116(b)(1). After these fees are collected by

the Copyright Office, they are to be distributed in due

course to copyright owners, primarily through performing

rights societies. 17 U.S.C. § 116(e).

The Act also provides for the periodic review and ad-

justment of the compulsory license royalty fee by the

Tribunal, in accordance with several specified criteria. See

17 US. § 801(b)(1)(A)-(D). Thus, the Tribunal was

required in 1980 to commence rulemaking proceedings to

determine whether continued compliance with the statutory

criteria required any adjustment in the compulsory copy-

right license fee for jukeboxes. 17 U.S.C. § 804(a). The

Act further provides that subsequent adjustment pro-

ceedings may be held, upon petition by any person having

a significant interest in the outcome, in 1990 and in

each subsequent tenth calendar year thereafter. 17

U.S.C. § 804(a) (2).

Tribunal Proceedings

Pursuant to its statutory mandate, the Tribunal pub-

lished a notice of rulemaking in the Federal Register on

January 2, 1980 (45 Fed. Reg. 62), and thereafter con-

ducted a seven-day hearing concerning the jukebox voyalty

fee. See App. C, infra. 36a. AMOA, ASCAP, BMI, and

SESAC participated in the hearing. App. C, infra, 36a.

AMOA presented evidence to show that continued com-

pliance with the statutory criteria required no adjust-

ment of the $8.00 fee. App. C, infra, 42a-44a.' AMOA em-

phasized (see App. C, infra, 48a) that the Tribunal

was statutorily required to ascertain whether, among other

things, the license fee ‘‘afford[ed] the copyright owner a

fair return for his creative work and the copyright user

a fair income under existing economic conditions.’’ See

17 U.S.C. § 801(b)(1)(B). AMOA therefore produced

evidence to show the precarious financial condition of the

jukebox industry, and argued that the Tribunal must also

examine the costs and economic conditions of the copyright

owners. In particular, AMOA contended that the Tribunal

must pierce the veil of the performing rights societies, and

consider the collective costs and financial condition of the

ultimate copyright owners themselves. See App. C, infra,

48a.

The Tribunal rejected AMOA’s view and instead found

„the ASCAP/SESAC concept of basing the rate on mar-

ketplace analogies to be most attractive.“ App. C, infra,

52a (emphasis in original). ASCAP and SESAC had

argued that Section 801(b) of the Act, 17 U.S.C. § 801(b),

required the establishment of ‘‘a compulsory license fee

similar to the fee which would be reached on the open

* AMOA also contended, as the Seventh Circuit noted, that “the

burden of proof to justify any increase above the $8.00 fee set by

Congress rested on the copyright owners” (App. A, infra, Sa).

The court of appeals, however, approved the Tribunal’s holding “that

none of the parties had the burden of proof in the initial mandatory

hearing” (App. A, infra, 6a; emphasis in original).

—

marketplace if performing rights societies and jukebox

operators were free to negotiate for licenses absent a com-

pulsory license. App. C, infra, 37a. ASCAP and

SESAC suggested that three marketplace analogies’’

were sufficient to make this determination (App. C, infra,

37a): (a) general establishments, such as bars, grills,

restaurants and taverns using mechanical music (i.e., music

provided by non-live means); (b) background music ser-

vices; and (c) foreign jukebox operators.’’ Relying only

on these three marketplace analogies, ASCAP and

SESAC argued that the royalty fee should be increased

from $8.00 to $70.00. App. C, infra, 36a.

The Tribunal found these ‘‘marketplace analogies’’ suf-

ficient to provide ‘‘an appropriate benchmark’’ for the

jukebox royalty fee. App. C, infra, 53a. The Tribunal

noted, however, ‘‘that some jukebox operators function on

a narrow profit margin, and that certain jukeboxes pro-

duce modest revenues. App. C, infra, 53a. Thus, the

Tribunal concluded (App. C, infra, 57a):

On the basis of the marketplace analogies presented

during the proceeding, taking the record as a whole,

and with regard for the statutory criteria, the Tribunal

has adjusted the royalty rate for coin-operated phono-

record players to $50 per machine. The rate takes

into account both of what is paid for music elsewhere

under similar circumstances and, since it is a flat rate,

of the Tribunal’s concern for the smaller, less profit-

able operators.

Finally, the Tribunal rejected AMOA’s contention that

the Act provides no authority for making interim fee ad-

justments. App. C, infra, 46a-48a. Thus, the Tribunal

set the fee at $25.00 per jukebox per year for 1982 and

1983, at $50.00 for the years 1984 through 1986, and at

$50.00, subject to an inflation adjustment, for the years

1987 through 1990. App. C, infra, 53a-54a.

Seventh Circuit Review Proceedings

AMOA and ASCAP each filed petitions for review in the

United States Court of Appeals for the Seventh Circuit.“

Both petitions were denied. See App. A, infra, 32a.

AMOA challenged the Tribunal’s rule on several

grounds, including the three grounds upon which it seeks

review here.“ First, AMOA argued that the Tribunal erred

in relying upon the three so-called marketplace analogies

as the price benchmark for jukebox royalty fees because

„the allegedly ‘analogous’ fees in each situation were

established under the protection of government-granted

monopoly rights . . . rather than in a free competitive

2? ASCAP argued that the Tribunal's $50.00 fee was outside the

“gone of reasonableness” and that the lowest reasonable fee was

$70.00. See App. A, infra, 25a. ASCAP also asserted that the

Tribunal erred in phasing in the new fee, claiming that the $50.00

fee, if reasonable, should have been established immediately. See

App. A. infra, 22a. BMI appeared as a party-respondent, support-

ing the final rule against AMOA'’s objections, but taking no posi-

tion as to ASCAP’s contentions. SESAC did not appear as a party

in the court of appeals.

*AMOA also challenged the Tribunal's findings on the grounds

that: (1) the so-called “marketplace analogies” were not sufficiently

comparable to jukebox copyright use (C.A. Br. at 40); (2) the

Tribunal ignored extensive evidence concerning the financial plight

of the jukebox industry (id. at 44) ; and (3) the Tribunal’s decision

improperly relied upon information contained in a letter that was

not part of the administrative record (id. at 65). AMOA also argued

that the increase was not supported by “substantial evidence,” and

that the performing rights societies had not carried the burden of

justifying it. Id. at 36, 43.

market. App. A, infra, 26a; see AOA C.A. Br. at

40.“ Second, AMOA asserted that the Tribunal erred

in refusing, for the purpose of calculating a ‘‘fair return’’

to copyright owners, to accept any evidence concerning the

collective costs or financial condition of copyright owners.

OA. Br. at 52. Third, AMOA contended that the Tribu-

nal’s decision to adopt an interim inflation adjustment

violated the Act. Id. at 56.

The Seventh Circuit rejected each of these contentions.

First, the court held (App. A, imfra, Na; emphasis

added) that the ‘‘arguably analogous musical fees pro-

vided substantial evidence of the value of the right to play

copyrighted music on a jukebox, and the agency did not

act arbitrarily or capriciously under the circumstances in

considering these fees as a benchmark.’’ Second, the court

held (App. A, infra, 30a) that the Tribunal properly

declined to consider any evidence concerning the costs

and financial conditions of copyright owners because it

would be not only improper but also impossible to attempt

to provide each copyright owner with an appropriate re-

turn on his or her ‘investment’ in copyrighted material.

*The Act provides full monopoly protection to composers and

performers with respect to both: (a) “mechanically” recorded music

played in establishments such as restaurants, and (b) “background”

music supplied by wire, radio, or other means to business and com-

mercial subscribers. 17 U.S.C. § 106. With respect to these uses,

and may exact monopoly prices. The license fees paid by jukebox

operators in foreign countries are also set in a monopoly context.

As the Tribunal noted (App. C. infra, 40a): [The [foreien|

fees are either negotiated with industry groups or are subject to

governmental approval.”

and also because ‘‘the inquiries sought by AMOA into

the internal distribution processes of the performing rights

societies are irrelevant to the purposes of the Act. Third,

the court held (App. A, i#fra, 22a) that the interim

inflation adjustment merely demonstrates] a flexibility

with which Congress intended to endow the Tribunal in

making its determinations.’’ Thus, the court of appeals

found ‘‘no fault with the Tribunal’s final rule as promul-

gated’’ (App. A, mfra, 32a).

The Tribunal’s final rule, which has increased by at

least 525% the fee that Congress thought appropriate for

imposition just four years ago, is inconsistent not only with

the plain language and legislative history of the Copyright

Revision Act of 1976, 17 U.S.C. § 101 et seq., but also with

numerous decisions of this and other courts. Moreover,

the decision of the court below, which upheld the rule in

all respects, constitutes the definitive interpretation of

various provisions of the Act, which cannot be challenged

anew at least until 1990, when the Tribunal may again

undertake rulemaking in this area. Nonetheless, the con-

struction of the Act and general legal principles endorsed

by the court below doubtless will be cited as authority in

future rulemaking proceedings under other provisions of

this and other statutes.

I. The Tribunal’s Establishment Of What Is Essentially

A Monopoly Price For A Copyright Use With Respect

To Which Congress Explicitly Denied Monopoly Pro-

tection Is Inconsistent Both With The Act And With

General Legal Principles.

The Copyright Revision Act of 1976, 17 U.S.C. § 101

et seq., establishes three levels of copyright protection.

First, and as a general rule, the Act provides complete

monopoly protection, pursuant to which copyright owners

may either preclude use of their property or exact what-

ever charge they can obtain for its use. 17 U.S.C. § 106.

Second, when copyrighted material is used pursuant to

the fair use provisions of the Act, copyright owners

must submit to the use of their property without receiving

any compensation u all. See 17 U.S.C. §§ 107-110. Third,

under the ‘‘compalsory licensing provisions of the Act,

which are applicable to jukeboxes, copyright owners must

allow others to use their works in exchange for compensa-

tion that is specifically set by statute. See, e.g., 17 U.S. C.

116. The Tribunal’s final jukebox royalty rule is utterly

inconsistent with this congressional scheme.

In raising the jukebox compulsory copyright license fee

by at least 525%, the Tribunal relied solely upon the three

so-called ‘‘marketplace analogies’’ suggested by the per-

forming rights societies. See page 6, supra. In fact,

however, the ‘‘marketplace analogies’’ that the Tribunal

found conclusive are all instances of monopoly pricing.

For example, the Act specifically grants absolute monopoly

protection to composers and performers of ‘‘background

music,’’ who therefore may exact monopoly compensation

for the use of their property. See generally 17 U.S.C.

§ 106.° Jukeboxes, by contrast, are one of a handful of

monopoly protection and instead chose to establish a com-

pulsory licensing scheme, which takes into account not only

the needs of copyright owners, but also those of copyright

users and the general public. 17 U.S.C. § 116.“

As previously noted (see page 8 n.4, supra), the other two analo-

gies used by the Tribunal mechanical recordings played in res-

taurants and jukebox license fees paid in foreign countries—are also

examples of monopoiy pricing.

Compulsory licensing is applicable to jukeboxes and three addi-

tional copyright uses: (a) secondary transmissions by cable tele-

vision systems (17 U.. C. § 111); (b) mechanical reproduction of

musical records and tapes that have been distributed to the public

(17 U.S.C. § 115); and (e) use of copyrighted materials by non

commercial educational broadcasters (17 U.S.C. § 118). Congress

obviously intended compulsory licensing as an intermediate level

between uncompensated “fair use” and full monopoly protection.

Until 1976, when Congress established the compulsory

licensing scheme for jukeboxes, jukebox owners had gen-

erally been exempt from any special requirements under

the copyright laws. See 17 U.S.C. § 1(e) (1976) (repealed).

In 1976, therefore, Congress clearly intended to improve

the position of copyright owners by allowing them, for the

first time, to receive some return for the use of their works

by jukebox operators, but not the monopoly profits that

they would receive from full copyright protection.’ In-

deed, Congress specifically directed the Tribunal to set a

reasonable rate by, among other things, accommodating

both the interests of copyright owners (who naturally want

a monopoly price) and those of copyright users (who

naturally prefer a lower price). See 17 U.S.C. § 801(b)

(1)(A)-(D).

* Commentators have repeatedly emphasized that compulsory li-

censing is a direct limitation on monopoly control and pricing. See,

e.g., Seltzer, Exemptions and Fair Use in Copyright: The “Exclu-

sive Rights” Tensions in the New Copyright Act, 24 Bull. of Copy-

right Soc. 215, 261 (1977) (“Having first come to a decision that

there are appropriate copyright interests to be reallocated,

Congress has two ways of dealing with an exception from the

scheme: (1) either by altogether exempting certain uses from pay-

ment or permission, thereby concluding that no further reliance on

the copyright scheme incentives is either needed or warranted ; or

(2) by substituting statutory for author controls of access and price

(compulsory licensing), reaffirming the essential reliance on the

Law § 5:12 at 146 (1981) (“‘[C]jompulsory licensing was

established to encourage the widespread mechanical, or recorded,

use of music and to prevent absolute control of popular music by

the copyright owners thereof)

In this rulemaking, however, the Tribunal established

the jukebox fee simply by ascertaining the monopoly price

that would be charged absent compulsory licensing (which

it mistakenly believed to represent a ‘‘marketplace’’ price).

The Tribunal then slightly discounted that price to take

into account the financial condition of the jukebox indus-

try, but provided no methodological support for the final

fee that it selected.* By setting the jukebox licensing rate

at what is essentially a monopoly price, the Tribunal ef-

fectively established a monopoly price with respect to a

oly protection. Thus, the Tribunal has produced an inef-

ficient level of copyrighi use which Congress specifically

sought to avoid—and has defeated the very purpose of the

Tribunal’s existence. See page 15 & n.10, infra. More-

aver, by creating a result through administrative regula-

tion that Congress explicitly rejected when it established

*The Tribunal lowered the jukebox fee from the $70.00 bench-

mark proposed by ASCAP and SESAC to $50.00, not because the

Tribunal desired to account for the fact that $70.00 was a monopoly

price, but rather because the Tribunal believed that the “analogies”

were not completely comparable to jukebox copyright use, and also

because it was concerned about possible harm to the jukebox indus-

try. See App. C, infra, 52a-53a; see also page 6, supra. In other

words, the Tribunal was concerned not that $70.00 was a monopoly

price, but that $70.00 was not necessarily the monopoly price which

the marketplace would set for jukeboxes in the absence of compul-

sory licensing. Inasmuch as the Tribunal issued no contempora-

neous methodological explanation for the fee that it set, any new

explanation would now constitute mere “post hoc rationalizations of

the agency [which] . cannot serve as a sufficient predicate for

agency action.” American Textile Manufacturers Institute, Inc. v.

Donovan, 452 U.S. 490, 539 (1981).

the copyright regulatory scheme, the Tribunal unlawfully

exceeded the powers that Congress delegated to it.“

The Tribunal’s complete reliance on monopoly price

analogies, which the Seventh Circuit unreservedly ap-

proved, is inconsistent not only with the clear intent of

the Act, but also with numerous decisions in which this

Court has held that government grants of monopoly pro-

tection, particularly in the area of intellectual property,

must be constrned narrowly. See, e. g., Hotchkiss v. Green-

wood, 52 U.S. (11 How.) 248, 267 (1851) (patent protection

limited to those inventions which, in addition to being new

and useful, required more ingenuity and skill . . than

were possessed by an ordinary mechanic acquainted with

the business); Baker v. Selden, 101 U.S. 99 (1880) (copy-

right protection held not to extend to ideas); White-Smith

Music Publishing Co. v. Apollo Co., 209 US. 1 (1908)

(piano rolls, mechanical reproductions of copyrighted

musical compositions, held not to be ‘‘copies’’ within mean-

ing of prior Act); Graham v. John Deere Co. of Kansas

City, 383 U.S. 1, 19 (1966) (emphasizing the importance of

non-obviousness for patent protection: ‘‘He who seeks to

build a better mousetrap today has a long path to tread

before reaching the Patent Office.’’).

Had Congress simply intended for jukebox owners to pay

monopoly royalties, it would have enacted provisions for jukeboxes

similar to those applicable to copyright use by noncommercial broad-

casters, who are encouraged to negotiate license agreements with

casters only in cases where licenses have not been negotiated pri-

rig In cases, the Act provides (17 U.S.C. § 118(b)(3))

that “the Copyright Royalty Tribunal may consider the rates for

comparable circumstances under voluntary license agreements nego-

tiated as provided in [17 U.S.C. § 118(b)(2)].”

Moreover, the decision below conflicts with numerous de-

cisions in which other courts of appeals have recognized

that the central purpose of compulsory licensing is to pre-

vent the deleterious effects on pricing and consumption

which monopoly control typically engenders.” See, e. .,

Fame Publishing Co., Inc. v. Alabama Custom Tape, Inc.,

507 F.2d 667, 670 (Sth Cir.), cert. denied, 423 U.S. 841

(1975) (‘‘Congressional intent [in establishing compulsory

licensing of mechanical reproduction] was apparently two-

fold: to encourage future creative endeavor and to combat

monopolization in the music industry’’); Norbay Music,

inc. v. King Records, Inc., 290 F.2d 617, 618 (2d Cir.

1961) (with regard to mechanical reproduction, ‘‘the dis-

trust of monopoly was so great that the form of remedy

chosen was that of the famous compulsory license);

Todamerica Musica, Ltda., v. Radio Corporation of Ameri-

ca, 171 F.2d 369, 371 (2d Cir. 1948) (“‘[T)he right of a

0 Indeed, Congress has specifically directed the Tribunal to set

the jukebox compulsory license fee at a rate which, among other

things, will “maximize the availability of creative works to the pub-

lic.” 17 U.S.C. § 801(b)(1)(A). The strong public policy against

monopolies rests, of course, not on the mere that monopolies

lead to higher prices, but on the fact that prices artificially

restrict consumption of goods by the public. See R. Posner, Eco-

nomic Analysis of Law 201 (2d ed. 1977).

The Act specifically provides that the Tribunal must set

jukebox royalty fees at a level that will, among other

things, ‘‘afford the copyright owner a fair return for his

creative work. 17 U.S.C. § 801(b)(1)(B). The Act

also requires that the fee reflect the relative roles of

the copyright owner and the copyright user in the product

made available to the public with respect to . . . capital

investment, costs, [and] risk. 17 U.S.C. § 801(b)(1)(C)."

As AMOA repeatedly asserted, in both the Tribunal and

the court of appeals (App. C, imfra, 48a; App. A,

infra, 29a-30a), these determinations logically require

the making of some inquiry into the costs incurred by copy-

right owners in connection with the production or pur-

chase of copyrighted material. In setting the fees at issue

here, however, the Tribunal eschewed consideration of

any cost data whatsoever,” choosing instead to rely only

™ The Act also requires that the fee be calculated “[t]o maximize

the availability of creative works to the public” (17 U.S.C. § 801(b)

(1)(A)), “[tlo afford the . copyright user a fair income under

existing economic conditions (id. at § 801(b)(1)(B)), and “[t]o

minimize any disruptive impact on the structure of the industries

involved and on generally prevailing industry practices” (id. at

§ 801(b)(1)(D)).

The Tribunal repeatedly declined (see App. A. infra, 8a. 29a;

AMOA C.A. Br. at 53-54) to allow AMOA to present evidence

concerning the costs incurred by copyright owners or their overall

economic condition, preferring instead to consider only the so-called

“marketplace analogies.” Indeed, the Tribunal was so convinced

(footnote continued )

upon marketplace parallels’’ which, as we have shown

(see pages 10-14, supra), are simply instances of monopoly

pricing. The court of appeals approved the Tribunal’s

departure from its clear statutory mandate, recognizing

that the Tribunal relied on ... genoral marketplace

analogies wot related to cost. App. A, infra, 8a.

By definition, a monopoly price far exceeds cost. See

R. Posner, Economic Analysis of Law 282 (2d ed. 1977)

(„Just as the natural monopolist may, if unregulated,

charge a price well above his average costs, so too may the

price analogies, the Tribunal failed even to consider, let

Tribunal’s approach (App. A, infra, 29a): “In the proceedings

before the Tribunal, the AMOA vigorously sought to bring into

tributed jukebox royalties to their affiliates and members. [Wie

believe i

as to what constitutes a fair return to copyright owners.

The Tribunal simply disregarded its statutory mandate and

the court of appeals approved that lawless act.“

Not only does the decision below disregard the require-

ments of the Act, but it also conflicts in principle with

the decision of the District of Columbia Circuit in Record-

ing Industry Association of America v. Copyright Royalty

Tribunal, 662 F.2d 1 (1981). In Recording Industry, the

court affirmed that portion of a Tribunal rule that estab-

lished a new compulsory license fee for the mechanical re-

production of copyrighted works. Although the court of

appeals there noted that the setting of [such] royalty

rate[s] is not a routine exercise in historical cost of service

ratemaking,’’ and that a broader inquiry’’ is required

to determine the ‘‘fairness’’ of the return to the copyright

owner (662 F.2d at 8-9), the court emphasized that the

Tribunal properly ‘‘analyzed the empirical evidence in

The court of appeals’ reliance (App. A, infra, 8a, 30a) upon this

Court's decision in Permian Basin Area Rate Cases, 390 U.S. 747

(1968), for the proposition that a “fair return” may reasonably be

established without any estimate of copyright owners’ costs, is mis-

placed. Indeed, Permian Basin. a complicated natural-gas rate-set-

ting case, supports the view that costs must be carefully considered

in fixing a fair return. In Permian Basin, this Court merely allowed

those costs to be estimated by using “composite cost data intended

to evidence the national costs of finding and producing gas-well

gas” rather than insisting upon calculation of the actual costs of

discovery and production of the gas in the geographical area that

was the subject of the ratemaking proceeding. 390 U.S. at 8° Far

from holding that costs may be ignored—and that mom / et

“marketplace analogies” may be substituted as the sole proxy for

“fair return —Permian Basin holds that costs are critical to “fair

return” ratemaking, but may be estimated when accurate data is

clearly difficlt or impossible to obtain.

relation to the statutory criteria’’ (id. at 10). Unlike the

evidence here, the record evidence in Recording Industry

included substantial empirical studies of the economic costs

and well-being of copyright owners.“

Indeed, the Tribunal’s refusal in this case even to ap-

proximate a rough surrogate for the costs incurred by

have repeatedly emphasized the importance of costs in

„fair return“ ratemaking. See, e.g., Permian Basin Area

Rate Cases, 390 U.S. 747, 800 (1968). The Tribunal’s de-

™ Among other things, the Tribunal noted two sets of statis-

tics which indicated that copyright owners were not receiving a fair

return on their costs. See 662 F.2d at 11 n.25. First, the Tribunal

found that royalties paid to copyright owners had fallen drastically

from slightly more than those paid to recording artists in 1955, to

barely one-fourth of those paid to recording artists in 1979. 46 Fed.

Reg. 10485 (1981). Second, although recording artists’ royalties

had increased to 16.8 percent of wholesale record prices in 1974,

of wholesale record prices in 1964 to 7.27 percent in 1974. Id. at

10476, 10481.

™ See also Interstate Commerce Commission v. New York, New

Haven and Hartford Railroad, 372 U.S. 744, 747 n.5 (1963) (rail-

road rate setting: “Fully distributed costs based on the out-of-

pocket costs plus a distribution of the constant costs indi-

cate the revenue necessary to a fair return on the traffic, disregard-

ing ability to pay.); Wisconsin v. Federal Power Commission, 373

U.S. 294, 298 n.6 (1963) (natural gas rate setting: “The phrase

‘jurisdictional cost of service’ as used here means the producer’s

system-wide cost of service (i e., all operating expenses . plus a

fair return on the rate base) for its sales of natural gas subject to

the Commissions jurisdiction.”); Tenneco Oil Co. v. Federal

Energy Regulatory Commission, 571 F.2d 834, 840 (Sth Cir.),

cert. dismissed, 439 U.S. 801 (1978) (natural gas rate setting:

(footnote continued)

termination, that the fair return to copyright owners“

requirement of the Act is necessarily satisfied by the award

of de facto monopoly returns, without any inquiry into the

collective costs or financial condition of copyright owners,

is contrary both to the statute and to the case law.

III. The Tribunal Violated The Act And General Prin-

ciples Of Administrative Law By Establishing Auto-

matic Interim Rate Adjustments For The Periods

Between Ratemaking Proceedings.

The Tribunal determined, without any statutory basis,

that it was authorized to establish automatic—but not yet

fully quantified—interim rate adjustments to become ef-

fective during the ten-year intervals between statutorily

authorized ratemaking proceedings. Se 17 U.S.C. § 804

(a).

Because the Act mandates not only that the Tribunal

base fee adjustments upon explicit statutory criteria (17

U.S.C. § 801(b)(1)), but also that fees be re-examined only

at ten-year intervals (17 U.S.C. § 804(a)), the Act plainly

(footnote continued)

“The producers, under the Constitution as well as the Act, are, at

bottom, only entitled to a fair return on their actual costs );

Consolidated Rail Corporation v. United States, 619 F.2d 988, 991

(3d Cir. 1980) (freight car rate setting; court holds that ICC used

improper measure of cost when calculating “a fair return on the

cost of owning and maintaining each type of freight car.); Celanese

Chemical Co. v. United States, 632 F.2d 568, 571 n4 (Sth Cir.

1980), cert. dismissed, 453 U.S. 950 (1981) (coal transportation

rate setting: [Tjhe word costs includes] all variable and

constant costs plus a fair return on capital and an amount needed

to attract additional capital.)

proscribes automatic interim fee adjustments such as those

imposed here.“ Similarly, it is beyond dispute that Con-

gress intended that all fee increases be specially tailored

to the unique conditions of the particular industries in-

volved, not to general fluctuations in the broad-based Con-

sumer Price Index. See H.R. Rep. No. 94-1476, 94th Cong.,

2d Sess. 173 (1976) („It is therefore expected that any

adjustment of a rate .. shall be based on the economic

conditions peculiar to the industries affected by that

rate.). By definition, automatic fee adjustments are

based not upon pre-adjustment review of specific industry

conditions in light of specific statutory criteria, but upon

mere, generalized predictions that the fee might not

satisfy the statutory criteria in the future. The Act re-

quires that adjustments be based upon findings, not predic-

1% The legislative history clearly shows that Congress envisioned

periodic, rather than continuous, adjustments of compulsory license

fees: “Chapter 8 establishes a Copyright Royalty Commission for

the purpose of periodically reviewing and adjusting statutory royalty

rates for use of copyrighted materials pursuant to compulsory li-

censes H.R. Rep. No. 94-1476, dach Cong. 2d Sess. 173

(1976) (emphasis added). Congress made clear not only that it

was not concerned that a fee might be stable over long periods of

time, but that it actually intended that result where appropriate

(ibid.): “The Committee does not intend these rate changes, wheth-

er up or down, should necessarily be made as the result of such

periodic review.” Moreover, congressional debate on the Act was

focused not on the details of the periodic adjustment of compulsory

license fees, but on the question whether there should be any peri-

odie review of such fees and, if so, at what intervals. See AMOA

C.A. Br. at 61-64 (description of legislative history).

tions, that an existing fee no longer satisfies the statutory

criteria."

Indeed, the Tribunal itself has recognized the impro-

priety of interim inflation adjustments in an analogous

context. In the subsection immediately following that

which establishes the criteria for adjusting jukebox royalty

fees, the Act provides that one of the factors which the

Tribunal may take into account in adjustment proceedings

for cable television compulsory license fees—which may

occur only every five years—is ‘‘national monetary infla-

tion or deflation’’ (17 U.S.C. § 801(b)(2)(A)). Congress

has made no such explicit provision for jukebox fees. See

17 U.S.C. § 801 (b) (1).

Despite Congress, specific expression of concern for the

inflation-adjustment of cable television fees, however, the

Tribunal recently rejected an industry proposal for in-

terim inflation adjustment of such fees on the ground that

the Act provides for review of these fees only once every

five years. The Tribunal correctly stated that a ‘‘con-

tinuous adjustment mechanism would render this periodic

review scheme meaningless’’ (46 Fed. Reg. 896 (1981)).

Therefore, just as cable television rates (for which Con-

gress explicitly expressed its inflation-adjustment con-

cerns) cannot lawfully be subject to a ‘‘continuous adjust-

ment mechanism’’ lest the Act’s periodic review scheme

be frustrated, a fortiori jukebox fees (for which Congress

specifically expressed no such concern) cannot be subject

to any interim inflation adjustment.

*The Tribunal imposed two types of interim fee adjustments:

(a) a phase-in mechanism, and (b) an inflation adjustment. The

Tribunal ordered that its $50.00 rate be phased-in at $25.00 for

1982 and 1983, increased to the full $50.00 for 1984 through 1986,

and then adjusted for inflation for 1987 through 1990. The proce-

dure that the Tribunal followed here is, in this respect, simply in-

consistent with its statutory mandate.

The Tribunal invoked a novel prinei ole of administrative

law to justify these interim jukebox fee adjustments: that

the power of an administrative agency is not limited by its

organic law, but extends to whatever Congress has not ex-

plicitly prohibited it from doing. Thus, the Tribunal stated

(App. C, mfra, 48a): ‘‘We find that there is nothing

in the statute or legislative history which could be con-

strued to limit the application of annual cost of living

adjustments.’’ The Seventh Circuit approved this concept

of inherent agency authority (App. A, imfra, 22a).

Although the Tribunal and the court of appeals may have

believed that the Act would be more effective if it pro-

vided for interim adjustments of jukebox royalty fees, the

fact of the matter is that Congress made no such provi-

sion. By effectively rewriting the statute, the Tribunal has

exceeded its statutory authority.

IV. This Case Raises Important Issues Which Should Be

Decided By This Court.

As we have shown (see pages 10-22, supra), the court

below declined review of the Tribunal’s final jukebox rule

despite the fact that the rule is inconsistent with both the

lished by the decisions of this and other courts, and also

with the way in which the Tribunal has construed the stat-

ute in analogous rulemaking proceedings. Not only has

the Tribunal increased by at least 525% the statutory rate

that Congress thought fair only four years ago, but, be-

cause of the peculiar structure of the Act, the Seventh

Cireuit’s decision is now the law of the land and will re-

main so for at least ten years. Moreover, the rationale of

the decision below will doubtless be relied upon in other

Tribunal rulemaking proceedings.

Likewise, the ramifications of the Seventh Circuit’s de-

cision may extend well beyond the limits of the Copy-

right Revision Act. Because of the government’s efforts

at reducing unnecessary regulation, an increasing number

of industries that were once fully regulated are now subject

to only partial regulation. This case well demonstrates the

effect of an administrative agency’s reliance on statistics

and indices generated by unregulated portions of an in-

dustry as a substitute for fulfilling its statutory mandate

with respect to portions of the industry that Congress has

chosen to regulate. Although such statistics may sometimes

be relevant, they should never be deemed conclusive. But

cf. Separate Findings of Facts, Conclusions and Opinion

of Commissioner James, App. C, infra, 59a (empha-

sis in original) (‘‘[I}t is clear that the marketplace guide-

lines of other analogous music users, provide the only

credible evidence in the record to establish a ‘reasonable’

fee. Negotiated fees by analogous music users, which are

identical or similar, based on this record is the only indi-

cator of true market value.). The decision below ratifies

the Tribunal’s neglect of its statutory duty.

Also pregnant with pernicious implication is the reason-

ing that an administrative agency may do whatever Con-

gress has not explicitly prohibited it from doing. That

justification for administrative action is well wide of the

mark because, by definition, administrative agencies possess

only those powers that specifically have been delegated

to them. They are bound to carry out—not create—basic

government policy. Here, Congress was capable of grant-

ing copyright owners full monopoly protection instead of

compulsory licensing rights, but chose not to do so. Like-

wise, Congress was capable of establishing an inflation ac-

celerator for royalty fees, but again chose not to do so.

The Tribunal exceeded not only the limits of its particular

statutory mandate, but also the most fundamental prin-

ciples of administrative law.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

Joxatuan T. Howe

Counsel for Petitioner

Of Counsel:

Barry Suiiivan

Rosert A. Scuvuckmax

C. Joux Kocn

Jexner & BTocx

One IBM Plaza

Chicago, Illinois 60611

Dated: July 15, 1982

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