Petition for Writ of Certiorari — Cablevision Co. v. Motion Picture Ass'n of America, Inc.

Supreme Court brief1988

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Supreme Court U.S.

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Q 4 Nol & 4 A. MAY 4 june

JO Eh eet OL, JR.

CLE®K

‘

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

NATIONAL CABLE TELEVISION ASSOCIATION, INC..

Petitioner.

. ae ans : = Ee : }

COLUMBIA PIcTt RES INbt SL mints. IN eh at.

Re spondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Jay E. Ricks

Counsel of Record

GARDNER F. GILLESPIE

STEVEN J. HORVITZ

ROBERT CORN-REVERE

HOGAN & HARTSON

555 Thirteenth Street, N.W.

Washington, D.C. 20004

(202) 637-5600

OF Counsel:

BRENDA L. Fox, Esq.

NATIONAL CABLE TELEVISION

ASSOCIATION, INC.

1724 Massachusetts Avenue, N.W.

Washington, D.C. 20036

(202) 775-8664

May 4, 1988

LOE 3 A TD

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

QUESTIONS PRESENTED

Section 111 of the Copyright Act of 1976, 17 U.S.C.

§ 111 (1982 & Supp. IV 1986), establishes a compul-

sory copyright license for cable television’s retrans-

mission of broadcast programming. The District of

Columbia Circuit, reversing the District Court, de-

ferred to the Copyright Office and upheld an inter-

pretation of Section 111 that requires cable operators

to include revenues derived from non-broadcast pro-

gramming—for which cable operators pay the copy-

right holders-directly—in calculating their compulsory

royalty fee.

The questions presented are:

1. Whether the court below erred in concluding,

contrary to the Second Circuit, that the Copyright

Office, an arm of Congress with an acknowledged

institutional bias, is entitled to judicial deference in

interpreting substantive provisions of the Copyright

Act.

2. Whether the court below erred in concluding that

Section 111 requires cable operators computing co-

pyright royalties due to the owners of broadcast pro-

gramming to include revenue derived from non-

broadcast services.

LIST OF PARTIES

Petitioner in this Court, and Appellee in the D.C.

Circuit, is the National Cable Television Association,

Inc.* Respondents in this Court, and Appellants in

the D.C. Circuit, are Columbia Pictures Industries,

Inc., Embassy Communications, MGM/UA Communi-

cations Co., Orion Pictures Corporation, Paramount

Pictures Corporation, Turner Entertainment Com-

pany, Twentieth Century Fox Film Corporation, Uni-

versal Pictures, A Division of Universal City Studios,

Inc., Warner Bres., Inc., the Motion Picture Associ-

ation of America, Inc., the United States Copyright

Office and its Register.

Cablevision Company appeared in consolidated cases

below as appellant/cross appellee.

* National Cable Television Association, Inc. is a non-profit

trade association primarily of cable television operators, with

associate membership of programmers and suppliers. It considers

its membership list proprietary and confidential, but will en-

deavor to provide a list of members under seal upon request of

this Court.

—

ill

TABLE OF CONTENTS

Eg, ee

NE TEEN en aR Re

REASONS FOR GRANTING THE WRIT ...ececccccccccecceceee

Il.

The Court Below Erred In Deferring To The

Over Which The Office Has No Statutory

Ne cans csck scutinanumncsanes

A. The Decision Below Granting the Copy-

right Office Deference in Interpreting

Section 111 Contradicts Established Law

in the Second Circuit and Has No Sta-

ST IIE cavonascanceussisveancesenerniecensesss

B. The Copyright Office Is Institutionally

Biased in Favor of Copyright Owners and

Not Entitled to Deference in Resolving

Disputes Between Copyright Owners and

C. The Copyright Office Is a Part of the

Legislative Branch~and Not Entitled to

i eee When Assuming Functions Re-

served for the Executive Branch ...........

The Statutory Interpretation Advanced By

The Copyright Office, And Upheld By The

Court Below, Is Unreasonable ....................

a ERRETS EE pe ee

Table of Contents Continued

APPENDIX

Opinion of the Court of Appeals .........:0:++

Opinion of the District Court ........::sscssesee

17 U.S.C. § 111(d\(1) (Supp. IV 1986) ............

37 C.F.R. § 201.17(bX1) (1987) «0... eeeeeeeereeeeees

TABLE OF AUTHORITIES

CASES: Page

Bartok v. Boosey & Hawkes, Inc., 523 F.2d 941 (2d

Cle, SIRIP asisissccciscetictsetenaenainsce mannan . 10,11

Bethlehem Steel Corp. v. EPA, 723 F.2d 1303 (7th

CAE, FINED stccssccosciceccccasmeninimnenanidasioiaamameenaa 16

Bowsher v. Synar, 106 S. Ct. 3181 (1986) .... 19,20,21,22

Buckley v. Valeo, 424 U.S. 1 (1976) ...............cceee8 19

Cablevision Co. v. Motion Picture Ass’n of

America, Inc., 641 F. Supp. 1154 (D.D.C.

EGIDGD nskcisnsnsccsnnssanontdenonsadoaniaaanaaianinamiianaia passim

Cablevision Systems Development Co. v. Motion Pic-

ture Ass'n of America, Inc., 836 F.2d 599 (D.C.

COP, TD nnsccccsinsssncensehénssintietaaasniaaimiadbinaiie passim

Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc., 467 U.S. 837 (1984) .............. 9,10,22

Eltra Corp. v. Ringer, 579 F.2d 294 (4th Cir.

RGD sicsuinsssonsinssieabeasnkassceaalapaeetanaiaceedia 22

Esquire, Inc. v. Ringer, 591 F.2d 796 (D.C. Cir.

1978), cert. denied, 440 U.S. 908 (1979) ........ 14

Fortnightly Corp. v. United Artists Television, Inc.,

See UD. GeO CD senncunaeennneus 2,17

Hampton & Co. v. United States, 276 U.S. 394

CRIED csissessscadsscsssacistaneiaiaiiicisamasiomeemeninianae 19

INS v. Cardoza-Fonseca, 107 S. Ct. 1207 (1987) .. 9,22

INS v. Chadha, 462 U.S. 919 (1988) .......:cceseeeeees 19,20

Keeffe v. Library of Congress, 777 F.2d 1573 (D.C.

CO TID snxissnseictinsiceniovmnacidnisinlpmetsintatiatianeiiicses 21

National Conference of Bar Examiners v. Multistate

Legal Studies, Inc., 692 F.2d 478 (7th Cir.

1982), cert. denied, 464 U.S. 814 (19838) ........ 14

National Treasury Employees Union v. FLRA, 810

P28 Se Gls. Ca: Tee cicesoaaduiecen 9

NLRB vy. United Food and Commercial Workers

Union, Local 22, 108 S. Ct. 413 (1987) ......... 9,22

Table of Authorities Continued

Page

Teleprompter Corp. v. CBS, Inc., 415 U.S. 394

(ROTO) <ccctcieccotectosessessicsnisennaan maaan 2.17

Universal Shipping Co. v. United States, 652 F.

Sump. G65 GIDL. WGBE) ascecessscccsssercecesesnenseres 20

STATUTES AND REGULATIONS:

17 U.S.C. § 111 (1982 & Supp. IV 1986) ............ passim

17 U.S.C. § 111(dX1) (Supp. IV 1986) .............0... 2,12

17 U.S.C. § 111(dX1XB) (Supp. IV 1986) .................. 3,22

17 U.S.C. § 111(dX2) (Supp. IV 1986) ................... 12

17 U.B.C. © GRR GER RID cecccsscccssccssetsscesetsannicnnse 13

17 UDG. © FOR Gee wtiscicieccncccensssntaonucenen 21

AT USC. & FOU Cie ccccscsesecnenscecsrncsaqmsaseasonniees 13

17 U.S.C. § 801 (1982 & Supp. IV 1986) ............. 12,18

SB UBC. § REGED Cie cascscccscseresevceeipsnctssssctnels 2

SB UBC. © THE GROG scsscsccisscssinmissecmanninon 2

38 USL. § 1906 Glee ttictcinienaen 2

28 U.S.C. § 2201(a) (Supp. ITI 1985) ..................... 2

28 USB... § SERB CORD svnistcccicieetiien 2

37 C.F.R. § 201.2(aX1) (1975Xamended 1985) ........ 11

37 C.F.BR. § B01. LTT) (1687) ....cccseccccscccscescsscceses passim

ST C.F RR. § BOR. TIS CRIED cccccsncccaccenecscsmssssinnns 11

LEGISLATIVE MATERIALS:

H.R. Rep. No. 2222, 60th Cong., 2d Sess. (1909) . 13

H.R. Rep. No. 83, 90th Cong., 1st Sess. (1967) ... 15

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

reprinted in 1976 U.S. Code Cong. &

FROG GIRO ccccesestnseccsscsseicsesestasaniensedaiaeneenias 4,14,15,23

vii

Table of Authorities Continued

Page

Before the Subcomm. on Courts, Civil Liberties

and the Admin. of Justice of the House Comm.

on the Judiciary, 94th Cong., 1st Sess.

CERNE cctsicvenitcninsiaspinidcieanitessaibiaiienaneiniiaaitaitaiaitiae 15,16,17,24

Oversight of the Copyright Act of 1976: Cable Tel-

evision Hearings Before the Senate Comm. on

the Judiciary, 97th Cong., Ist Sess. (1981) ... 17

122 Cong. Rec. 3822-23 (1976) .................cccccccecesees 15

122 Cong. Rec. 31,984, 32,009 (1976) .................... 15

ADMINISTRATIVE REPORTS AND PROCEEDINGS:

Oi a i Ta I seeccrstensencersccepenntitoneneneens 13

TD Ss ee SE eerecrentetcreetteccorcdensess 11

GB FOG. Tee. GOTR CGT cececcccsccccccccscbssatescncoscsscosss 13

GD Fe BR, Bae CO ‘cnscnscccckcccnsnccotncnceusinnsioc 5,12

Ds ee CD ccestinibaiaciiatttnniiasnteniiioes 11,17,21

Be re SE CII sh coasintsticstisncetecineinacsincaiaiaten 8

MISCELLANEOUS:

8 Communications Daily No. 44 (March 7, 1988) . 3,7

E. Brylawski, The Copyright Office: A Constitu-

tional Confrontation, 44 Geo. Wash. L. Rev. 1

EIT: siiietdiisaisithanclaenisdlbmniahactnadseamubintenpiahaiemtebiasateons 22

Letter from Dorothy Schrader, Copyright Office,

General Counsel, to David J. Saylor, June 9,

BASU itisssasisbahheieattceinnsciicieiceaanteadhiceintbigiaeasnlacninesinote 5

Transcript of Status Hearing, April 25, 1986 ....... 12

United States Government Manual 1986/87 ........... 21

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No.

NATIONAL CABLE TELEVISION ASSOCIATION, INC.,

Petitioner,

Vv.

COLUMBIA PICTURES INDUSTRIES, INC., et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Petitioner National Cable Television Association,

Inc. (“NCTA”) respectfully prays that a writ of

certiorari issue to review the judgment and opinion

of the United States Court of Appeals for the District

of Columbia Circuit entered in Cablevision Systems

Development Co. v. Motion Picture Association of

America, Inc., et al., on January 5, 1988.

OPINIONS BELOW

The opinion of the Court of Appeals is reported at

836 F.2d 599 and is reprinted in the appendix hereto

(““App.’’) at la.

The opinion of the District Court is reported at 641

F. Supp. 1154 and is reprinted at App. 36a.

JURISDICTION

NCTA’s action in the District Court arose under

28 U.S.C. §§ 1338, 2201, and 2202(a). Review by the

D.C. Circuit was sought pursuant to 28 U.S.C. § 1291.

The decision for the D.C. Circuit was filed on January

5, 1988. On March 22, 1988, the Chief Justice granted

an Order extending NCTA’s time to file this petition

until May 4, 1988. The jurisdiction of this Court to

review the judgment of the D.C. Circuit arises under

28 U.S.C. § 1254(1).

STATUTES AND REGULATIONS INVOLVED

The relevant portions of the Copyright Act, 17

U.S.C. § 111(d\1) (Supp. IV 1986), and of the Co-

pyright Office regulations, 37 C.F.R. § 201.17(b\1)

(1987), are reprinted in the Appendix hereto, at App.

9a-62a.

STATEMENT OF THE CASE

The Copyright Act of 1976 established a compulsory

of broadcast signals.! Section 111 of the Act, 17

U.S.C. § 111 (1982 & Supp. IV 1986), App. 59a, im-

posed liability on cable operators for the ‘‘secondary

transmission”’ of broadcast signals and provided a sta-

tutory mechanism to calculate royalty obligations.

Over half of American television households now re-

ceive their broadcast programming through operation

‘The compulsory copyright license was adopted in direct re-

sponse to this Court’s rulings allowing cable systems to retrans-

mit broadcast signals without incurring copyright liability. See

Fortnightly Corp. v. United Artists Television, Inc., 392 U.S.

399 (1968) (a cable system ‘‘no more than enhances the viewer’s

capacity to receive the broadcaster’s signals’); Teleprompter

Corp. v. CBS, Inc., 415 U.S. 394 (1974).

of this license. The resulting royalty fees for 1987,

collected from more than 10,000 separate cable sys-

tems, exceeded $100 million.?

The statutory royalty mechanism, with its detailed

computational formula, was designed so that cable

operators would not be forced to negotiate privately

with the myriad copyright owners of broadcast pro-

gramming. Section 111(d1)\B) provides that the com-

pulsory royalty payment shall be “‘computed on the

basis of specified percentages of the gross receipts

... for the basic service of providing secondary trans-

mission of primary broadcast transmitters.”

App. 60a. The more revenue a cable system generates

from its carriage of broadcast signals, the greater the

operator’s compulsory copyright fee.®

Section 111 does not address cable’s delivery of

non-broadcast, or ‘‘cablecast,’’ programming. At the

time the Copyright Act was adopted, cablecast pro-

gramming was of little significance, and cable tele-

vision operators were dependent almost entirely upon

retransmitting broadcast signals. Through the advent

of satellite technology, cablecast programming has

since expanded so that it now frequently occupies

more channels on a cable system than does broadcast

programming. Cablecast programming, which today

includes such popular services as Cable News Net-

work, C-Span, and ESPN, have always been privately

purchased from the copyright owners for distribution

over cable systems.

28 Communications Daily No. 44, at 3 (March 7, 1988).

3 Royalties paid to the government under Section 111 are ul-

timately distributed to individual copyright owners by the Co-

pyright Royalty Tribunal.

The underlying controversy in this case concerns

how compulsory copyright fees should be computed

when broadcast programming (which is covered by

the compulsory license) is offered together with ca-

blecast programming (which is not covered). The

House Report accompanying the 1976 Copyright Act

stated that, in calculating royalty payments, ‘only

receipts for the basic service of providing secondary

transmission of primary broadcast transmitters are to

be considered. Other receipts from subscribers, such

as those for pay cable services or installation charges,

are not included in gross receipts.’’

In September 1983, NCTA, as the principal trade

association for the nation’s cable television operators,

filed a complaint in the United States District Court

for the District of Columbia against the Motion Pic-

ture Association of America, Inc. (“‘“MPAA’’) and its

member companies seeking a declaratory ruling in-

terpreting Section 111.° The District Court later or-

dered that NCTA join the Copyright Office as a co-

defendant, and the court ultimately consolidated

NCTA’s case with on-going cases involving an indi-

vidual cable operator, Cablevision Company, and

MPAA.* It was while these cases were pending before

‘H.R. Rep. No. 1476, 94th Cong., 2d Sess. 1, 96 (1976), re-

printed in 1976 U.S. Code Cong. & Admin. News 5659, 5710-

11.

* MPAA’s member companies receive the largest share of the

fees paid under the compulsory copyright license.

® Cablevision espouses a different interpretation of Section 111

than that offered by either NCTA, MPAA, or the Copyright

Office. Cablevision filed a petition for writ of certiorari on April

4, 1988, No. 87-1642. These separate petitions from the same

judgment should be considered together.

the District Court that the Copyright Office, for the

first time, clearly addressed in regulations and other

writings how to compute the compulsory copyright

payment where valuable non-broadcast and broadcast

signals are combined on a single tier for one price.

At that time, the Copyright Office indicated that

where the cablecast programming is “‘offered in com-

bination with secondary transmission [broadcast] ser-

vice for a single fee,’’ all revenues must be included

in the computation. 37 C.F.R. § 201.17(bX1) (1987).

The Copyright Office offered the following explana-

tion:

Whenever the two types of services [i.e.,

broadcast and nonbroadcast] are offered for

a single price or, if on separate tiers, when-

ever it is necessary to subscribe to one tier

in order to receive another, the two services

are in reality being offered as a single pack-

age of service; if secondary transmissions are

included in the package, gross receipts from

both tiers of the combined package must be

reported and used in calculating copyright

royalties.’

In promulgating the regulation, the Copyright Office

noted that it could not ‘“‘decide tlie matter finally since

definitive interpretation of a statute is the province

of the courts.” 49 Fed. Reg. 18029, 138031 (1984).

The Office went on expressly to ‘‘welcome the guid-

ance of the courts.” Jd.

Under the Copyright Office’s interpretation, if a

cable operator offers ten channels of broadcast pro-

? Letter from Dorothy Schrader, Copyright Office General

Counsel, to David J. Saylor, June 9, 1986, at 2.

gramming for $5 and ten channels of cablecast pro-

gramming for another $7, the compulsory copyright

fee would be based solely on the $5 broadcast tier.

If the operator instead offers a single twenty channel

package, consisting of the same broadcast and cable-

cast programming, for $12, all $12 must be included

in the fee calculation.

The District Court held for NCTA and struck down

the Copyright Office’s new regulations. It noted that

‘the mere inclusion of nonbroadcast signals on the

same tier with broadcast signals does not magically

transform the nonbroadcast signals into signals now

subject to the compulsory licensing scheme. They re-

main outside the licensing scheme and any revenues

attributable to them should not be included in the

calculation of ‘gross receipts.’’’ App. 5la. The court

concluded that “‘the Copyright Office’s definition of

‘gross receipts’ does not have a reasonable basis in

law and frustrates the underlying congressional pol-

icy.” Id. at 48a.

The Court of Appeals reversed the District Court

and sustained the regulations. Finding the statute

‘silent or ambiguous,” the court felt obliged to defer

to the interpretation offered by the Copyright Office.

“Congress saw a need for continuing interpretation

of Section 111,” the court concluded, ‘‘and thereby

gave the Copyright Office statutory authority to fill

that role. Its interpretations are therefore due the

same deference given those of any other agency.”’ Id.

at 2la (emphasis added).

REASONS FOR GRANTING THE WRIT

The decision below dramatically increases the

amount of copyright fees that cable television oper-

ators must pay to broadcasters and other copyright

holders. The rates have soared 140 percent in the

short time since the Court of Appeals decision issued

in January 1987.* The increase will translate literally

to hundreds of millions of dollars and will affect far

more than the profitability of cable operators. The

decision also will adversely affect the nation’s cable

subscribers. Indeed, cable operators are now being

forced to reevaluate existing marketing practices.

Broadcast signals may be excluded from popular pro-

gramming packages or deleted altogether. On the

other hand, cable operators will be penalized for of-

fering packages with more cablecast programming,

since that programming now bears a “‘double’’ copy-

right payment. This case will affect the media land-

scape throughout the country for program producers,

cable operators, artists and, ultimately, consumers.

Even beyond the implications of this particular

interpretation of the Act, the decision below is sig-

nificant in granting unprecedented authority to the

private dispute between the owners and users of co-

pyrighted material, the Court of Appeals bestowed

powers on the Office never envisioned by Congress.

The decision to do so conflicts directly with Second

Circuit precedent limiting the Office’s interpretative

authority. Under the Copyright Act, the Copyright

Office is the depository of compulsory copyright pay-

ments. Whether cable operators have properly com-

8 For the first half of 1987, prior to the appellate decision,

cable operators paid $32.1 million in compulsory copyright fees.

Payments for the second half of 1987, which were due after the

appellate decision was issued, soared to $76.8-million. 8 Com-

munications Daily No. 44, at 3 (March 7, 1988).

puted their compulsory copyright fees is a matter to

be determined in the first instance by the courts in

an infringement action.’ The Copyright Office has no

role in disputes between owners and users of copy-

righted materials as to the amounts owed under the

compulsory license.

The breadth of the ruling of the court below prom-

ises to be especially damaging to the congressional

ency of the Copyright Office to favor copyright own-

ers. The Office was established to serve the interests

of the copyright holders, and the Register of Copy-

rights has clearly recognized this duty.’ The inevi-

table consequence of the court’s holding that the

Office’s interpretations are entitled to deference will

be a tilting of Congress’ careful copyright balance

toward the copyright holders in a manner not in-

tended in the Copyright Act. Already the Copyright

Office has been importuned by MPAA to flex its new

muscles in favor of the copyright holders." And in a

Notice of Inquiry released just weeks after the Court

of Appeals decision, the Office suggested a willingness

to make certain determinations regarding broadcast

signals which heretofore were the exclusive province

of the Federal Communications Commission. 53 Fed.

Reg. 5591 (1988).

* See pages 10-14, infra.

‘On February 12, 1988, MPAA submitted a petition request-

ing the Copyright Office to impose interest charges, nowhere

mentioned in the Copyright Act, on cable operators for late

payments. The Copyright Office has not yet ruled on the petition.

Not only is this development contrary to Congress’

evident intent, but a ruling that Congress delegated

broad interpretive authority to the Copyright Office

of the Library of Congress—as issued by the court

below—is inconsistent with the separation of powers

doctrine. The Copyright Office is part of tte legis-

lative branch of government. Accordingly, constitu-

tionally imposed restrictions on the functions of the

legislative branch unequivocally preclude the treat-

ment of the Copyright Office as ‘‘any other agency.”

I. THE COURT BELOW ERRED IN DEFERRING TO

THE COPYRIGHT OFFICE TO RESOLVE A CON-

TROVERSY OVER WHICH THE OFFICE HAS NO

STATUTORY AUTHORITY.

In a series of important cases beginning with the

Chevron case in 1984, this Court has endeavored to

set forth the basic principles for reviewing statutory

interpretations by administrative agencies.'’* Although

Chevron and its progeny mandate deference to ad-

ministrative agencies in certain circumstances, this

Court has never suggested that deference is due to

an agency operating outside its lawful authority.’* The

court below overlooked this fundamental limitation,

and applied Chevron to the Copyright Office’s inter-

12 Chevron, U.S.A., Inc. v. Natural Resources Defense Council,

Inc., 467 U.S. 837 (1984).

18 See, e.g., INS v. Cardoza-Fonseca, 107 S. Ct. 1207 (1987);

NLRB v. United Food and Commercial Workers Union, Local

23, 108 S. Ct. 413 (1987).

14 Chevron, 467 U.S. at 842-45. See also National Treasury

Employees Union v. FLRA, 810 F.2d 295, 297 (D.C. Cir. 1987)

(deference will not be accorded unless “‘agency’s interpretation

falls within the scope of authority that has been properly del-

egated by Congress to the agency’’).

pretation of Section 111. App. 16a-2la. It failed to

appreciate that the Office’s ministerial charge under

the Copyright Act did not convey with it a concom-

itant responsibility to make statutory interpretations

affecting the substantive rights of private parties. The

court applied Chevron because it erroneously assumed

that the Copyright Office was ‘‘an agency to which

Congress has delegated policy-making responsibili-

ties.’’ App. 19a. By ignoring the special characteris-

tics of the “‘agency’’ at issue and deferring to the

stretched the Chevron doctrine beyond recognition.

A. The Decision Below Granting the Copyright Office De-

ference in Interpreting Section 111 Contradicts Estab-

lished Law in the Second Circuit and Has No Statutory

Support.

The decision of the court below to defer to the

directly with the Second Circuit’s decision in Bartok

v. Boosey & Hawkes, Inc., 523 F.2d 941 (1975). At

issue in Bartok was whether a particular composition

should be treated as ‘‘posthumous” work under the

give weight to the Copyright Office’s definition of the

statutory term. “[T]he Copyright Office has no au-

thority to give opinions or define legal terms and its

interpretation on an issue never before decided should

not be given controlling weight.” Jd. at 946-47.

The court below summarily dismissed Bartok’s

treatment of the Copyright Office as dictum and ir-

relevant to disputes arising under Section 111. App.

21a. But resolution of the deference issue in Bartok

was critical to that court’s construction of the un-

defined statutory term. Moreover, the court below

failed to explain why Congress ascribed a larger role

to the Copyright Office in interpreting Section 111

than in interpreting other provisions of the Copyright

Act. Notwithstanding the efforts of the court below,

its decision cannot be reconciled with the decision in

Bartok. Unless this Court addresses the issue, this

split among the circuits will create confusion as to

the proper role of the Copyright Office in adminis-

tering the Copyright Act.

The decision in Bartok was based, in part, on the

“(t]he Copyright Office ... does not ... give legal

opinions or advice on such matters as ... [t]he suf-

ficiency, extent or scope of compliance, with the co-

pyright law.”’ 37 C.F.R. § 201.2(a)(1) (1975Xamended

1985). And the Copyright Office has, in other con-

texts, acknowledged the limited scope of its authority.

It has readily admitted that active enforcement of the

statute ‘‘would be beyond [its] statutory authority”’

and emphasized that ‘“‘[t]he principal obligation for

enforcement of violations of Section 111 rests with

the affected copyright owners, not the Copyright Of-

fice.”’ 45 Fed. Reg. 45270, 45271 (1980).'® Counsel for

the Copyright Office explained to the District Court:

“By statute and by its own practice, the Copyright

‘5 The Office in the past has expressed concern that cable

systems might reject the Office’s statutory interpretation, but

concluded “‘that the only remedy lies with the copyright owners

themselves, who may decide to bring civil infringement actions

for violation of the compulsory license.” 49 Fed. Reg. 14944,

14948 (1984). See also 37 C.F.R. § 201.17(cX2) (1987) (final proc-

essing by the Copyright Office “‘shall in no case be considered

a determination that ... requirements to qualify for a compul-

sory license have been satisfied’’).

Office says, we are not the S.E.C., we are not the

F.C.C.; we do not go out and affirmatively say to the

this, you shall not do that.’"* In adopting the very

regulation contested here, the Copyright Office ex-

pressly invited judicial resolution of the issue. 49 Fed.

Reg. 13029, 13031 (1984).

As previously recognized by both the Second Circuit

and the Copyright Office, the latter has no role in

making substantive interpretations governing the

scope of compliance with copyright laws. The Office’s

authority, with respect to Section 111, is restricted

to the procedural matters of gathering identifying in-

formation, revenue data, and royalty payments. 17

U.S.C. §§ 111(dX1), 111(d\2), (Supp. IV 1986);

App. 59a-61a.'’ Although Section 111 describes in de-

tail the Office’s authority as a depository to design

and collect copyright reporting forms, it never as-

‘ Transcript of Status Hearing, April 22, 1986, at 25. No-

where is the Copyright Office given statutory authority to make

substantive policy determinations regarding Section 111. Indeed,

Congress created a separate entity, the Copyright Royalty Tri-

bunal, and charged it with responsibility for distributing the

royalty fees collected and also for periodically adjusting the roy-

alty rates to account for changing circumstances. 17 U.S.C. §§

801 et seg. (1982 & Supp. IV 1986).

‘ To avoid the need for private copyright negotiations, Section

111 provides that the government act as an intermediary ‘‘clear-

inghouse.’’ Cable operators deposit compulsory royalty fees with

the Copyright Office. The Copyright Royalty Tribunal then re-

views the aggregate composition of broadcast programming car-

ried by cable systems and determines what percentage of the

royalties collected should be distributed to each copyright owner.

cribes to the office the authority to certify or deny

compliance with the Act’s requirements."*

To be sure, Section 702 of the Copyright Act au-

thorizes the Register of Copyrights, as director of the

administration of the functions and duties made the

responsibility of the Register under this title.” 17

U.S.C. § 702 (1982). But this authorization has never

previously been construed to give the Office the right

to determine the scope of compliance with the Co-

pyright Act.’®

In short, the Copyright Office may interpret the

priate forms for filing compulsory copyright pay-

ments. It may even provide advice to cable operators

as to how these forms should be completed. But this

‘* A cable operator automatically secures a compulsory copy-

right license under Section 111 upon filing the requisite reports

and royalties with the Copyright Office. Under Chapter 5 of the

owner shows in court that the requirements of Section 111 have

not been met, the operator becomes a copyright infringer and

is liable for damages.

'* Section 702 of the 1976 Copyright Act derives directly from

Section 53 of the 1909 Act. The 1909 provision provided that

“the register of copyrights shall be authorized to make rules

and regulations for the registration of claims to copyright as

provided by this Act." The accompanying House Report ex-

plained that the provision “for the making of rules and regu-

lations does not confer upon the register any judicial functions.”

H.R. Rep. No. 2222, 60th Cong., 2d Sess. (1909). The Copyright

Office has reiterated in various public notices that it is the

judiciary, not the Copyright Office, that must decide whether

the statutory requirements of Section 111 have been met. See,

e.g., 44 Fed. Reg. 73123, 73127 (1979); 48 Fed. Reg. 6372 (1983).

limited ministeria! role does not allow the Copyright

Office to determine the substantive rights of private

parties under the Copyright Act.”

B. The Copyright Office Is Institutionally Biased in Favor

of Copyright Owners and Not Entitled to Deference in

Resolving Disputes Between Copyright Owners and Co-

pyright Users.

In adopting Section 111, Congress fashioned a long-

negotiated and carefully-balanced compromise be-

tween the interests of the cable operators and their

consumers, on the one hand, and the copyright own-

ers, on the other.*! From its inception, however, the

* Prior to the decision below, the courts had narrowly cir-

cumscribed the Copyright Office’s authority. The Office was given

latitude only in strictly ministerial functions, see, e.g., National

Conference of Bar Examiners v. Multistate Legal Studies, Inc.,

692 F.2d 478 (7th Cir. 1982), cert. denied, 464 U.S. 814 (1983)

(upholding ministerial decision regarding the retention of copy-

right works in the Office’s files), and in determining whether a

particular submission was “‘copyrightable."’ See, e.g., Esquire,

Ine. v. Ringer, 591 F.2d 796 (D.C. Cir. 1978). cert. denied, 440

U.S. 908 (1979). Assuming for the sake of argument that the

Office is entitled to deference in resolving whether something

is “copyrightable,” it does not follow that the Office is entitled

to deference here. Unlike the controversy in this case, resolving

whether something is “‘copyrightable” is critical to the Office's

“depository”’ function. Moreover, in contrast to this case, res-

olution of the “copyrightability”’ issue does not necesarily place

the interests of recognized copyright owners (whom the Office

serves) in conflict with copyright users.

** “The difficult problem of determining the copyright liability

of cable television systems" was before Congress for a decade

prior to adoption of the 1976 Act. H.R. Rep. No. 1476, supra

note 4, at 89, 1976 U.S. Code Cong. & Admin. News at 5703.

Congress recognized that “{njeither the full liability sought by

the copyright interests, nor the complete exemption sought by

fice’s substantive interpretation of the Act, the court

below tilted that balance toward the copyright owners

in a way Congress did not intend.”

the [cable] interests would be appropriate or fair.’ H.R. Rep.

No. 83, 90th Cong., 1st Sess. 1, 51-52 (1967). Section 111, as

drafted, ‘“‘attempt[ed] a compromise between the[se] extreme po-

sitions.” Copyright Law Revision: Hearings on H.R. 2223 Before

the Subcomm. on Courts, Civil Liberties, and the Admin. of

Justice of the House Comm. on the Judiciary, 94th Cong., 1st

Sess. 132 (1975) (statement of Irwin Goldbloom, Deputy Assist-

ant Attorney General) [hereinafter cited as Hearings].

Supporters of Section 111 proudly noted that it ‘“reflect(ed]

a compromise” between NCTA and MPAA, and “reconcil{ed]

many conflicting interests as fairly, as justly, and as construc-

tively as possible.” 122 Cong. Rec. 31,984 (1976). “In working

ovt this formula, the committee ... arrived at a solution which

. is workable and is fair and equitable to both the owners

and users of copyrighted materials and which also protects and

serves the public interest.” Jd. at 32,009. See also H.R. Rep.

No. 1476, supra note 4, at 362, 1976 U.S. Code Cong. & Admin.

News 1976 at 5804.

Section 111 proponents were well aware of the fragility of

the statutory compromise. Recognizing that the legislation “im-

pose(d] copyright liability for the first time on several industries,

including cable television,"’ one Senator expressed his ‘concern

that these industries not be overpowered by long established

and more prominent industries who also have an interest in this

bill.” 122 Cong. Rec. 3822 (1976). In opposing a pending amend-

ment, he explained that Section 111 “‘is a fair and equitable

balance for all parties. However, it is a delicate balance, and

one that I earnestly hope will not be upset.” Jd. at 3823.

2 As the Seventh Circuit has noted:

[W]here a statute strikes a political balance but administra-

tion of the statute is entrusted to an agency that may not

embody that balance, it is dangerous to defer automatically

The institutional tilt of the Copyright Office is pro-

nounced and undisputed. In the legislative hearings

prior to adoption of the 1976 Copyright Act, then-

she viewed her responsibilities as solely to the co-

pyright holders:

My feeling as the head of the Copyright Of-

fice is that my responsibility is to one group

and one group only, and that is the group

that is identified as the sole and only bene-

ficiary of the copyright law of the United

States under the Constitution, the authors of

the so-called writings.”

She urged Congress that, in fashioning a ‘‘compro-

mise’ between copyright owners and copyright users,

“it is vitally important that you consider the effect

of a particular provision on the individual author and

not primarily of its effect on an economic group using

the author’s work for good or ill.’’*4

to the agency’s view. An agency that may be dominated by

one faction in the legislative struggle that led to enactment

of a compromise is not authorized to hand that faction a

victory that was denied it in the legislative arena through

the efforts of an other faction. The court must enforce the

compromise, not the maximum position of one of the interest

groups about which the compromise was struck.

Bethlehem Steel Corp. v. EPA, 723 F.2d 1308, 1309 (7th Cir.

1983).

°° Hearings, supra note 21, at 106 (statement of Barbara

Ringer, Register of Copyrights). Ringer went on to state, “I am

profoundly of the belief that authors in this country have been

treated shabbily and stingily from the very beginning of our

*4 Jd. Former Register and Honorary Consultant in Copyright

The Copyright Office has, in fact, never hidden its

dislike for cable’s compulsory copyright license.” Nor

has it made secret its approach to disputes regarding

cable’s compulsory copyright. It has explained that it

“construe[s] the compulsory license strictly, since the

burden of responsibility is on cable systems to prove

that they have satisfied the legislature’s conditions

for a compulsory license in derogation of the other-

wise recognized ... property rights of copyright own-

ers.” 49 Fed. Reg. 14944, 14950 (1984).

The tilt of the Copyright Office toward the copy-

right holders is not a matter of personalities or tim-

ing. It is institutional. To defer to the Copyright Office

on matters affecting the rights of copyright owners

vis-a-vis copyright users would be akin to giving a

at the Library of Congress Abraham Kaminstein explained in

congressional testimony, “I make no bones about favoring au-

thors, composers, and artists.’ Hearings, supra note 21, at 94.

Significantly, the Copyright Office, while steadfastly defending

its interpretation before both the District Court and the Court

of Appeals, never once attempted to refute NCTA’s charge that

it was, as an institution, biased in favor of the copyright owners.

*5 See, e.g., Oversight of the Copyright Act of 1976: Cable Tel-

evision Hearings Before the Senate Comm. on the Judiciary, 97th

Cong., lst Sess. 97, 149 (1981) (statement by Donald Ladd,

*6 In placing the ‘‘burden of responsibility’’ on cable systems,

the Copyright Office overlooks the historical origins of the com-

pulsory copyright provision. Prior to the adoption of the 1976

free to retransmit broadcast programming without paying any

royalties whatsoever to the copyright owners. Fortnightly, su-

pra; Teleprompter, supra. Thus, cable’s compulsory copyright

license constituted an expansion, rather than a contraction, of

the rights of copyright owners.

——

trustee deference in resolving a dispute between the

trust’s beneficiary and a third party. The trustee has

no choice but to interpret the trust agreement in a

manner advantageous to the trust’s beneficiary. Re-

cognizing and acting on this fact, as Congress did in

precluding the Copyright Office from playing an ac-

tive role in defining the substantive rights of copy-

right owners and users, is no slight on the integrity

of the trustee.

Certainly, there is nothing in the record to suggest

that Congress wanted Section 111 interpreted by an

entity that would invariably resolve issues in favor of

the copyright owners. To the contrary, Congress took

pains to avoid placing the Copyright Office in a sit-

uation where its loyalty to copyright owners might

threaten the integrity of the compulsory copyright

compromise. It created the Copyright Royalty Tri-

bunal and relied upon the Tribunal, rather than the

the various compulsory copyright licenses included in

the 1976 Copyright Act. And it left resolution of dis-

putes over the amounts necessary to earn the com-

pulsory license to private litigation between the

to the inability of the Copyright Office to balance the

needs of both copyright owners and copyright users

in setting rates intended to provide a fair return to

both parties.’

*" In light of the delicacy of the compromise underlying Section

111, Congress placed numerous restrictions on the Tribunal’s

discretion to adjust rates for this particular compulsory license.

See 17 U.S.C. § 801 (1982 & Supp. IV 1986).

C. The Copyright Office Is a Part of the Legislative Branch

and Not Entitled to Deference When Assuming Func-

tions Reserved for the Executive Branch.

The court below granted the same deference to the

court would grant to ‘‘any other agency.’’ But the

division of the Library of Congress and part of the

legislative branch of government. Congress did not,

and could not permissibly, delegate to the Copyright

Office responsibility for determining the substantive

rights of copyright holders and copyright users. To

have done so would have violated the separation of

powers doctrine. Although the Copyright Office is en-

titled to interpret the Copyright Act as necessary to

perform its ministerial functions as depository for

compulsory copyright payments, its interpretations are

not entitled to judicial deference in infringement ac-

tions involving the substantive rights of private par-

ties.

Recent decisions of this Court have affirmed the

bedrock principle that the legislative branch cannot

delegate power that properly resides in another

branch. E.g., Bowsher v. Synar, 106 S. Ct. 3181

(1986); INS v. Chadha, 462 U.S. 919 (1983); Buckley

v. Valeo, 424 U.S. 1, 137-43 (1976). The need to draws

a bright line between the co-equal branches of gov-

ernment arises not simply out of procedural fussiness;

“it is a breach of the National fundamental law if

Congress .. . attempts to invest itself or its members

with ... executive power ....”’ Buckley, 424 U.S. at

121-22 (quoting Hampton & Co. v. United States, 276

U.S. 394, 406 (1928)).

The court below erred by deferring to the Copy-

right Office, an arm of the Congress, in interpreting

the substantive rights of copyright users. As this

Court pointed out in Bowsher, ‘‘iJnterpreting a law

enacted by Congress to implement the legislative

mandate is the very essence of ‘execution’ of the

law.”’ 106 S. Ct. at 3192.% But ‘{t]he structure of

the Constitution does not permit the Congress to ex-

ecute the laws; it follows that Congress cannot grant

to an officer under its control what it does not pos-

sess.”’ Id. at 3188. See INS v. Chadha, 462 U.S. at

951-59.

The court below assumed without analysis that sub-

stantive statutory interpretive powers are vested in

the Copyright Office, as they are in ‘‘any other

agency.’ But this Court’s recent cases make clear

that authority that might be delegated to an inde-

pendent agency is not acceptable if delegated to a

component or an agent of Congress. In Bowsher, for

example, this Court voided that portion of a budget

balancing statute that delegated executive functions

to the Comptroller General of the General Accounting

Office (‘‘GAOQ”’).”9

*8 See Universal Shipping Co. v. United States, 652 F. Supp.

668, 674 (D.D.C. 1987) (‘‘Bowsher makes clear that ‘execution’

involves making judgments about application of a statute in a

particular instance and making actual interpretations of law in

order to implement it’’).

*° Because it found the GAO to be ‘“‘a part of the legislative

branch of government,” Bowsher, 106 S. Ct. at 3192, the Court

held that delegation of interpretive power to the Comptroller

General is the “‘kind of congressional control over the execution

of the laws [which] is constitutionally impermissible.” Jd. at 3189.

The same constitutional considerations as in

Bowsher bar delegation of executive functions to the

gress. In his concurring opinion in Bowsher, Justice

Stevens compared the Comptroller General to ‘‘other

obvious congressional agents, such as the Librarian

of Congress ....”’ Jd. at 3205 n.25. Other courts have

similarly recognized that “‘the Library of Congress is

a congressional agency.’ See, e.g., Keeffe v. Library

of Congress, 777 F.2d 1573, 1574 (D.C. Cir. 1985).*°

The Copyright Office itself has stated that ‘[t]he Co-

pyright Office is a department of the Library of Con-

gress in the legislative branch. Neither the Library

of Congress nor the Copyright Office is an agency

within the meaning of the Administrative Procedure

Act ....” 49 Fed. Reg. 14944, 14951 (1984).* Be-

cause the Copyright Office is a creature of Congress,

30 The “‘official handbook of the Federal Government”’, lists

the Library of Congress and its Copyright Office as being part

of the Legislative Branch. United States Government Manual

1986/87, pp. iii, v. Neither the Library of Congress nor the

‘Independent Establishments” described in the Manual. The

Manual states that “ujnder the organic law, the Library’s first

responsibility is service to Congress.” Jd. at 50. Moreover, Li-

brary employees (including those in the Copyright Office) are

exempt from the Hatch Act, which restricts political activity by

executive branch employees, thus providing further evidence of

the Office’s independence from the executive branch. Keeffe, 777

F.2d at 1577 (Library of Congress personnel are legislative

branch employees).

31 The Copyright Office’s structure and responsibilities as an

“agency” are set forth in Chapter 7 of the Copyright Act. Sec-

tion 701 establishes the Copyright Office as a part of the Library

of Congress. 17 U.S.C. § 701(a) (1982).

its views on the substantive meaning of the Copyright

Act are not entitled to deference by a court attempt-

ing to determine the respective rights of parties be-

fore it.*

Il. THE STATUTORY INTERPRETATION AD-

VANCED BY THE COPYRIGHT OFFICE, AND UP-

HELD BY THE COURT’ BELOW, IS

UNREASONABLE.

Even if the Copyright Office were accorded the

deference due ‘‘any other agency,”’ such treatment

would hardly justify the decision of the court below.

Section 111(d\1)(B) provides that royalties shall be

“computed on the basis of specified percentages of

the gross receipts from subscribers ... for the basic

service of providing secondary transmissions of pri-

mary broadcast transmitters.’”’ App. 60a. The lan-

guage of that provision necessarily precludes the

inclusion of revenue from nonbroadcast sources in the

gross receipts calculation.**

8° See E. Brylawski, The Copyright Office: A Constitutional

Confrontation, 44 Geo. Wash. L. Rev. 1 (1975). But see Eltra

Corp. v. Ringer, 579 F.2d 294, 298-301 (4th Cir. 1978) (Register

of Copyrights is an executive officer via presidential appointment

of the Librarian of Congress). The reasoning employed in Eltra

Corp. has since been rejected by this Court. Bowsher, 106 S.

Ct. at 3189-91 (Comptroller General is an agent of Congress

despite appointment by the President).

88 Although the practice of mixing valuable cablecast and

broadcast programming in the same tier of service was not

prevalent when the Copyright Act was adopted, the language

and legislative history of Section 111 of the Copyright Act clearly

reveal how Congress would have resolved the issue now pre-

sented. Thus, under the standard set forth by this Court, the

D.C. Circuit erred in looking to the Copyright Office’s inter-

pretation. See, e.g., Chevron, U.S.A., Inc. v. Natural Resources

The court below rejected NCTA’s interpretation of

the language of Section 111 largely because it be-

lieved the interpretation read the phrase “‘basic ser-

vice’ out of the statute. App. 22a. According to the

court, under NCTA’s approach, Congress could have

based the royalty calculation simply on gross receipts

“for secondary transmissions,” rather than on gross

receipts “for the basic service of providing secondary

transmissions.”’ Jd. (emphasis added). But the term

‘basic service’ was more likely intended as a limi-

tation on gross receipts, rather than an expansion. It

is through this phrase, and this phrase alone, that

Congress indicated that the revenue base for the com-

pulsory copyright fee was to be closely circumscribed.

Without this clarification, revenue from a host of ser-

vices relating, but not fundamental, to the delivery

of broadcast retransmissions could be included in the

gross receipts pool.* As evident in the Act’s legis-

lative history, the congressional compromise that re-

sulted in Section 111 was rooted in carefully limiting

the revenues to be included in the copyright com-

putations.*

Defense Council, Inc., supra; INS v. Cardoza-Fonseca, supra,

NLRB v. United Food & Commercial Workers Union, Local 28,

supra.

34 While the other parties to this case have clouded the issue,

the statutory phrase actually supports, rather than undermines,

NCTA’s position. Using its ordinary meaning, the phrase sug-

gests that cable revenue should be included in the compulsory

broadcast retransmission and from nothing else. Where a single

charge covers a multitude of services, the phrase dictates that

only the component attributable to providing broadcast pro-

gramming be considered.

35 See H.R. Rep. 1476, supra note 4, at 96 (excluding receipts

NCTA’s interpretation is consistent not only with

the language of Section 111, but also with the un-

derlying logic. Because Congress established the com-

pulsory license to cover broadcast signals, it was

natural that the accompanying royalty would be based

solely on cable revenues attributable to broadcast re-

transmission. As Section 111 made the right to re-

transmit each and every broadcast signal contingent

upon a statutory grant, Congress was free to create

a compensation formula that drew from all broadcast

retransmissions. It does not follow, however, that

Congress intended to subject nonbroadcasting pro-

gramming to the same licensing obligations. Congress

had no logical basis to demand an additional statutory

payment for the right to carry programming which

cable operators had already acquired and paid for

through private negotiations.

Respondents’ construction of Section 111, on the

other hand, defies common sense. Two cable systems

with the same total revenue and channel line-up could

pay dramatically different compulsory copyright fees

depending on whether the broadcast and cablecast

channels were marketed separately or together. Yet,

in affirming the reasonableness of the Copyright Of-

fice regulations, the court below explained: ‘We find

no requirement in the statute or its history that the

fee paid by a cable system reflect precisely the value

it received from retransmissions .... Congress in-

stead chose an easily calculable revenue base and used

the DSEs [distant signal equivalent charges] to ap-

for ‘“‘pay cable” and “‘installation” from the copyright calcula-

tion). Even Register Ringer recommended against allowing the

supra note 21, at 1824.

proximate the value received by the cable companies.”’

App. 24a. The conclusion overstates the mathematical

effect of the DSE and dramatically understates its

financial consequences.

The DSE charge was devised so that cable oper-

ators would pay higher copyright fees as they in-

creased the number of distant signals they carried.

This special charge for distant signals was premised

on the understanding that cable’s importation of dis-

tant signals has more of an effect on the copyright

market than the carriage of local signals, which, by

definition, are already available ‘‘over-the-air.’’ But

the DSE charge does not negate the need to calculate

correctly the system’s gross receipts.** The compul-

sory fee derives from multiplying together two var-

iables—‘‘gross receipts’ and “DSEs.”” When two

variables are multiplied, they produce a “‘proper”’ re-

sult only if both variables are themselves accurately

stated.

Perhaps suspecting the weakness of its mathemat-

ical explanation, the court below concluded that the

‘Gmprecision” inherent in the Copyright Office reg-

ulations was not unreasonable in light of the

“congressional goal of minimizing transaction costs.”’

App. 25a. But its decision more than doubled cable's

compulsory copyright payments. “Imprecision”’ of that

magnitude cannot be justified as a matter of admin-

istrative convenience.*

36 This is especially true in the case of smaller cable systems

(i.e., those with semi-annual gross receipts below $292,000) be-

cause their compulsory copyright calculation does not even in-

clude a DSE factor.

37 The court belittled the problem by suggesting that it can

Congress provided that the compulsory copyright

fee shall be calculated on the basis of “gross receipts

... for the basic service of providing secondary trans-

missions of primary broadcast transmitters.’’ It is

plainly unreasonable to construe that provision so that

the resulting fees derive more from the carriage of

cablecast programming than from the retransmission

of broadcast programming.

be avoided if cable operators would adjust their marketing prac-

tices to offer broadcast and cablecast programming separately.

The court ignored marketing realities—best illustrated by com-

paring cable marketing to that of a conventional daily news-

paper. A newspaper could theoretically sell each of its sections—

i.e., news, lifestyle, sports, etc.—for a separate price. For a

variety of business reasons, newspaper publishers have deter-

mined that it is better to offer their product as a package for

a single price. Cable operators should not be penalized for fol-

lowing a similar practice. In cable television, as in any compet-

itive commercial endeavor, effective marketing is critical to

economic success. The Copyright Office must not be allowed to

transform Section 111 from a copyright regulation into a mar-

keting regulation.

CONCLUSION

For the foregoing reasons, this Court should grant

the writ and reverse the decision of the court below.

Respectfully submitted,

JAY E. RICKS

Counsel of Record

GARDNER F. GILLESPIE

STEVEN J. HORVITZ

ROBERT CORN-REVERE

HoGAN & HARTSON

555 Thirteenth Street, N.W.

Washington, D.C. 20004

(202) 637-5600

Counsel for Petitioner

Of Counsel:

BRENDA L. Fox, Esq.

National Cable Television

Association, Inc.

1724 Massachusetts Avenue, N.W.

Washington, D.C. 20036

(202) 775-3664

May 4, 1988

APPENDIX

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 86-5552

CABLEVISION SYSTEMS DEVELOPMENT COMPANY

Vv.

MOTION PICTURE ASSOCIATION OF AMERICA, INC., et al.,

APPELLANTS

U.S. COPYRIGHT OFFICE AND ITS REGISTER

And Consolidated Case Nos. 86-5553,

86-5554, 86-5597, 86-5635, 86-5636 and 86-5637

Appeals from the United States District Court

for the District of Columbia

(Civil Action Nos. 83-01655, 83-02785 and 84-03097)

Argued October 15, 1987

Decided January 5, 1988

Stuart H. Newberger, Assistant United States Attor-

ney, with whom Joseph E. diGenova, United States Attor- ~-

ney, Dorothy Schrader, General Counsel, United States

Ryan, Assistant United States Attorneys, were on the

brief for federal appellants /cross-appellees.

Richard M. Cooper, with whom Edward Bennett Wil-

liams, Robert W. Hamilton, Paul Mogin, Arthur Scheiner

and Dennis Lane were on the brief for appellants/cross-

appellees, Motion Picture Association of America, Inc.,

et al.

Jay E. Ricks, with whom David J. Saylor, Gardner F.

Gillespie, Steven J. Horvitz and Brenda L. Fox, were on

the brief for appellee, National Cable Television Associa-

tion, Inc. Michael S. Schooler also entered an appearance

for appellee, National Cable Television Association, Inc.

Mark J. Tauber and Michael A. Schlanger, with whom

Deborah C. Costlow and Nora E. Garrote were on the

brief for appellee/cross-appellant, Cablevision Company.

Phillip R. Hochberg, for National Basketball Associa-

tion and National Hockey League, Ritchie T. Thomas and

Judith Jurin Semo, for National Collegiate Athletic Asso-

ciation, David H. Lloyd, Robert Alan Garrett, Terri A.

Southwick, and Edwin M. Durso, for Major League Base-

ball, Victor E. Ferrall, Jr. and Jghn I. Stewart, Jr. for

National Association of Broadcasters, Bernard Korman

and /. Fred Koenigsberg, for American Society of Com-

posers, Authors and Publishers, Charles T. Duncan and

Michael Faber for Broadcast Music, Inc., Nicholas Arco-

mano for SESAC, Inc., Gene A. Bechtel for Public Broad-

casting Service, James S. Gorelick for National Public

Radio, John H. Midlen, Jr. for Old-Time Gospel Hour,

and Douglas G. Thompson, Jr. for Canadian Broadcast-

ing Corp., were on the brief for amici curiae, National

Basketball Association, et al.

= §

Robert W. Coll also entered an appearance for amici

curiae, National Hockey League.

Before: ROBINSON, RUTH B. GINSBURG and SILBER-

MAN, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBER-

MAN.

SILBERMAN, Circuit Judge: The Copyright Act of

1976, 17 U.S.C. §§ 101 et seg. (1982 & Supp. IV 1986),

grants cable television systems a license to retransmit

copyrighted broadcast ' programming to their subscribers,

id. §111{c) (1), and requires in return that the systems

deposit with the Copyright Office a fee equal to a “spe-

cified percentage[] of the gross receipts from subscribers

to the cable service . . . for the basic service of provid-

ing secondary transmissions of primary broadcast trans-

mitters,” id. § 111(d) (1) (B).? In a series of complaints

consolidated for trial, a trade association. representing

the cable television industry and Cablevision, an individ-

ual cable company, sued several copyright owners seeking

a declaration of the meaning of the above-quoted lan-

guage. The copyright owners filed counterclaims against

Cablevision for copyright infringement, alleging that

Cablevision’s interpretation of the statutory phrase led

to an underpayment of the required fee and thus made

! Throughout this opinion, a “broadcast” program is one

originally propagated by traditional over-the-air television

signals for receipt by antenna, and a “cable-originated” or

“non-broadcast” program is one produced solely for cable sys-

tems and disseminated only through them. “Transmission”

is a genera! term denoting any means of delivering program-

ming. Thus, a broadcast program could be retransmitted over

cable.

2In 1986, Congress amended 17 U.S.C. § 111(d) by elimi-

nating old § 111(d)(1) and redesignating accordingly. Pub.

L. No. 99-397, §2(a). The subsection at issue here, new

§ 111(d)(1), appears as §111(d)(2) in the district court’s

opinion.

the company an infringer. On the district court’s order,

the trade association joined the Copyright Office as a de-

fendant.

On cross motions for summary judgment, the district

court rejected the Copyright Office’s interpretation of the

statute—that gross receipts “include the full amount of

monthly (or other periodic) service fees for any and all

services or tiers of services which include one or more

secondary transmissions of television or radio broadcast

signals,” 37 C.F.R. § 201.17(b) (1) (1987)—as incon-

sistent with congressional intent and endorsed instead the

position of the trade association. Cablevision Co. v.

Motion Picture Ass’n of Am., 641 F. Supp. 1154, 1161

(D.D.C. 1986). ‘rhe court ordered the Copyright Office

to modify its regulation to accord with the court’s per-

ception of congressional intent. The district court then

dismissed the counterclaims for infringement on grounds

that there had been no violation of “the spirit of the

law.” Id. at 1163. The copyright owners, the Copyright

Office, and Cablevision appeal, putting forward a wide

variety of arguments for reversal or modification of the

district court’s order. We hold that the Copyright Office

has the authority to issue regulations interpreting the

statutory language at issue and that its interpretation

was a reasonable one. We agree with the district court’s

rejection of Cablevision’s reading of the statutory term

“basic service,” but hold that the district court erred in

declining to defer to the Copyright Office’s regulation

as to what revenues make up “gross receipts.” We

also reverse and remand for further proceedings regard-

ing the counterclaims. The basis for the district court’s

dismissal is unclear, and the record before us is insuffi-

cient to allow us to rule as a matter of law on whether

infringement occurred.

This case presents a dispute over the structure of a

statutory fee that cable television operators must pay for

the right to retransmit broadcast television program-

ming. Those who pay the fee, the cable systems, advocate

a construction that the eventual recipients of the fee, the

because, after governmental intervention designed to cor-

rect a market imperfection, the market evolved in un-

anticipated directions. The disagreement has its roots in

two Supreme Court decisions, Teleprompter Corp. v.

Columbia Broadcasting System, 415 U.S. 394 (1974),

and Fortnightly Corp. v. United Artists Television, 392

U.S. 390 (1968), that held retransmissions by cable tele-

vision systems of broadcast programming, whether of

local or distant origin, did not constitute “performances”

under the copyright law and thus did not give rise to

liability for infringement. The Teleprompter Court con-

cluded that if the Copyright Act of 1909 was inadequate

to govern the commercial relationships that had emerged

in the interim, it was for Congress to create a substitute.

415 US. at 414.

Thus prompted, Congress, as part of its revision of the

“secondary transmissions.” When a cable system takes

a broadcast signal (“primary transmission”) and de-

livers it to the system’s subscribers (‘“‘secondary trans-

mission”), the system is earning money by selling to its

customers the copyrighted material licensed only for the

primary broadcast transmission. Under Fortnightly and

Teleprompter, the copyright owner was unable to share

directly in those revenues. Congress was of the view that

the copyright holders should receive direct compensation

for the use of their rights. But Congress also recognized

that the transaction costs accompanying the usual

scheme of private negotiation that controls the use of

copyrighted materials could be prohibitively high. H.R.

Rep. No. 1476, 94th Cong., 2d Sess. 89, reprinted in

1976 U.S. CopE Conc. & ADMIN. News 5659, 5704.

The operator of a small cable system in a rural area, for

instance, might find it more profitable to forgo rebroad-

casting a wide variety of signals rather than to negotiate

with various copyright owners in Atlanta, Chicago, and

Los Angeles; cable operators, subscribers, and copyright

holders would all be worse off under such circumstances

than in a world where the retransmission rights could

change hands at a lower cost. Congress saw that neither

the situation as it existed after Fortnightly and Tele-

prompter nor a replication of classic copyright arrange-

ments would be entirely satisfactory.

The response was a new regime, embodied in section

111 of the revised Act. Congress first abandoned the no-

tion of individual negotiation in favor of a compulsory

license. Under §111(c) of the Act, a cable system may

retransmit to its customers any primary transmission

made by a broadcast station licensed by the Federal Com-

munications Commission.? In exchange for this privilege,

however, the cable systems are required to pay a fee, to

be distributed to the copyright owners as surrogate for

the royalties for which they might have negotiated under

a pure market scheme.

In devising that fee, Congress drew a crucial distinc-

tion between local and distant broadcast signals. The

House Judiciary Committee observed that “there was no

evidence that the retransmission of ‘local’ broadcast sig-

nals ... threatens the existing market for copyright

program owners.” H.R. REP. No. 94-1476, supra, at 90.

Because local* retransmission does not carry the signal

3 7.e., the familiar network and local programming that can

be received with an antenna. The words “station” and “chan-

nel” are synonymous for purposes of this opinion and refer to

an entity that transmits by broadcast or cable a single regular

schedule of programming. For example, a local affiliate of a

network is a station or channel, as is a cable-originated entity

such as ESPN that offers a single complete bill of fare.

‘The technical definition of local, which appears at 17

U.S.C. § 111(f), is not at issue in this case. For conceptual

to households beyond those local advertisers would be

willing to pay to reach, the advertising revenue base will

be increased by any expansion of the scope of the dis-

semination due to the retransmission, and copyright

owners will be able to negotiate with the broadcaster to

receive appropriate compensation. By the same token,

the retransmission of network signals, from whatever

distance, causes no difficulty. Advertisers on national

network television—such as CBS—expect to reach au-

diences nationwide and pay accordingly. Because na-

tional advertisers will pay to reach any incremental

viewers, networks will be willing and able to pay copy-

right holders the full value placed on the receipt of the

program by viewers (as measured by the willingness of

advertisers to buy time during the program). I/d. Dis-

tant non-network programming is altogether another

matter. Local advertisers will not pay extra to reach

viewers who cannot reasonably be expected to patronize

their businesses, so the revenue base from which to com-

pensate the owners understates the value of the use of

the materials, and the copyright holders would, absent

an adjustment mechanism, be undercompensated. I/d.;

see also National Cable Television Ass’n v. Copyright

Royalty Tribunal, 689 F.2d 1077, 1079 (D.C. Cir. 1982).

The Act therefore allows the copyright owners of distant

non-network programs to receive a portion of the fees

paid to the cable systems by subscribers. 17 U.S.C.

§ 111(d) (3) (A).

Congress’ broad purpose was thus to approximate ideal

market conditions more closely than would either the

Teleprompter or individual negotiation models; the com-

pulsory license would allow the retransmission of signals

for which cable systems would not negotiate because of

purposes, a signal is “local,” as opposed to “distant,” if the

subscribers of a particular cable system can receive the broad-

cast signal with an antenna. See, e.g., Teleprompter, 415 U.S.

at 401 & n.7.

high transaction costs, and the owners of copyrights for

non-network programs carried on cable systems far from

the original area of broadcast—who could not receive

full value out of advertising revenues—wouid receive

compensation out of the fees paid by the systems.

The disputed fee computation comprises two parts and

is deceptively simple in principle. The cable system first

calculates “the gross receipts from subscribers to the

cable service during [the applicable] period for the basic

service of providing secondary transmissions of primary

broadcast transmitters.” 17 U.S.C. § 111(d) (1) (B). By

using one of three formulas, selected according to the

amount of gross receipts, the system then determines

what percentage of gross receipts is due as a fee.

For larger cable systems, the percentage of gross

receipts owed depends upon the number of distant signal

equivalents (“DSEs”) carried by the system.° The DSE

figure is calculated by assigning a value of 1.0 to each

distant independent station carried and 0.25 to each

distant network station or distant noncommercial educa-

tional station, and summing. 7d. §111(f). The lower

value is assigned to distant network affiliates because

the bulk of their programming is provided by the net-

works and, as described above, copyright owners of net-

work broadcasts are presumed to be fully compensated

out of revenues from advertisers seeking to reach the

national market. The fee owed rises by a certain per-

5 Congress was concerned about the potential impact of the

fees on smaller systems, especially since many such systems

must carry more distant signals to compensate for sparse

local broadcasting, and therefore provided them special relief.

See H.R. Rep. No. 1476, supra, at 96-97; S. Rep. No. 473, 94th

Cong., 1st Sess. 81 (1975). Systems with semiannual gross

receipts of $75,800 or less pay a flat fee of $28. Systems with

semiannual gross receipts of more than $75,800 but less than

$292,000 pay a fee based on set percentages of gross receipts

without regard to DSEs. See 17 U.S.C. § 111(d) (1) (C), (D);

37 C.F.R. § 308.2(b).

centage of gross receipts—which percentage, established

by regulation, declines as the number of DSEs rises—

for each incremental DSE. See id. § 111(d)(1)(B);

37 C.F.R. § 308.2(a).° Thus, a large (gross receipts

greater than $292,000) cable system that carried one

distant signal equivalent would pay 0.893% of gross

receipts, a comparable system with a DSE of 2.0 would

pay 1.456%, and a similar system with a DSE of 5.0

would pay 2.847%. A system with a DSE of less than

one, however, would also pay 0.893%. 37 C.F.R. § 308.2

(a) (1); see also H.R. Rep. No. 94-1476, supra, at 96.

The Act does not require perfect correlation between the

number of distant signals retransmitted and the fee paid,

but it operates roughly to charge systems according to

the number of distant signals they use. See supra note

5 (small systems pay regardless of signal use). Fi-

nally, the fees are distributed to the designated copyright

owners by the Copyright Royalty Tribunal (“CRT”),

a body created by the Copyright Act to administer cer-

tain of its provisions.’

* The declining proportion of gross receipts added to the fee

for each additional DSE is appropriate since, ceteris paribus,

the revenues of a large system, see supra note 5, could be

expected to rise with each new signal. The mechanism pro-

vides for a more uniform dollar-per-subscriber-per-signal fee.

"17 U.S.C. § 801. The CRT performs two main tasks rele-

vant here. The first is the quasi-judicial function of distribut-

ing among copyright owners the fees paid to the Copyright

Office under section 111, thus completing the statutory substi-

tute for market transactions. Jd. § 801(b) (3); see also id.

§ 111(d) (3), (4). Second, the CRT has the quasi-legislative

responsibility to adjust the fee rates to reflect inflation or

cable system subscription rate changes in order to maintain

the real per-subscriber royalty fee which existed at the date of

enactment. Jd. § 801(b) (2) (A). The CRT also has the power

to adjust overall rates to maintain reasonableness in the light

of FCC rule changes. 17 U.S.C. § 801(b) (2)(B), (C). The

CRT has no responsibility or authority to define gross receipts

or otherwise to determine the relative share of the total fund

10a

The foregoing description of the operation of section

111 is common ground for the parties. The dispute cen-

ters on the definition of “gross receipts . . . for the basic

service of providing secondary transmissions,” the base

amount from which the fee is calculated and on which

depends the size of the fund the CRT distributes. Con-

gress did not define “gross receipts” or “basic service”

in the 1976 Copyright Act, but an examination of the

reports on the legislation evokes a fairly sharp image of

the model that Congress had in mind at the time of en-

actment. According to that picture, the cable subscriber

had available from the system a single package for a flat

fee containing a number of retransmitted broadcast

signals and some channels produced just for cable—the

“basic service” that every subscriber received—and be-

yond that, individually priced specialty channels avail-

able only on cable from which the subscriber to the basic

service could pick and choose—“pay cable.” See, e.g.,

H.R. Rep No. 94-1476, supra, at 88.* In this paradig-

matic case, the definition of gross receipts from basic

service was simple; gross receipts were the flat fee for

the initial package multiplied by the number of sub-

scribers. It was clear from the outset that receipts for

pay cable and other charges unrelated to programming,

such as those for installation, were not to be a part

of gross receipts, see H.R. Rep. No. 99-1476, supra,

at 96, and that proposition is undisputed before us.

to be contributed by individual cable systems. See 17 U.S.C.

§ 803 (a).

* The legislative history does not make it absolutely clear

whether Congress understood the term pay cable to encom-

pass only individually priced non-broadcast stations—the

usual content of the term, see Home Bor Office, Inc. v. FCC,

567 F.2d 9, 18 & n.8 (D.C. Cir.), cert. denied, 434 U.S. 829

(1977)—or to include the possibility of a package of several

cable-originated channels offered for one price. As the re-

mainder of this opinion will indicate, we need not reach the

question and therefore leave it unanswered.

lla

Primarily because of technological constraints, the initial

package consisted largely of the retransmission of local

broadcast signals and of certain rather rudimentary

cable-originated programming—mostly automated time,

weather, and news services and access channels available

to local citizens as an outlet for speech, see 47 C.F.R.

§ 76.254 (1976). As a rule, such cable-originated serv-

ices were not greatly prized by subscribers and whether

they were included in the gross receipts pool was a mat-

ter of negligible concern.

Evolution of the cable industry and its marketing prac-

tices rather quickly made the meaning of gross receipts

problematic, however, as reality diverged from the model

on which the Act was based. As improvements in ter-

restrial technology gave cable systems increased channel

capacity, advanced satellite services allowed cable trans-

missions to be offered nationwide. These developments

ushered in such familiar and popular cable-originated

stations as ESPN and CNN and made possible the de-

velopment of “superstations,” stations broadcast in one

location but carried nationwide by cable. such as WTBS

from Atlanta and WGN from Chicago.* Because the

initial package offered to subscribers might now contain,

for one price, local broadcast programming, distant

broadcast programming (e.g., WTBS), and highly de-

sirable cable-originated programming (e.g., ESPN), the

question arose whether cable companies could allocate

part of the initial package’s subscription price to cable-

* As advertisers recognize that the superstations reach na-

tional audiences, one would expect the charges for advertising

time to rise, allowing copyright owners to negotiate appro-

priate royalty fees from superstations as they do from net-

works. The statutory scheme could thus become superfluous

for perhaps the most important category of distant broadcast

programming. See Operators Rate WTBS, ESPN Most Valu-

able Basic Services, Multichannel News, July 4, 1983, at 1

(listing superstation WTBS as one of the most lucrative cable

properties other than pay cable).

iia liana

l2a

originated programming and exclude that amount from

gross receipts. Changes in the marketing of cable serv-

ices added to the confusion. The practice of selling a

single initial package plus individually priced pay cable

stations gave way to tiering: the offering of several

different packages, or tiers, of stations, with each tier

separately priced." And each tier might contain both

broadcast and cable-originated stations. The question

soon arose of whether entire tiers could be excluded from

gross receipts as well as whether it was permissible to

exclude revenues from non-broadcast channels within a

“mixed” tier that contained both broadcast and non-

broadcast channels. Because the congressional debates

centered on a model of the cable industry that omitted

such complexities, no obvious answers were available.

We thus arrive at the crux of this case—whether reve-

nues from all tiers other than pay cable and from all

channels within each included tier must be included in

gross receipts. The cable companies argue that, since the

statute was not meant to reimburse the copyright owners

of non-broadcast programming, and since advertisers buy

time on cable-originated stations that are carried nation-

wide such as CNN and ESPN just as they do on the

broadcast networks, with the desire to address the entire

audience actually reached, there can be no reason to in-

clude receipts for subscriptions to cable-originated chan-

nels in a fund designed to reimburse the owners of copy-

rights on distant broadcast programming. Therefore, the

cable companies reason, revenues from non-broadcast

channels or tiers that do not resemble the initial package

envisioned by Congress should not be included in gross

receipts.

” For example, tier 1 could offer four loca! broadcast sta-

tions and an automated weather service plus ESPN and

WTBS for $6, tier 2 could carry WGN and CNN for $3, and

tier 3 could carry eight more cable-originated channels for $5.

13a

The germ of a regulatory answer to these contentions

appeared in 1978 in a revision of the Copyright Office’s

regulations implementing section 111. Those regulations

emphasized that gross receipts included “the full amount

of monthly (or other periodic) service fees,” 43 Fed.

Reg. 27,827, 27,832 (1978). The preamble explained

that systems that furnished to subscribers “for a single

monthly fee, a service that includes retransmission of

radio and television signals and local origination (such

as time and weather and automated news services) ,”

id. at 27,828 (emphasis added), could not allocate a por-

tion of the fee to the local origination services (and

thereafter exclude that portion from gross receipts) be-

cause the Copyright Office could find “no statutory jus-

tification or basis for allocating” the fee. Jd. The Office

thus determined early on, albeit without considering the

case of more valuable non-broadcast properties such as

ESPN, that intra-tier allocation was impermissible.

In response to changes in the cable industry, and, most

important for our purposes, to comments from cable sys-

tem operators that a review of the definition of gross

receipts was desirable, the Copyright Office undertook an

exhaustive veevaluation of its regulations in 1981. 46

Fed. Reg. 30,649, 30,650 (1981). Among other items, it

proposed to examine whether gross receipts from a par-

ticular tier could be prorated when that tier contained

non-broadcast components and whether a system that of-

fered tiered service should be required to include any,

all, or part of revenues from tiers not received by all

subscribers in gross receipts from basic service. Jd. at

30,651.

In the public hearing, Robert W. Ross, Vice President

for Legal Affairs and Government Relations of the Na-

tional Cable Television Association (“NCTA”), a trade

association for cable system operators, admitted that at-

tempts to prorate revenues among channels offered on the

same tier “would add an undue complication to the pro-

NN ee

l4a

cess, and might well be a subject for substantial litigation

and dispute.... [Attempting proration] is not the posi-

tion that reflects the attitude of the Association. .. .

I think vou could create a regulatory monster... .”

Hearings of July 28, 1981, Joint Appendix at 325-27.

The resulting regulation issued some time later, in April

of 1984. 49 Fed. Reg. 13,029 (1984). No doubt in-

fluenced in part by the NCTA’s position, the regulation

provides that “[g]ross receipts for the ‘basic service of

providing secondary transmissions of primary broadcast

transmitters’ include the full amount of monthly (or

other periodic) service fees for any and all services or

tiers of services which include one or more secondary

transmissions of television or radio broadcast signals.”’

37 C.F.R. § 201.17(b) (1). In short, if a tier contains

a broadcast signal, all subscription revenues from the

tier are to be included in gross receipts.

This lawsuit cannot accurately be styled solely a chal-

lenge to that interpretation, for the first complaint was

filed almost one year before the regulation took effect.

Cablevision, a New York cable system operator, sought a

declaratory judgment regarding the proper definition of

gross receipts from basic service. Cablevision had since

1979, when it moved distant broadcast programming

from the initial tier those channels occupied with local

broadcast programming to an optional, higher tier, in-

terpreted the term to include only those monies received

for subscriptions to the first, or lowest, tier to which

all customers were required to subscribe before electing

higher tiers. Cablevision argued that its interpretation

was correct because its definition of ‘‘basic service’ com-

ported with trade usage of the term and a consistent line

of FCC and congressional use."

The defendants to that declaratory action, the Motion

Picture Association of America and eight of its member

11 Cablevision later filed a second complaint on behalf of

three of its other systems that engaged in the same reporting

practices.

15a

companies (“Copyright Owners”) filed counterclaims

charging Cablevision with copyright infringement under

section 111 for retransmitting broadcasts without paying

the proper statutory fee. See 17 U.S.C. § 1ll(c) (2).

The district court bifurcated the case; the first phase

was to deal with the proper definition of gross receipts,

the second, to follow if it was determined that Cable-

vision had not complied with the law, with the question

of what copyrights had been infringed and what reme-

dies were due.

The NCTA entered the battle in September of 1983

by filing a complaint for declaratory judgment regarding

the meaning of the Act against the same defendants. It

was the NCTA’s position that cable systems should be

allowed to attribute a portion of the revenues received as

subscribers’ fees for each tier containing both broadcast

and cable-originated programming to the latter program-

ming and to exclude that amount from gross receipts.

In effect, the NCTA was challenging the decision of the

1978 regulations not to allow allocation and abandoning

—indeed reversing—its position in the 1981 hearings be-

fore the Copyright Office. The district court ordered the

NCTA to join the Copyright Office and the Register of

Copyrights as necessary parties and then consolidated the

cases and ruled on motions for summary judgment.

The district court declined to accord deference to the

tion’s definition of gross receipts did “not have a reason-

able basis in law and frustrate[d] the underlying con-

gressional policy.” 641 F. Supp. at 1160. The district

judge concluded that it “seem[ed] unfair” to require a

cable system to pay the section 111 royalty fee on non-

broadeast transmissions for which it had already paid

merely because the channel was in the same tier with

broadcast programming. /d. The court however rejected

Cablevision’s attempt to equate “basic service” with “first

tier” as also inconsistent with Congress’ purpose and as

l6a

inviting manipulation. It instead agreed with the NCTA

that the statute requires revenues attributable to non-

broadcast programming to be excluded from gross re-

ceipts and ordered the Copyright Office to devise a means

of performing this allocation. Jd. at 1162-63. Finally,

the court dismissed the counterclaims, finding that Cable-

vision “did comply with the spirit of the law.” Jd. at

1163. On appeal, all parties but the NCTA attack the

district court’s definition of gross receipts, and the Copy-

right Owners seek reversal of the dismissal of their

counterclaims.

IT.

We agree with government counsel’s statement at

oral argument that, as applied to the cable industry

as now constituted, section 111 is “not a model of clar-

ity.” The statute fails to define the basic terms at

issue here, and the legislative history strongly indicates

that Congress never considered the arguments now be-

fore us. The instant case thus would seem to be con-

trolled by Chevron U.S.A. Inc. v. Natural Resources De-

fense Council, 467 U.S. 837 (1984), in which the Su-

preme Court addressed the “bubble concept” for defining

“stationary source” within the Clean Air Act Amend-

ments of 1977 and concluded that an examination of the

legislation and its history revealed that Congress had no

specific intention regarding the matter. Jd. at 851, 862.

The Court held that, in the face of such legislative

silence, “the question for the court is whether the agen-

cy’s answer is based on a permissible construction of the

statute.” Jd. at 843."* But before we examine the reason-

% We are urged to undertake a more searching review on

the strength of language in JNS v. Cardoza-Fonseca, 107 S. Ct.

1207 (1987). Cablevision in particular argues that this case

means that a court owes no deference to an agency whenever

“a pure question of statutory construction,” id. at 1221, is

involved. The Supreme Court has recently confirmed, how-

ever, that the language in Cardoza-Fonseca does not alter the

Chevron test—courts are to use the “traditional tools of statu-

17a

ableness of the Copyright Office’s interpretation, we must

first deal with an anterior question: Does the promul-

gating agency, the Copyright Office, have authority to

interpret the statute and are its interpretive regulations

due judicial deference if reasonable?

Cablevision and the NCTA contend that the Copyright

Office’s interpretation is owed no deference because the

Office has no authority to issue such a substantive regula-

tion. The NCTA’s position on this point, however, is

paradoxical; it argues that ‘“‘the Copyright Office lacks

the legal authority and expertise to issue binding inter-

pretations of the Copyright Act,” yet at the same time

asks us to direct that same Office to issue regulations

(forms) to implement its general intra-tier allocation

proposal. The awkwardness of the NCTA’s position

serves to emphasize that this statute is not self-executing.

Given Congress’ awareness of the rapid changes taking

place in the cable industry, we cannot believe that Con-

gress intended that there be no administrative overseer

of this scheme. The statute’s language is not to the con-

trary. Section 702 of title 17 of the United States Code

authorizes the Register of Copyrights ‘“‘to establish regu-

lations . . . for the administration of the functions and

duties made the responsibility of the Register under this

title.” More specifically, section 111(d)(1) of that title

directs that cable systems deposit their compulsory li-

cense royalty fees with the Register of Copyrights, “in

accordance with requirements that the Register shail,

after consultation with the Copyright Royalty Tribunal

. ., prescribe by regulation.”

Cablevision and the NCTA resist the obvious import

of these passages by contending that this rulemaking

tory construction” to determine congressional intent, and to

defer to the agency’s permissible construction when the

statute is “silent or ambiguous.” NLRB v. United Food &

Commercial Workers Union, Local 28, 56 U.S.L.W. 4037, 4040-

41 (U.S. Dee. 15, 1987); see also id. at 4043 (Scalia, J.,

concurring).

18a

power is limited to the ministerial task of designing

forms, and they present authority asserted to stand for

the proposition that the Copyright Office is unusual among

government agencies in that its interpretations of the

statutes it administers are due no judicial deference. Of

course, designing forms to implement the NCTA’s pro-

posal has a substantial policy component. But, more to

the point, we observe that this case is fundamentally one

of first impression regarding section 111 and hold that

the cases cited do not, for reasons we will discuss, es-

tablish the general principle that the Copyright Office’s

interpretation of that statute can be ignored. Our hold-

ing on deference due the Office does not extend beyond

the bounds of its interpretation of section 111, but we

do believe the Office’s construction of at least that section

is due deference.

We have emphasized that the compulsory licensing

scheme was a break from the traditional copyright regime

of individual contracts enforced in individual lawsuits.

If we agreed that the Copyright Office had no power to

interpret the statute, every dispute over the meaning of

the statute could give rise to an infringement action

where, as this case suggests, enormous damage claims are

commonplace.’* If, on the other hand, reasonable inter-

pretations of the statute by the Copyright Office are due

judicial deference, a copyright holder’s incentive to bring

infringement actions that are based on interpretations

other than those of the Copyright Office would be reduced.

Since Congress consciously rejected traditional, contract-

based implementation as unworkable, a holding that

forced resolution of every dispute in an infringement or

declaratory judgment action would be unfaithful to this

13 No party argues that the CRT or the FCC, or anyone

other than the Copyright Office or the judiciary, has authority

to interpret the language in question.

14 Cablevision suggests it could be subject to a $3 billion

judgment.

19a

policy choice and antithetical to Congress’ central concern

of providing a low cost transfer of copyrighted materials.

We are also unpersuaded by the suggestion that no

deference is due the Office because it lacks expertise in

this field. The Copyright Office certainly has greater

expertise in such matters than do the federal courts;

and while watching over the cable industry may have

been a novel brief for the Copyright Office when the new

Act was passed, that agency has had time to accumulate

experience. But, in any event, Chevron’s rationale for

deference is based on more than agency expertise.

[A]n agency to which Congress has delegated policy-

making responsibilities may, within the limits of

that delegation, properly rely upon the incumbent

administration’s views of wise policy to inform its

judgments. ... [I]t is entirely appropriate for

this political branch of the Government to make

such policy choices—resolving the competing inter-

ests which Congress itself either inadvertently did

not resolve, or intentionally left to be resolved by

the agency charged with the administration of the

statute in light of everyday realities.

Chevron, 467 U.S. at 865-66. Like the Court in Chevron,

we are faced with several interpretations of ambiguous

language which really involve competing policies among

which Congress did not explicitly choose. We see no

reason to deny the Copyright Office’s legitimacy in select-

ing, as the EPA did in Chevron, among those choices so

long as the interpretation selected is reasonable.

The Supreme Court implicitly considered whether def-

erence is due the Copyright Office’s construction of the

(1956). Resolving a dispute between an author’s widow

and his illegitimate child, the Court took note of Copy-

right Office regulations, recently rescinded though ap-

parently still followed in practice, that ostensibly gov-

erned the issue. The Court stated that it “would ordi-

20a

narily give weight to the interpretation of an ambiguous

statute by the agency charged with its administration,”

id. at 577-78, but declined to rely on the interpretation

because the fact that the practice was “more the result

of a decision that there is substantial doubt over the ques-

tion, rather than the result of a confident interpretation

of the statute” deprived the practice “of any force as an

interpretation of the statute,” id. The Supreme Court

has thus indicated that it would defer to the Copyright

Office when the latter actually interpreted the statute,

undermining the notion that the Office is never owed

deference.’®

To be sure, the Copyright Office in this case may have

come close to the point of excessive diffidence identified in

DeSylva. In its statement promulgating the 1984 regu-

lations, the Office ‘“‘welcome[d] the guidance of the courts

on ‘tiering,’”’ but concluded it could not justify further

delay in issuing regulations in light of requests from “the

major interests affected by the compulsory license” that

the agency take a position. 49 Fed. Reg. 13,029, 13,031

(1984). The Office also stated it could not “provide the

flexibility requested by cable systems absent guidance

from the Congress or the courts.” Jd. at 13,035. On

balance, however, we conclude that the Office did see it-

self as having the authority to issue regulations and did

make ‘“‘a confident interpretation of the statute.” De-

Sylva, 351 U.S. at 577. The Office stated that “[wl]ith

respect to administration of the Copyright Act in gen-

eral and the compulsory licenses in particular, the Copy-

right Office must and does, however, interpret the Act.”

49 Fed. Reg. 13,029, 13,031 (1984). After weighing the

potential administrative costs of intra-tier allocation, it

concluded that “the Copyright Act does not permit any

proration or other allocations of either DSE’s or gross re-

1’ The DeSylva Court may also have been unwilling to at-

tribute to Congress an intent to delegate to the Copyright

Office authority over a matter such as the descent of property

that is traditionally entrusted to the states.

2la

ceipts,” id. at 13,035 (emphasis added)—not that the

Office did not have the power to order the allocation. The

Office thus did interpret the statute with the meaning of

DeSylva.

Cablevision and the NCTA also rely on Bartok v.

Boosey & Hawkes, Inc., 523 F.2d 941 (2d Cir. 1975).

The Second Circuit there refused to give weight to a

definition of “posthumous” appearing on a Copyright

Office form, stating flatly that “the Copyright Office has

no authority to give opinions or define legal terms and

its interpretation on an issue never before decided should

not be given controlling weight.” Jd. at 946-47 (foot-

notes omitted). But the court held the interpretation

put forward by the Office was inconsistent with legis-

lative intent, so its statement on the deference due the

Office would seem to be a dictum. In any event, the Sec-

ond Circuit was not considering section 111, and we can-

not agree with Cablevision and the NCTA that the court’s

proposition, even if generally sound, should be extended to

cover that section. We think Congress saw a need for

continuing interpretation of section 111 and thereby gave

the Copyright Office statutory authority to fill that role.

Its interpretations are therefore due the same deference

-given those of any other agency. We thus turn to the

reasonableness of the construction at issue.

ITI.

The regulation applies the language of 17 U.S.C. § 111

(d)(1)(B): “the gross receipts from subscribers .. .

for the basic service of providing secondary transmissions

of primary broadcast transmitters.” We find it telling

that the interpretations of that language offered by

Cablevision and the NCTA as alternatives to the Copy-

right Office’s regulation violate the canon of construction

16 The Bartok court cites DeSylva. As our discussion of the

latter case indicates, we do not believe it stands for this

proposition.

22a

that effect should be given to every word of the statute

so that no part is rendered “inoperative or superfluous.”’

Norfolk & W. Ry. v. United States, 768 F.2d 373, 379

(D.C. Cir. 1985), cert. denied, 107 S. Ct. 270 (1986).

The NCTA’s interpretation, adopted by the district court,

would allow cable companies to assign monetary values to

non-broadcast programming that is combined with broad-

cast programming in a mixed tier and to exclude those

amounts from gross receipts. This approach reads “basic

service” out of the statute; under this view, the language

could as easily be “gross receipts from subscribers .. .

for secondary transmissions of primary broadcast trans-

mitters.”” By emphasizing only the delivery of discrete

stations, this reading ignores the clear implication of

the phrase “basic service” that cable services are typ-

ically provided in packages.

Cablevision, conversely, contends that “basic service”

is a well defined term of art, meaning the first or lowest

tier. But a necessary consequence of this interpretation

is that all language that follows that term is superfluous.

Indeed, since Cablevision contends basic service can con-

tain anything the cable system chooses, and not neces-

sarily just—or even any—broadcast retransmissions, see

infra p. 29, the phrase “of providing secondary trans-

missions of primary broadcast transmitters,” which

would seem to serve the purpose in the statute of ex-

plaining “basic service.” could actually contradict “basic

service.” The Copyright Office’s regulation is thus the

interpretation before us that best accounts for the statu-

tory language.

The regulation also evinces a full understanding of the

structure and purpose that underlie that language. In

holding the regulation to be inconsistent with the will of

Congress and adopting the interpretation espoused by the

NCTA, the district court in our view misunderstood a

fundamental mechanism of the statute. The court cor-

rectly observed that liability under the compulsory license

23a

was to be limited to the retransmission of distant non-

network programming, 641 F. Supp. at 1161; see H.R.

Rep. No. 94-1476, supra, at 90, but failed to appreciate

how the distant signal equivalents satisfy that intention.

Because the DSE value—and hence the percentage of the

fixed gross receipts base due as a fee—rises with each

distant broadcast channel retransmitted, the cable system

pays only for distant non-network' programming ac-

tually broadcast.

That Congress intended the DSEs to correlate the

number of distant signals carried and fees paid can be

further established by examining the divergences of the

content of the revenue base and the programs eligible for

reimbursement from the CRT. Congress never contem-

plated a precise congruence of the royalties paid and the

amount of distant non-network programming actually

carried. Instead, Congress picked a convenient revenue

base and used the DSEs to discount it in a reasonable

manner. Attempting to fine tune the gross receipts base

to include only revenues from items reimbursable by the

CRT is a plausible approach a priori, but it ignores Con-

gress’ actual decision and would ultimately render the

DSE mechanism superfluous. Congress’ clear understand-

ing that gross receipts were to include revenues from sub-

scription fees paid in part for the retransmission of local

broadcasts (that much is apparent from the statutory

language alone) is, since such local broadcasts are pro-

gramming not eligible to draw from the fund -adminis-

tered by the CRT, a strong indication of its approach.”

17 Recall that a DSE of 0.25 is assigned to the retransmis-

sion of a distant network affiliate’s signal, to approximate the

proportion of non-network programming carried by such a

station.

18 The same is true of network programming on distant net-

work affiliates. Gross receipts are not reduced to account for

the payment copyright owners already receive for network

programming, DSE's are. See supra text accompanying note

24a

If an allocation between broadcast and non-broadcast

programming revenues in each tier were required by the

statutory scheme, one would wonder why Congress did

not call for a further allocation, to remove local broad-

cast revenues from gross receipts, and do away with the

DSE system altogether. The answer, it seems to us, must

be that DSE calculations were considered more practical

and were therefore adopted in lieu of attempts at such

allocation. All cable systems, moreover, pay a section 111

fee regardless of whether they carry any distant signals.

See supra note 5. A payment scheme that reflected

usage exactly would not impose such a_ requirement.

Finally, it should be noted that the Act was an attempt

to simulate the market in the face of the market's in-

ability to provide precise fits between retransmissions

and royalty fees, and so the Act could not itself aspire

to too much precision.

In short, the reasonableness of the regulatory require-

ment that all revenues from a tier containing one re-

transmitted broadcast signal be included in gross receipts

cannot be attacked for its failure to allow cable systems

to attribute a value to norbroadcast programs and to

subtract that value from gross receipts. We find no

requirement in the statute or its history that the fee

paid by a cable system reflect precisely the value it re-

ceived from retransmissions—indeed, as we have shown,

in many cases the relationship is skewed considerably.

Congress instead chose an easily calculable revenue base

and used the DSEs to approximate the value received by

the cable companies. The Copyright Office has simply con-

tinued that practice.

’ The regulation’s stance on attribution is also due defer-

ence because of its relative contemporaneity with the enact-

ment of the statute and its consistency. See Udall v. Tallman,

380 U.S. 1, 16 (1965). It has its roots in the 1978 regulation

prohibiting attribution. See 43 Fed. Reg. 27,827, 27,828,

27,832 (1978).

25a

Comparison of the Copyright Office’s regulation with

the position now espoused by the NCTA suggests a fur-

ther reason deference is due the regulation. The NCTA’s

interpretation, endorsed by the district court, would cre-

ate “a hornet’s nest of problems.” ” If five channels are

sold as a package for $5, and none is priced separately

for individual sale, one can conclude nothing more about

the revenue that each generates individually than that

it does not exceed $5.** The artificiality of contending

that each is worth $1 is obvious from the example of a

tier containing ESPN and four weather channels. Nor

do viewer measurement techniques such as the Nielsen

ratings provide a solution. Methodological wrangles and

monitoring expenses far in excess of those required under

the Copyright Office’s regulation are easily foreseeable

and would thwart the congressional goal of minimizing

transaction costs.

The Copyright Office’s interpretation avoids these ob-

vious pitfalls, and that practicality alone provides sub-

stantial support for the reasonableness of its interpre-

tation. When Congress delegates a function to an agency,

we believe that an important element of congressional

purpose is that the function be carried out sensibly and

efficiently. Congress recognizes that it can only legislate,

2» The phrase is that of Robert W. Ross, testifying on be-

half of the NCTA in hearings held by the Copyright Office on

July 28, 1981, regarding attempting to allocate revenues to

particular items sold in a single tier for one price. Joint Ap-

pendix at 326; see supra p. 13. It is interesting that the

regulation promulgated after the district court adopted the

NCTA’s approach simply directs cable systems to attribute

any amount they see fit to cable-originated programming. It

asks only that they maintain records of the amounts thus

deducted from gross receipts. See 51 Fed. Reg. 30,214 (1986) ;

id. 45,110. No obvious method of attribution suggests itself.

2! We assume, perhaps unrealistically, that no television sta-

tion would have a negative value for a large number of con-

sumers.

26a

not administer, so it necessarily relies on agency action

to make “common sense’’ responses to problems that arise

during implementation, so long as those responses are

not inconsistent with congressional intent. In Drummond

Coal Co. v. Hodel, 796 F.2d 503, 507 (D.C. Cir. 1986),

cert. denied, 107 S. Ct. 1593 (1987), for instance, this

court agreed that the Secretary of the Interior’s defini-

tion of “coal produced” was reasonable, noting that the

Secretary adopted the regulation out of concern for the

vexing complications and expense that accompanied com-

peting approaches and for the need for a uniform national

standard. Similarly, including all revenues from any

separately priced tier that contains one or more broad-

cast stations is a convenient, indeed perhaps the only

reasonable, way of computing gross receipts that ensures

a revenue base large enough to perform the function

Congress intended—reimbursing copyright owners.

The reasonableness of the regulation is further bol-

stered by the ability it provides cable systems to control

their own destiny. See 49 Fed. Reg. 13,029, 13,035

(1984) (Copyright Office’s discussion of final regulation) ;

see also Drummond, 796 F.2d at 507 n.9 (coal companies

can act to limit impact of interpretation). A company

can segregate all its secondary transmissions into a single

tier and thus avoid including in gross receipts any reve-

nues from cable-originated programming. Although the

ing practices of cable companies, the companies could on

their own forgo those marketing advantages that now

lead them to pay higher than necessary fees.

In its separate challenge to the reasonableness of the

regulation, Cablevision puts forth an alternative that at

least can be said not to present administrative com-

plexity. Cablevision concedes that the gross receipts base

was not necessarily intended to include only broadcast

signals, and rather was selected to provide a clear, uni-

form, and constant base for the calculation of royalty

fees, but asserts that the regulation is unfaithful to the

the first tier of service to which all customers must sub-

scribe. Cablevision argues that basic service was at the

time of passage of the Act a trade term with the mean-

ing Cablevision suggests and that the language was con-

sistently used in earlier bills in the same manner.

Because Congress never considered the issue of “mixed

tiering” this view is not without surface plausibility. The

legislative history shows that Congress contemplated only

one “tier” containing a mixture of broadcast and cable

originated stations. All higher “tiers” in this model con-

tained only cable-originated stations for a separate fee,

and these pay cable services were excluded from gross

receipts. See H.R. Rep. No. 94-1476, supra, at 96. Thus

the tier from which gross receipts were to be calculated

was at the same time all tiers (the only one) containing

a broadcast signal—the Copyright Office’s view—and the

first tier alone—Cablevision’s position.

As support for its construction, Cablevision points first

to numerous affidavits of cable industry executives stat-

ing that basic service was an accepted trade term in the

early 1970’s, that it referred to the lowest tier of service,

and that it was used interchangeably with “minimum

level of service,” “initial package,” and “regular sub-

seriber service.” Cablevision contends the Congress must

be presumed to have adopted this trade meaning. Our

difficulty with this argument is that one can concede each

step and not reach Cablevision’s conclusion. Congress

may have envisioned basic service as the first tier or the

initial package when debating the Act, but it also viewed

this level of service as the only level—other than tiers of

pay cable that were to be excluded from gross receipts.

The truth, it seems to us, is that Congress never con-

sidered the situation of multiple tiers containing broad-

casting materials, and use of an industry definition from

28a

« period when the practice under consideration was not

widespread in the industry is singularly unenlightening.**

Cablevision nevertheless attempts to link its definition

of basic service to the early concept of “adequate tele-

vision service” that appeared in an unenacted Senate bill.

See S. 644, 92d Cong., lst Sess. (1971). That bill would

have provided cable systems a compulsory license to re-

transmit local signals and any distant signals that would

be a necessary complement to local broadcasting in pro-

viding “adequate television service’—service that would

provide the system’s customers access to a_ prescribed

minimum range of stations—as defined by the Act. See

id. $ 111(c) (3). In return, cable systems were to pay a

fee based on a percentage of gross receipts after report-

ing the “gross amounts paid to the cable system by sub-

scribers for the basic service of providing secondary

transmissions of primary broadcast transmitters.” /d.

$ 111(d) (2). Cablevision argues that, since the language

at issue in this case appeared initially in a bill relating

to minimum or adequate service, basic service must be

equivalent to “adequate” or “first tier” service.

Identity of language in an unenacted bill addressing

adequate television service with language in an Act

passed years later to deal with a transaction cost prob-

lem in the copyright law is not, by itself, particularly

significant. Putting to one side the weight properly to

be accorded an unenacted bill, we observe that words can

take on vastly different meanings in different contexts.

See, e.g., Director v. Black Diamond Coal Mining Co.,

22 A homely metaphor illustrates the tension between Cable-

vision’s view and Congress’ intent. Imagine a fee to be paid

on the gross revenue from the sale of dressers, enacted at a

time when dressers were available only as single pieces of

furniture. With the advent of modular furniture, is it more

in keeping with the statute’s spirit to base the fee on revenues

from the sale of bottom drawers only, which every customer

must buy, or on the sale of all dresser drawers?

29a

598 F.2d 945, 951 (5th Cir. 1979) (most words have

multiple meanings, depending on context; absent evidence

Congress intended to create a term of art, a word’s

meaning in one statute does not necessarily indicate its

meaning in another). It is furthermore unclear whether

the language of S. 644 does what Cablevision would have

it do. The provision actually directing payment of a fee

refers not to the “gross amounts paid . . . for the basic

service’ that the company is required to report, but to

“the gross receipts from subscribers,” presumably a much

broader concept, even in Cablevision’s view. /d. at § 111

(d) (2) (B).

The most troublesome aspect of this argument, how-

ever, is the explicit equation of basic service with ade-

quate service. Cablevision has argued to us that the

first tier—basic service in its parlance—may contain

anything the cable system chooses. Its concept of basic

service is therefore simply unrelated to adequate service,

which presumably involves a specific content. And we

are bemused by Cablevision’s slightly misleading attempts

to suggest that the FCC’s “must-carry” rules, which re-

quire a cable system to provide certain services, assure

a minimum content on the first tier. This court has twice

struck down particular FCC must-carry rules as incom-

patible with the First Amendment. Quincy Cable TV v.

FCC, 768 F.2d 1434 (D.C. Cir. 1985), cert. denied, 106

S. Ct. 2889 (1986); Century Communications Corp. v.

FCC, No. 86-1683 (D.C. Cir. Dec. 11, 1987).

Even where two equally tenable interpretations of a

statute are put forward, one by the agency charged with

administering the Act—as we have held the Copyright

Office to be—and the other by a private party, we will

favor the former. See Udall v. Tallman, 380 U.S. 1, 4

(1965). But on examination we find Cablevision’s posi-

tion untenable, since it could lead to the absurdity of only

a minuscle portion of revenues, at the option of a cable

erential

30a

company, being included in gross receipts—hardly a rea-

sonable interpretation of Congress’ objective.”

For the foregoing reasons, we conclude that the Copy-

right Office’s regulation is reasonable as applied to calcu-

lations involving any tier viewed in isolation, the primary

element of dispute in this case. If we rested on this

conclusion, however, we would omit discussion of a mat-

ter heavily debated in the briefs and at oral argument

and relied on substantially by the district court. In the

proceeding below, the district court allowed counsel for

the NCTA to request from Dorothy Schrader, General

Counsel of the Copyright Office, responses to certain hypo-

thetical questions regarding the Office’s interpretation of

its regulation. Whether or not that procedure was ap-

propriate, once it was employed—once the General Coun-

sel’s letter of reply had put this ancillary dispute in issue

—we understand why the district court acted on the

questions the letter raised.

Nevertheless, and despite the government’s failure to

argue the point explicitly, we believe that the issues

raised in Schrader’s June, 1986 letter are unripe for

judicial review. But because the issue has been hotly

litigated both before us and below, and, more impor-

tantly, because our conclusion regarding unripeness stems

as much from the confusion created by the letter as

from any intrinsic unsuitability of the issues for dis-

position, we find it necessary in explaining our con-

clusion to discuss in some detail the 1986 letter and the

debate surrounding it.

The letter deals with marketing practices we will style

“discounts” and “tie-ins.” The following hypotheticals

are addressed: A cable system offers tier A, containing

23 We intimate no view as to whether the operation of the

must-carry rules at an earlier time served to make Cable-

vision’s behavior more or less willful. That issue is for the

district court on remand. See infra Section IV.

3la

all broadcast signals, for $10, tier B, containing two non-

broadcast and two broadcast signals, for $4; and tier

C, containing a pay cable station, for $9. General Coun-

sel Schrader considers both a discount, offering all three

tiers for $22, and a tie-in, under which the subscriber

could receive tier A for $19 only after subscribing to

tier C for $9. Schrader’s opinion specifically requires

the entire $22 discount price to be included in gross

receipts, just as the $19 under the tie-in must be. She

explained:

Whenever the two types of service are offered for

a single price or, if on separate tiers, whenever it is

necessary to subscribe to one tier in order to receive

another, the two services are in reality being offered

as a single package of service; if secondary trans-

missions are included in the package, gross receipts

from both tiers or the combined package must be

reported and used in calculating copyright royalties.

Joint Appendix at 491 (emphasis omitted).

The NCTA argues, and the district court agreed, see

641 F. Supp. at 1160, that this language, if followed

literally, would violate Congress’ intent. They both read

the letter to suggest that in precisely the paradigm

case envisioned by Congress—in which the subscriber

must purchase a basic package of retransmitted stations

before going on to buy pay cable—receipts from pay

cable must, contrary to Congress’ specific intent, be in-

cluded in gross receipts because “it is necessary to sub-

scribe to one tier in order to receive” pay cable. We

have some reason to believe, however, that the General

Counsel was addressing a slightly different problem and

merely expressed herself incompletely. Another, earlier

letter from the General Counsel that appears in the

record, Joint Appendix at 488, was written in August

of 1985 and avoids the problem the 1986 letter seemingly

creates. -

32a

The 1985 letter and the parties’ presentations suggest

the following analysis. Whenever a tier, call it Y, can

be purchased only after another tier, X, has been pur-

chased, there is a danger that the price associated with Y

is merely notional. Thus, if Y contained broadcast signals

that would be valued by consumers at $20, a cable op-

erator bent on downward manipulation of receipts from

the sale of Y could construct an X tier of automated

services worth $1, make Y available only to subscribers

to X, charge $19 for X and $2 for Y and, absent a re-

quirement that the two amounts be lumped together, un-

derstate gross receipts for Y by $18 per subscriber. This

technique will not work in reverse, however. Subscribers

forced to buy through tier Y to be allowed to pay $19

for tier X will simply stop after buying Y, leaving the

cable operator to absorb a loss or to raise the price to

reflect value accurately. Generally, if a subscriber can

buy a given tier without purchasing any others, its

nominal price will be at least as great as its value; if

the subscriber must purchase another tier to receive the

one in question, the latter’s price may be understated.

The language of the General Counsel’s 1986 letter

therefore would appear, as the district court discerned,

to be too sweeping. Indeed, counsel for the Copyright

Owners, a group whose interests would certainly be

served by a strict adherence to the literal language of

Schrader’s letter, conceded it was “overbroad.” The let-

ter suggests that the two cases just described should be

treated the same—revenues from both tiers should go

into gross receipts regardless of whether X or Y must

be purchased first—when there is a strong argument

only the first should be so treated. The letter does

analyze the tie-in case as we tentatively do, for in that

hypothetical the broadcast signals in A can be bought

only after purchasing C, so the price for A may be no

more than nominal and there is a risk that gross receipts

will be understated. The treatment of the discount seems

33a

incorrect, though, for as we understand the hypothetical

it would be possible to buy all the broadcast signals, A

and B, alone for $14. That $14 price is therefore an

accurate reflection of the value placed on the package

and could be used in calculating gross receipts from re-

transmission from the $22 discount fee.

The Government’s Reply Brief, moreover, adopts the

analysis of the 1985 letter and seems to back delicately

away from the inconsistencies in the 1986 letter. But

at oral argument, counsel for the Government was un-

willing to make any firm statement regarding the Copy-

right Office’s position on this issue. We cannot, in light

of this rather bewildering array of conflicting positions,

affirm the reasonableness of this facet of the agency’s

interpretation of the statute. We nevertheless are quite

unprepared to reject either the regulation or the inter-

pretation in Schrader’s 1986 letter on this basis. First,

there is no showing as to the Copyright Office’s actual

practice in these cases. Requirements that subscribers

“buy through” initial tiers of broadcast programming

before receiving pay cable stations such as HBO are

apparently widespread; it would be imprudent to in-

validate an interpretation of a regulation on the subject,

without more information, on the strength of one letter

from ‘he General Counsel replying to a hypothetical

question.

Further, the rulemaking from which this regulation

sprang never addressed tie-ins or discounting; it focused

on the treatment of individual tiers. 49 Fed. Reg. 13,029

(1984). And the lawsuits now before us are focused on

the first tier/basic service equivalence and the permissi-

bility of allocating values within a tier. The tie-in and

discount issues are a litigating afterthought, and we are

uncertain from the record as to the Copyright Office’s

authoritative interpretation. It is often necessary to re-

view agency action in a rather theoretical setting, but

a court must have some sort of record upon which to base

its review. There has been here no showing of an in-

34a

terpretation to which the Office firmly adheres. The

Supreme Court in Abbott Laboratories v. Gardner, 387

U.S. 136 (1967), observed that the purpose of the ripe-

ness doctrine in the context of reviewing administrative

action is to “prevent the courts, through avoidance of

premature adjudication, from entangling themselves in

abstract disagreements over administrative policies, and

also to protect the agencies from judicial interference

until an administrative decision has been formalized and

its effects felt in a concrete way by the challenging par-

ties.” Id. at 148-49. If this dispute is not abstract, it

is certainly not yet well defined enough for judicial re-

view. The Copyright Office, will, we hope, clarify its

position regarding tie-ins, perhaps in a rulemaking. Any

party injured by the Office’s new application of the regu-

lation could, of course, seek relief from that concrete

injury. See Geller v. FCC, 610 F.2d 973, 978 (D.C. Cir.

1979). -

The district court ordered that the first phase of the

trial consider “[{w]hether plaintiff complied with the

statutory prerequisite conditions for obtaining a compul-

sory license,” and that a further hearing would be had,

if it were determined that Cablevision was not entitled

to a compulsory license, regarding ‘which copyrights

of defendants have been infringed and the remedies

therefor.” In its opinion ending the first phase, the court

dismissed the Copyright Owners’ counterclaims. It noted

that Cablevision had paid the fees indicated by its

method of calculating gross receipts and had posted bonds

to cover the difference between its payments and the

amount required by the Copyright Office’s regulation.™

The court concluded Cablevision had complied “with the

spirit of the law.” 641 F. Supp. at 1163. The Copyright

24 Cablevision had used its accounting convention since 1979

but posted bonds only for the periods after the 1984 issue of

the regulation.

35a

Owners point to the bifurcation order and claim this dis-

position was premature.

Section 111(c) (2) makes a cable system liable for in-

fringement when, without paying the required royalty fee,

it engages in the “willful or repeated secondary transmis-

sion” of primary transmissions. We recognize that tne

district court might have intended to conclude as a

matter of law at the end of the first phase that Cabse-

vision’s conduct was neither willful nor repeated within

the meaning of the Act.*% The court did not couch its

ruling in the statutory language, however, and while it

might have thought “willful or repeated” equivalent to

a disregard for the “spirit of the law,” it did not clearly

explain its reasoning. Nor did the court address how,

if at all, Cablevision’s conduct is to be judged in light

of regulatory changes. Because we are unsure of the

basis for the district court’s dismissal and are unwilling

to consider the issue of liability for infringement without

the benefit of its full reasoning, and because it is also

unclear whether the court’s opinion directed Cablevision

to pay back royalties for the entire period not excepted

by the statute of limitations or only for the period after

promulgation of the regulation—the period covered by

the bonds the district court mentioned—we reverse the

dismissal and remand for further proceedings on the

counterclaim consistent with this opinion. The action is

Reversed in part and reversed and remanded in part.

25“The words ‘willful or repeated’ are used to prevent a

cable system from being subjected to severe penalties for

innocent or casual acts .... The Committee does not intend

... that a good faith error by the cable system in computing

the amount due would subject it to full liability as an in-

fringer.” H.R. REP. No. 94-1476, supra, at 93.

36a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

CABLEVISION COMPANY,

Plaintiff,

¥.

MOTION PICTURE ASSOCIATION

OF AMERICA, INC., et al.

Defendants.

NATIONAL CABLE TELEVISION

ASSOCIATION, INC.,

Plaintiff,

COLUMBIA PICTURES INDUSTRIES,

INC., et al.

Defendants.

eee eee wae

CABLEVISION COMPANY

Plaintiff,

MOTION PICTURE ASSOCIATION,

Or AMERICA, INC., et al.,

Defendants.

Nee eee eae ae SS

Civil Action No. 83-1655

Civil Action No. 83-2785

Civil Action No. 84-3097

37a

OPINION

These matters are before the Court on cross-motions for

summary judgment, the respective opposition and reply

briefs to the motions, a hearing on the motions, and the

entire record herein.

I. Background

This civil action consists of three separately filed com-

plaints which seek a judicial interpretation of a phrase

contained in Section 111(d) of the Copyright Act of 1976,

Pub.L. No. 94-553, 90 Stat. 2541 (1978) (codified at 17

U.S.C. §§ 101 et seg.) Plaintiff Cablevision Company (‘‘Ca-

blevision’’) filed two of those complaints, Civil Action Nos.

83-1655 and 84-3097. Cablevision provides cable television

services to subscribers residing in Nassau, Westchester,

and Suffolk Counties, New York, and in Bayonne and Ber-

gen Counties, New Jersey. Plaintiff National Cable Tele-

vision Association, Inc. (““NCTA’’) filed the third complaint,

Civil Action No. 83-2785. NCTA is a trade association

whose members include owners and operators of cable tel-

evision systems in the United States. Cablevision, a mem-

ber of NCTA, is also a plaintiff-intervenor in the NCTA

action. See March 20, 1984, Order granting Cablevision’s

Motion to Intervene.

The defendants are the same in all three cases. They

include eight copyright owners, co-owners or exclusive li-

censees of public performance, distribution and rights to

the motion pictures which are the subject of this dispute

and a trade association which represents the interests of

these copyright owners. These copyright owners are Co-

lumbia Pictures Industries, Inc., Embassy Communications,

MGM/UA Entertainment Co., Orion Pictures Corporation,

Paramount Pictures Corporation, Twentieth Century-Fox

Film Corporation, Universal City Studios, Inc., Warner

Bros. Inc., and the Motion Picture Association of America

(“Copyright Owner Defendants’). The U.S. Copyright Of-

fice and its Register (‘Copyright Office Defendants’’) were

38a

joined as necessary party defendants in a separate count

of an amended complaint pursuant to an order of this

Court. See July 17, 1984, Order and Amended Complaint

of the Library of Congress in Washington, D.C., which

has certain responsibilities with respect to the Copyright

Act of 1976 pursuant to that Act. The Register of Co-

pyrights is the officer in charge of the Copyright Office.

Plaintiffs’ complaints seek a declaratory judgment as to

the proper interpretation of Section 111(d) of the Copy-

right Act of 1976, concerning the amount of gross receipts

included in calculating the payment of copyright royalty

fees by cable television systems for the basic service of

providing secondary transmissions of primary broadcast

transmitters. Both plaintiffs claim that the defendants in-

terpret improperly section 111(d) so as to require cable

operators to overpay substantially their copyright royalty

fees and thereby unjustly enrich defendants. Moreover,

Cablevision requests an order restraining Copyright Owner

Defendants from instituting any further action against it

for copyright infringement and such other relief as may

be appropriate.

The defendants disagree with plaintiffs’ reading of sec-

tion 111(d). They argue instead that the plaintiffs’ inter-

pretation of the statute results in an underpayment of

royalties. Defendant Copyright Owners filed a counterclaim

for copyright infringement, statutory damages, injunctive

relief, costs, and attorneys fees.

Before the Court discusses more fully the positions of

the parties in this dispute, a short overview of section

111(d) and the development of the cable industry is in

order.

A. The Copyright Revision Act of 1976

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

et seq., established a compulsory copyright license for the

39a

retransmission of television broadcast signals by cable sys-

tems. The Act was the culmination of congressional efforts

to respond to the Supreme Court’s decisions in Fortnightly

Corp. v. United Artists Television, Inc., 392 U.S. 390

(1968), and Teleprompter Corp. v. CBS, Inc., 415 U.S. 394

(1974), which held that the distribution of television broad-

casts was not a “performance” so as to be protected by

the Copyright Act of 1909. Consequently, the cable op-

erators were not required to make royalty payments to

the copyright owners. The Court stated in Teleprompter

that “any ultimate resolution of the many sensitive and

important problems in this field ... must be left to Con-

gress.” 415 U.S. at 414.

Congressional efforts to safeguard the interest of the

creators of copyright material being distributed on cable

systems, while still allowing for the fullest development of

the public’s right of access to information through cable

technology, began in 1964 and was followed quickly by the

introduction of bills in 1965, 1966, 1967, 1969, 1971, 1973,

and 1975, leading to the passage of the revised Copyright

Act of 1976. See The Cable Television Provisions of the

Revised Copyright Act, 27 Cath.U.L.Rev. 263, 279 n.64

(1978). Congress realized that it would be impractical, if

not impossible, for each and every cable operator to ne-

gotiate directly with every copyright owner and embarked

upon a new approach.

This new approach required cable operators to obtain a

compulsory license in order to retransmit television pro-

grams. Copyright owners of motion pictures and/or other

works that are embodied in the retransmitted signals are

compelled to license these works to cable systems in return

for which they are compensated through the payment of

semi-annual fees by individual cable systems. These semi-

annual royalty fees are computed in accordance with a

statutory formula based upon gross receipts from a basic

statutory service.

40a

The royalty schedule formula was the result of last-

minute negotiations between the copyright owners and the

cable television industry and, with some modifications, is

found in section 111(d\X2\B) which provides for the fee to

computed on the basis of specific percentages of

the gross receipts from subscribers to the cable

service during said period for the basic service

of providing secondary transmission of primary

broadcast transmitters. .. .

17 U.S.C. 111(dX2XB). The royalty fees are then distrib-

uted to those copyright owners whose works were the

subject of secondary transmissions of broadcast signals.

The Copyright Tribunal (‘“Tribunal’’), an independent

agency of the legislative branch, deterrnines the formulae

for dividing the fees among the copyright owners. The

Tribunal is also authorized to ‘‘... adopt regulations ...

governing its procedures and methods of operation... .’’

17 U.S.C. § 803.

Semi-annual statements of account which list the broad-

cast signals carried by the cable system operators must

also be filed with the semi-annual royalty payments. Cable

systems with semi-annual gross receipts below $146,000

pay a flat royalty fee ($28) regardless of the number of

distant signals carried, and are known as ‘“‘Form 1”’ sys-

tems. 17 U.S.C. § 111(dX2,%C); 37 C.F.R. § 308.2(bX1)

(1985). Cable systems with semi-annual gross receipts of

$146,000 to $292,000, commonly known as ‘‘Form 2”’ sys-

tems, pay a royalty fee based on a set percentage of gross

receipts regardless of the number of distant signals. 17

U.S.C. § 111(dX2KD); 37 C.F.R. § 308.2(b,2) (1985).

Major cable systems with semi-annual gross receipts in

excess of $292,000, known as ‘‘Form 3” systems, pay roy-

alty fees based on a percentage of gross receipts, but the

percentage varies with the number and nature of the

broadcast signals retransmitted. The licensing fee of the

4la

major cable operators is based upon a percentage of gross

receipts derived from basic subscriber charges multiplied

by the number of distant signal equivalents (““DSE’’) car-

ried. A DSE is a numerical value assigned to the secondary

transmission of a non-network television program beyond

the local service area of the primary transmitter by a cable

system. 17 U.S.C § 111(f). Different DSE values are as-

signed to three types of stations (independent, network

affiliated, and noncommercial educational) that can be re-

transmitted as distant signals.' Jd. See Copyright Owner

Defendants’ Motion for Summary Judgment on Phase One

Issue at 10-12, filed March 2, 1984, for a detailed expla-

nation of Form 3 System royalty fee calculations.

Congress defined the terms ‘‘secondary transmissions’’

and ‘‘primary transmissions’ used in section 111(dX2\B)

of the Act.? It failed, however, to define specifically the

terms “gross receipts’ or “‘basic service,” the meaning

upon which this controversy centers. The Copyright: Tri-

bunal, consistent with its mandate and over six months

after NCTA filed its complaint, adopted rules of procedure

and prepared forms for the use of cable operators to fa-

‘A greater distant signal equivalent (‘“‘DSE’’) value is ‘‘assigned in-

dependent television stations since they almost exclusively carry non-

network programming; a lesser value is assigned to network affiliates

since they carry only a limited amount of nonnetwork programming.”

National Cable TV v. Copyright Royalty Tribunal, 689 F.2d 1077, 1080

n.17 (D.C. Cir. 1982).

* A “primary transmission”’ is a transmission made to the public by

the transmitting facility whose signals are being received and further

transmitted by the secondary transmission service, regardless of where

or when the performance or display was first transmitted.

A “secondary transmission” is the further transmitting of a pri-

mary transmission simultaneously with the primary transmission,

or nonsimultaneously with the primary transmission if by a ‘‘cable

system’’ not located in whole or part within the boundary of the

forty-eight contiguous States, Hawaii, or Puerto Rico....

17 U.S.C. § 111(f).

42a

cilitate the filing of periodic statements of account and

defined specifically “gross receipts.” According to the Tri-

bunal,

[g]ross receipts for the “‘basic service of providing

secondary transmissions of primary broadcast

transmitters’ include the full amount of monthly

(or other periodic) service fees for any and all

services or tiers of service which include one or

more secondary transmissions of television or ra-

dio broadcast signals, for additional set fees, and

for converter fees. All such gross receipts shall

be aggregated and the DSE calculations shall be

made against the aggregated amount.

37 C.F.R. § 201.17(bX1) (April 2, 1984).

B. The Development of the Cable Industry

When the 1976 Copyright Act was passed, cable tele-

vision and ancillary technologies were still developing. Ca-

ble television developed originally as a means for

transmitting television broadcast signals by wire to the

homes of paying subscribers. These cable television Sys-

tems retransmit both local broadcast signals, received off

the air by antennae, and distant broadcast Signals, cus-

tomarily received by terrestrial microwave relay systems

or by satellite. Cable television systems also transmit non-

broadcast entertainment and _ informational programing,

.€., programing that is not originally broadcast by a tel-

evision station. Such nonbroadcast transmissions are made

under individually negotiated copyright licenses.

Early cable systems had limited channel capacity, usually

twelve systems or less. The principal use of these channels

was for retransmission of local broadcast signals received

off the air at a well-placed antenna site and distant broad-

cast signals imported by microwave. The cable systems

offered usually both the local and distant broadcast signals

for a single package price. By the early 1970's, a few

43a

cable systems began to offer one or more optional tiers

of services for an additional charge. The optional tiers

usually consisted of one or two channels of commercial-

free movies, i.e., Home Box Office (‘“‘HBO’’), or other en-

tertainment supplied to the cable system by tape or mi-

crowave.

A whole new category of nonbroadcast programing

emerged as satellite and cable technology developed in the

1970’s. This programing today consists of offerings such

as ESPN (a sports channel), The Weather Channel, the

Health Channel, cultural and religious channels, etc. Ac-

cording to NCTA, “‘some of these channels are supported

principally by advertising’’ while “‘others are financed in

substantial part by cable systems making direct payments

to the supplier for the right to offer the copyrighted pro-

graming.’’ NCTA Complaint at 11.

The cable system enters into a written agreement with

the program supplier licensing the system to transmit the

copyrighted nonbroadcast programing and governing the

compensation, advertising rights, and other terms agreed

to by the parties. Some cable systems offer the nonbroad-

cast channel as an optional tier of service at an additional

charge. Other systems add the nonbroadcast programing

with the system’s so-called ‘‘basic service’ or lowest tier

of service and the combined tier is offered at a higher

charge. As to the former type of “‘tiering,’’ the additional

tier will sometimes include retransmitted distant broadcast

signals. For example, a typical additional tier may include

one or more of the satellite delivered broadcast ‘‘super-

stations,” i.e., WTBS (Channel 17 in Atlanta) and one or

more distant broadcast signals. The marketing practice of

“tiering’’ has become prevalent in the cable industry and

cable operators now frequently market their program ser-

vices in ‘‘tiers’’ consisting of both broadcast and nonbroad-

cast programing. See 49 Fed. Reg. 13029, 13034 col. 3

(April 2, 1984).

ia |

44a

C. Positions of the Parties

The Court notes with interest that plaintiffs Cablevision

and NCTA see different interpretations of the phrase “‘gross

receipts from subscribers to the cable service ... for the

basic service of providing secondary transmissions of pri-

mary broadcast transmitters” contained in section 111(d)

“of the Act. Cablevision has interpreted section 111(dX2\A)

of the Act to require the computation of copyright royalty

payments on the basis of the gross receipts paid by sub-

scribers for Cablevision’s Basic Service, the tier of service

to which all of the subscribers must subscribe prior to

receiving any additional tiers of service. Cablevision claims

that when the Act was enacted in 1976, the term basic

service had a recognized meaning within the cable tele-

vision industry. ‘It was the lowest tier of service offered

by a cable television system to which all subscribers were

required to subscribe before they were permitted to sub-

scribe to any additional tiers of service.” Cablevision’s

Statement of Material Facts as to Which There is No

Genuine Issue ¢ 10. Cablevision also asserts that the term

“basic service’ was synonymous with and used inter-

changeably by the industry with such terms as ‘minimum

level of service,’ ‘initial package,’ and ‘regular subscriber

service.’ '’ Jd. Cablevision’s interpretation would exclude

from royalty calculations all revenue attributable to an

optional tier, whether or not that tier contained distant

broadcast programing.

NCTA, on the other hand, argues “that Section 111 of

the Act requires the payment of compulsory royalties only

for secondary transmissions of primary broadcast trans-

mitters and not for transmissions of other, nonbroadcast

programing. . . .""’ Memorandum of Points and Authorities

NCTA also challenges the meaning of the term “‘cable system " as

defined in Section 111(f), Title 17, United States Code. Because the

Court finds that this issue relates to the definition of a cable system,

see 17 U.S.C. § 111(f), an issue not presently before the Court. it will

not be addressed.

45a

in Support of NCTA’s Renewed Motion and Cross-Motion

for Summary Judgment and in Opposition to the Copyright

Owners’ and Copyright Office’s Motions for Summary

Judgment (““NCTA’s Motion for Summary Judgment’’), at

19. According to NCTA, such an interpretation would avoid

double payment by cable systems for nonbroadcast pro-

graming for which negotiated copyright royalties or other

forms of compensation have already been paid separately.

The Copyright Owner Defendants take the position that

“plaintiff's [Cablevision] private definition of ‘basic service’

is contrary to section 111’s intent and purpose which re-

quires gross receipts from all retransmission services on

which any distant or local broadcast signal is provided by

the system." Copyright Owner Defendants’ Opposition to

Plaintiff's Motion for Summary Judgment and Reply in

Support of their Motion for Summary Judgment in No.

83-1655 (“Copyright Owner Defendants Opposition’’) at 10-

ll. The Copyright Owner Defendants also assert that

plaintiff's definition uses terms that were not commonly

used in the cable industry in the period 1970-76 and is

not the definition used by Congress, the FCC, the fran-

chising authorities with whom plaintiff dealt, or even by

the plaintiff. Jd. at 28. They insist that Cablevision’s def-

inition relates to marketing practices alone and not to

areas of either congressional or FCC concern.

The Copyright Office Defendants support the arguments

made by the Copyright Owner Defendants. Moreover, the

of section 111 is entitled to substantial deference by the

Court given its expertise in copyright law and therefore

should not be overturned since it is not arbitrary, capri-

cious or otherwise not in accordance with law. As to

NCTA’s allocation of receipts argument, the Copyright Of-

fice contends that ‘‘[t]here is simply no provision in the

actual reception by subscribers of each individual copy-

righted work.’ Federal Defendants’ Opposition to

46a

Plaintiff's Cross-Motions for Summary Judgment at 18.

They assert that ‘“‘[a] licensing system that would permit

every cable operator to account for the retransmission of

each broadcast signal containing a copyrighted program

would be unworkable within the statutory scheme set by

Congress.” Id. at 17-18.

II. Discussion

A. Standard of Review

It is a well-settled principle that ‘‘the construction put

on a statute by the agency charged with administering it

is entitled to deference by the courts, and ordinarily that

construction will be affirmed if it has a ‘reasonable basis

in law.’”’ Volkswagenwerk v. FMC, 390 U.S. 261, 272

(1968) (citing NLRB v. Hearst Publications, 322 U.S. 111,

131 (1959)). ‘‘Nevertheless, while informed judicial deter-

mination is dependent upon enlightenment gained from

administrative experience,’”’ FTC v. Colgate-Palmolive Co.,

380 U.S. 374, 385 (1965), the courts are the final

authorities on issues of statutory construction. Judicial de-

ference cannot be blind or absolute and courts ‘‘are not

obliged to stand aside and rubber-stamp their affirmance

of administrative decisions that they deem inconsistent with

a statutory mandate or that frustrate the congressional

policy underlying a statute.’’ Volkswagenwerk v. FMC, 390

U.S. at 272 (citing NLRB v. Brown, 380 U.S. 278, 291

(1965)). See also Bureau of Alcohol, Tobacco and Firearms

v. FLRA, 464 U.S. 89, 97 (1988).

The Supreme Court recently reinforced the concept of

judicial deference to an expert agency’s statutory inter-

pretation in Chevron U.S.A. Inc. v. Natural Resources De-

fense Council, Inc., 467 U.S. 837 (1984). In Chevron, the

court held that ‘“‘a court may not substitute its own con-

struction of a statutory provision for a reasonable inter-

pretation made by the administrator of an agency.”’ 467

U.S. at 844 (footnote omitted). The Court further stated

that

the principle of deference to administrative inter-

pretations “‘has been consistently followed by this

Court whenever decision as to the meaning or

reach of a statute has involved reconciling con-

flicting policies, and a full understanding of the

force of the statutory policy in the given situation

has depended upon more than ordinary knowl-

edge respecting the matters subjected to agency

regulations.”’

Id. (citations omitted).

Under the Chevron view, a court’s first task when re-

viewing an agency’s construction of the statute which it

administers is to determine whether Congress has directly

spoken to the precise question at issue. If Congress has

not, “‘the Court does not simply impose its own construc-

tion on the statute, as would be necessary in the absence

of an administrative interpretation. Rather ... the ques-

tion is whether the agency’s answer is based on a per-

missible construction of this statute.’’ 467 U.S. at 842-43

(footnote omitted). See also Am. Fed. of Gov. Employees

v. FLRA, 778 F.2d 850, 856 (D.C. Cir. 1985).

B. Statutory Language

The statutory language of section 111(d) that this con-

troversy centers around is the phrase ‘‘gross receipts from

subscribers to the cable service during said period for the

basic service of providing secondary transmissions of pri-

mary broadcast transmitters. ...’’ 17 U.S.C. § 111(dX2\B)

(emphasis added). As noted previously, Congress failed to

define the terms ‘‘gross receipts’ and “‘basic service,’’ two

terms whose definitions affect greatly the calculation of

royalty fees due to copyright owners under the compulsory

licensing scheme embodied in section 111(d). The Copyright

Office, however, subsequently defined ‘‘gross receipts’ in

48a

the context of the statute so as to “include the full amount

of monthly (or other periodic) service fees for any and all

services or tiers of service which include one or more sec-

ondary transmissions [local or distant] of television or radio

broadcast signals, for additional set fees, and for converter

fees.” 87 C.F.R. § 201.17(b\1) (1984). It is this interpre-

tation that both plaintiffs challenge for reasons already

cited.

Based on an examination of the legislation and its his-

tory, the Court finds that the Copyright Office’s definition

of ‘‘gross receipts’ does not have a reasonable basis in

law and frustrates the underlying congressional policy.

The Copyright Office Defendants take the position that,

[w]here broadcast signals subject to compulsory

licensing under section 111 are offered in com-

bination with nonbroadcast services such as HBO,

as a package, the revenues from both tiers must

be combined for reporting purposes. ... The re-

quirement is clear. Whenever the two types of ser-

vice are offered for a single price or, if on separate

tiers, whenever it is necessary to subseribe to one

tier in order to receive another, the two services

are in reality being offered as a single package

of service; if secondary transmissions are in-

cluded in the package, gross receipts from both

tiers or the combined package must be reported

and used in calculating copyright royalties.

Letter from Dorothy Schrader, Copyright Office General

Counsel, filed June 20, 1986 (‘‘Schrader Letter’’) at 1 (em-

phasis in original).

Under the present definition of “‘gross receipts,’’ cable

system operators like plaintiff Cablevision are forced to

pay royalties on nonbroadcast signals for which they have

already paid simply because these signals are contained in

a tier of service with a secondary transmission signal. This

49a

—

seems unfair to the Court. For example, all parties concede

that if an operator markets all his broadcast channels (local

and distant signals) in one tier for $10 and separately

offers HBO or another movie service for $9, the compul-

sory royalty fee would be calculated on a $10 base. NCTA’s

Motion for Summary Judgment at 24-25 (citing Copyright

Owner Defendants’ Response to Plaintiff [NCTA’s] Re-

quest for Admission 17). However, if that same operator

combines services so that the only available package in-

cludes the broadcast channels and the movie channel for

$19, under the present definition of ‘“‘gross receipts’ all

$19 must be used to compute the broadcast royalty fee.

Id. Surely, Congress did not intend such an anomalous

result.

Congress established the compulsory license fee in the

programming initially broadcast in communities remote

from the cable system.” National Cable TV v. Copyright

Royalty Tribunal, 689 F.2d 1077, 1079 (D.C. Cir. 1982).

As explained by the Court of Appeals in that case,

[t]he Act’s compulsory license enables cable sys-

tems to offer subscribers essentially three types

of ‘‘basic’’ service: (a) signals of local stations

that are otherwise poorly received, (b) national

programming from affiliates of the three com-

mercial networks, regardless of the location of

the broadcast station, and (c) non-network or

‘syndicated,’ programming originating in a com-

munity distant from the cable system. As a result

of secondary transmissions, advertisers support-

ing the first two types of programming reach a

larger portion of their intended audience (local

and national, respectively). Thus, cable carriage

permits the originating station to raise its ad-

vertising rates and thereby increase its payments

to program producers. The market does not, how-

ever, as naturally compensate the owners of syn-

50a

dicated programming initially broadcast in

communities remote from the cable system. Such

programming is generally sponsored by local ad-

vertisers with little or no interest in the distant

cable audience.

Consequently, the Copyright Act requires cable

operators to pay royalties as a function of the

“distant signal equivalents’ (DSEs) they carry.

Since it would be impractical for each operator

to pay the copyright owners of syndicated pro-

gramming directly, the Act obliges the operators

to pay fees into a royalty pool controlled by the

Tribunal which, in turn, determines the appro-

priate share for different types of copyright own-

ers. The fees are calculated as a percentage of

gross receipts from basic subscriber charges,

varying according to the number of DSEs car-

ried.

Id. at 1079-80 (footnotes omitted).

Given the rational behind the compulsory license system,

the Court finds that Congress did not intend to include

revenues from nonbroadcast programing in the calculation

of “gross receipts.’’ The congressional reports accompa-

nying the legislation stated that “copyright liability of ca-

ble television systems under the compulsory license should

be limited te the retransmission of distant non-network

programing.’ H.R. Rep. No. 1476, 94th Cong., 2d Sess.

(1976) at 90. Furthermore, the report states that ‘“‘[flor

the purpose of computing royalty payments, only receipts

for the basic service of providing secondary transmissions

of primary broadcast transmitters are to be considered.

Other receipts from subscribers, such as those for pay-

cable services ... are not included in gross receipts.’”’ Jd.

at 96. This language makes clear Congress’ intent to ex-

clude revenues attributable to nonbroadcast signals from

the calculations of ‘‘gross receipts’’ under section 111(d).

dla

All parties to this controversy would without a doubt agree

with this conclusion.

The real point of contention is the Copyright Office

Defendants’ definition of ‘“‘gross receipts’ which includes

revenues from nonbroadcast signals when these signals are

offered in combination with broadcast signals subject to

compulsory licensing under section 111. According to the

offered for a single price or, if on separate tiers, whenever

it 1s necessary to subscribe to one tier in order to receive

another, the two services are in reality being offered as

a single package of service ... ”’ and “gross receipts from

both tiers or the combined package must be reported and

used in calculating copyright royalties.’’ Schrader Letter

at 2. NCTA argues that this method of calculating gross

receipts results in an inequitable double payment and thus

is an unreasonable interpretation of the statute. The Court

agrees.

Nonbroadcast signals are obtained by cable operators

through privately negotiated contracts which compensate

fully the copyright owners for such programing. The def-

inition of ‘“‘gross receipts’’ promoted by the defendants

results in a “‘double payment” to the copyright owners

since they would receive payment directly from the cable

operator pursuant to a contract and again from the Co-

pyright Royalty Tribunal. The Court finds that the mere

inclusion of nonbroadcast signals on the same tier with

broadcast signals does not magically transform the non-

broadcast signals into signals now subject to the compul-

sory licensing scheme. They remain outside the licensing

scheme and any revenues attributable to them should not

be included in the calculation of ‘‘gross receipts.’’ A con-

trary conclusion would contravene the congressional intent

to limit royalty payments under the Act to distant non-

network programing.

52a

Next the Court must define the term “basic service.”

Cablevision defines this term as the lowest tier of service

offered by a cable television system to which all subscri-

bers are required to subscribe before they can subscribe

to any additional tiers of service. Cablevision’s interpre-

tation of section 111 excludes revenues from any optional

tier of service, whether or not it contains distant signals.

Cablevision also contends that “‘basic service” is synony-

mous with the Federal Communications Commission (“FCC”)

terminology such as “minimum level of service.” “initial

package,”’ and “regular subscriber service.” The Copyright

Owner Defendants disagree with Cablevision’s definition and

assert instead that plaintiff's private marketing definition of

“basic service” bears no relationship to the Statutory defi-

nition intended by Congress. Moreover, the Copyright Owner

Defendants argue that section 111 requires the reporting of

all revenues attributable to both local and distant signals.

The Court agrees with the Copyright Owner Defendants.

First, the Court dismisses Cablevision’s assertion con-

cerning the synonymous meaning of the term “basic ser-

vice’’ with supposedly similar terms used by the FCC. The

Court finds that the FCC terms are to be construed in-

dependent of and differently from those used in section

111 of the Copyright Act. The FCC and the Copyright

Office are federal agencies charged with different areas

of responsibility and focus. Terms which appear to mean

the same standing alone may, when placed in their proper

contest, hold a very different meaning. For this reason.

the Court will consider this particular contention of Ca-

blevision no further.

Second, the Court finds that the term “basic service”

has already been defined by the U.S. Court of Appeals

for the District of Columbia in National Cable TV v. Co-

pyright Royalty Tribunal. In National Cable TV. the Court

defined “‘basic service’’ to include the following secondary

transmissions: (a) local signals, (b) national network sig-

nals, and (c) distant signals. 689 F.2d 1079. Although the

53a

Court in that case did not have the precise issue of the

statutory definition of “basic service’’ before it, this fact

in no way diminishes the weight to be given to that Court's

definition. Accordingly, the Court finds that it is bound

by the definition given to the term “basic service” by the

highest court in this Circuit and hereby incorporates that

definition into this opinion.

In light of this definition, the Court holds further that

the calculation of “gross receipts from subscribers to the

cable service ... for the basic service of providing sec-

ondary transmissions . . .”", 17 U.S.C. § 111(d2\B), should

include all revenues produced by the retransmission of /o-

cal and distant signals no matter what tier of service the

signal is included. Like nonbroadcast signals, signals des-

ignated as being a part of a cable system’s “‘basic service”

do not lose that designation simply by being placed on a

higher tier or on a mixed tier. A different conclusion would

subvert Congress’ express intention of providing compen-

sation to copyright owners of retransmitted distant signals

through implementation of the compulsory license statu-

tory scheme.

As noted in the congressional records on section 111,

{the] retransmission of distant non-network pro-

graming by cable systems causes damage to the

an area beyond which it has been licensed. Such

retransmission adversely affects the ability of the

tant market. It is also of direct benefit to the

cable system by enhancing its ability to attract

subscribers and increase revenues. For these rea-

sons, the Committee [on the Judiciary] has con-

cluded that the copyright liability of cable

television systems under the compulsory license

should be limited to the retransmission of distant

non-network programing [distant signals].

54a

H.R. Rep. No. 1476, 94th Cong., 2d Sess. (1976) at 90.

If the Court were to rule in a manner so as to limit

the calculation of ‘gross receipts’’ to include only the rev-

enues attributable to signals contained on the lowest or

first tier of service, cable operators like Cablevision would

be free to tailor their marketing practice in such a way

as to lower their royalty payments at the expense of the

gested by the Court today, the cable operators are asked

to do nothing more than Congress intended — compensate

the copyright owners for the retransmission of distant sig-

nals.

III. Conclusion

The Court concludes that any ca

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