Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings

Federal RegisterMay 8, 1998

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LIBRARY OF CONGRESS

37 CFR Part 260

[Docket No. 96-5 CARP DSTRA]

Determination of Reasonable Rates and Terms for the Digital

Performance of Sound Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Final rule and order.

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SUMMARY: The Librarian of Congress, upon recommendation of the Register

of Copyrights, is announcing the determination of the reasonable rates

and terms for the compulsory license permitting certain digital

performances of sound recordings.

EFFECTIVE DATE: May 8, 1998.

ADDRESS(ES): The full text of the public version of the Copyright

Arbitration Royalty Panel's report to the Librarian of Congress is

available for inspection and copying during normal working hours in the

Office of the General Counsel, James Madison Building, Room LM-403,

First and Independence Avenue, SE., Washington, DC, 20540.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or

Tanya Sandros, Attorney Advisor, Copyright Arbitration Royalty Panel

(CARP), PO Box 70977, Southwest Station, Washington, D.C. 20024.

Telephone (202) 707-8380. Telefax: (202) 707-8366.

SUPPLEMENTARY INFORMATION:

I. Background

The Digital Performance Right in Sound Recordings Act of 1995

(DPRSRA), Public Law 104-39, 109 Stat. 336, amended section 106 of the

recording copyright owners an exclusive right, subject to certain

limitations, to perform publicly sound recordings by digital audio

transmissions. 17 U.S.C. 114. The bill affords certain digital

transmission

[[Page 25395]]

services a compulsory license to perform digital sound recordings

publicly. The purpose of the bill is ``to provide copyright holders of

sound recordings with the ability to control the distribution of their

product by digital transmissions, without hampering the arrival of new

technologies, and without imposing new and unreasonable burdens on

radio and television broadcasters.'' S. Rep. No. 104-128, at 15 (1995).

All non-exempt digital subscription transmission services are

eligible for the statutory license, provided that they are non-

interactive and comply with the terms of the license. The statute

requires that the service not violate the ``sound recording performance

complement,'' 1 not publish in advance a schedule of the

programming to be performed, not cause any receiving device to switch

from one program channel to another, include in each transmission

certain identifying information encoded in each sound recording, pay

the royalty fees and comply with the associated terms, and comply with

any recordkeeping requirements promulgated by the Copyright Office.

2 17 U.S.C. 114(d)(2)(A)-(E) and 114(f)(2)-(5).

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\1\ (7) The ``sound recording performance complement'' is the

transmission during any 3-hour period, on a particular channel used

by a transmitting entity, of no more than--

(A) 3 different selections of sound recordings from any one

phonorecord lawfully distributed for public performance or sale in

the United States, if no more than 2 such selections are transmitted

consecutively; or

(B) 4 different selections of sound recordings--

(i) By the same featured recording artist; or

(ii) From any set or compilation of phonorecords lawfully

distributed together as a unit for public performance or sale in the

United States, if no more than three such selections are transmitted

consecutively: Provided, That the transmission of selections in

excess of the numerical limits provided for in clauses (A) and (B)

from multiple phonorecords shall nonetheless qualify as a sound

recording performance complement if the programming of the multiple

phonorecords was not willfully intended to avoid the numerical

limitations prescribed in such clauses.

17 U.S.C. 114(j)(7).

\2\ See Notice of Proposed Rulemaking, 61 FR 22004 (May 13,

1996); Notice of Proposed Rulemaking, 62 FR 34035 (June 24, 1997).

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The reasonable terms and rates of the section 114 statutory license

are determined by voluntary negotiations among the parties and, where

necessary, compulsory arbitration conducted under chapter 8 of the

II. The CARP Proceeding To Set Reasonable Rates and Terms

On December 1, 1995, the Librarian of Congress (Librarian)

initiated the statutorily mandated six month negotiation period within

30 days of the enactment of the DPRSRA, pursuant to section 114(f)(1)

of the Copyright Act, with the publication of a notice initiating the

voluntary negotiation process for determining reasonable terms and

rates of royalty payments. See 60 FR 61655 (December 1, 1995). In the

notice, the Library instructed those parties with a significant

interest in the establishment of the reasonable terms and rates for the

section 114 license to file a petition with the Copyright Office no

later than August 1, 1996, in the event that the interested parties

were unable to negotiate an agreement. Id.

Accordingly, the Recording Industry Association of America (RIAA)

filed a petition with the Copyright Office in which it asked the Office

to initiate an arbitration proceeding pursuant to chapter 8 of the

had a significant interest in the proposed CARP proceeding, the

Librarian published a notice setting the schedule for the 45-day

precontroversy discovery period and announcing the date for the

initiation of the 180-day arbitration period. 61 FR 40464 (August 2,

1996). The exchange of documents during the precontroversy discovery

period did not proceed smoothly, requiring the Office to reschedule

portions of the discovery period and vacate the scheduled date for the

initiation of the CARP. See Order in Docket No. 96-5 CARP DSTRA

(September 18, 1996); Order in Docket No. 96-5 CARP DSTRA (November 27,

1996). The Librarian announced the initiation of the 180-day

arbitration period following the conclusion of the discovery period and

the resolution of all pending motions. 62 FR 29742 (June 2, 1997).

The Parties

There are four parties to this proceeding: three digital audio

subscription services (the Services) and the Recording Industry

Association of America (RIAA).

1. The Recording Industry Association of America, Inc. (RIAA)--RIAA

represents a collective, consisting of more than 275 record labels,

established for the express purpose of administering the rights of

these sound recording copyright owners. RIAA represents the interests

of its members who are the copyright owners of more than 90% of all

legitimate sound recordings sold in the United States. Record companies

own the copyrights in the sound recordings.

2. Digital Cable Radio Associates (DCR)--A digital audio service

established in the United States in 1987 by the Jerrold Communications

Division of General Instrument Corporation. Current partners include

Warner Music, Sony Corporation, EMI, Time Warner Cable, Continental

Cablevision, Comcast Cable, Cox Cable, and Adelphia Cable.

3. Digital Music Express, Inc. (DMX)--A digital music subscription

service established in 1986 as International Cablecasting Technologies,

Inc. In 1997, DMX merged into TCI Music, Inc., a publicly traded

company with approximately 80% of its shares held by TCI, Inc.

4. Muzak, L.P.--With roots dating back to 1922, Muzak is America's

oldest background music provider for businesses. In the 1920s and

1930s, Muzak was part of the consumer music market until driven out of

that market by the growing popularity of radio. Muzak remained out of

the market until March, 1996, when it began providing 27 channels of

digital music under the name DiSHCD, as part of Echostar's satellite-

based DiSH Network.

The Position of the Parties at the Commencement of the Proceeding

RIAA, representing the interests of the sound recording copyright

owners, requested a royalty rate set at 41.5% of a Service's gross

revenues resulting from U.S. residential subscribers, or in some

circumstances, a flat rate minimum fee. Report of the Copyright

Arbitration Royalty Panel (Report) para. 33. RIAA also agreed to be

named the single entity to collect, administer, and distribute the

royalty fees. Report para. 184. RIAA proposed additional terms

concerning the timing of payments, statements of accounts, retention of

records, and audits. Report para. 33.

The three digital audio subscription services requested a royalty

rate ranging from a low of 0.5% to a high of 2.0% of gross revenues

resulting from U.S. residential subscribers, and unanimously opposed a

flat rate minimum fee. Report Paras. 34-36, 172. The Services proposed

that a single private entity or a government agency be named for

purposes of administering the royalty fees, but proposed submitting

payments on a quarterly basis rather than a monthly basis. Report Paras.

184-185. In addition, the Services proposed terms concerning

recordkeeping and audits, confidentiality of business records, and

payment terms for distributing license fees among featured artists and

nonfeatured musicians and vocalists.

[[Page 25396]]

The Panel's Determination of a Reasonable Rate

The Panel evaluated the four statutory objectives, 3 and

their component parts, in light of the evidence and determined that the

digital audio subscription services should pay a royalty fee of 5% of

gross revenues resulting from U.S. residential subscribers. Report Paras.

196, 200. This rate represents the midpoint of the range of possible

license rates that the Panel considered appropriate (but not the

midpoint of the parties' proposals). The Panel further concluded that

there was no reason to impose a minimum license fee on the Services at

this point, and consequently, it rejected RIAA's proposal to set a

minimum fee based on a flat rate. Report para. 204.

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\3\ (1) to make determinations concerning the adjustment of

reasonable copyright royalty rates as provided in sections 114, 115,

and 116, and to make determinations as to reasonable terms and rates

of royalty payments as provided in section 118. The rates applicable

under section 114, 115, and 116 shall be calculated to achieve the

following objectives:

(A) To maximize the availability of creative works to the

public;

(B) To afford the copyright owner a fair return for his creative

work and the copyright user a fair income under existing economic

conditions;

respect to relative creative contribution, technological

contribution, capital investment, cost, risk, and contribution to

the opening of new markets for creative expression and media for

their communication;

(D) To minimize any disruptive impact on the structure of the

industries involved and on generally prevailing industry practices.

17 U.S.C. 801(b)(1).

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In making this determination, the Panel followed the precedent set

in prior rate adjustment proceedings conducted by the former Copyright

Royalty Tribunal and other CARP panels which, as a first step,

determined a range of possible rates after considering different

proposed rates based on negotiated licenses or analogous marketplace

models. Report para. 123. See also, 1980 Adjustment of the Royalty Rate

for Coin-Operated Phonorecord Players, 46 FR 884 (January 5, 1981), and

the 1997 Rate Adjustment of the Satellite Carrier Compulsory License

Fees, 62 FR 55742 (October 28, 1997). Each party offering a

``benchmark'' rate contends that the rate it offers represents the cost

for similar products in analogous markets. The Panel considered three

benchmarks, weighing each in light of the record evidence to determine

whether the proposed models shed light on how the marketplace would

value a performance license in sound recordings. Once the Panel

identified the useful models, it used the corresponding rate

information to craft a range of potential royalty rates for the section

114 license, then chose the rate within the range which would further

the stated statutory objectives.

RIAA and the Services proposed rates based on three distinct

marketplace models in which rates are set through arms-length

negotiations. Report para. 124. The Services proposed two benchmarks

for consideration by the Panel: Negotiated license fees for a sound

recording performance right and the license fees the Services pay the

performing rights organizations for use of the underlying musical

works. RIAA put forth a single model for the Panel's consideration:

Cable television network license fees. The Panel found the Services'

models helpful in setting the rate for the digital performance right,

but rejected the RIAA model for the reasons stated herein.

Both RIAA and the Services seemed to agree that the best proxy for

reasonable compensation is a marketplace rate. The Panel, however,

noted that the DPRSRA instructs the CARP to set reasonable rates, which

need not be the same as rates set in a marketplace unconstrained by a

compulsory license. In support of its interpretation, the Panel cited

the statutory factors which must be considered in setting the rate. See

Report Paras. 10, 124.

The Panel's Evaluation of the RIAA Benchmark

The benchmark proposed by the recording industry analogizes the

cost of programming for cable television networks with the cost of

procuring the right to perform the sound recordings. The analogy,

however, did not withstand scrutiny by the Panel, which reasonably

found that the cable television network license fees model did not

represent rates for an analogous product in a comparable marketplace.

Its conclusion rested on a number of findings which described

analytical deficiencies in the two studies offered in support of the

41.5% proposed royalty rate. Report Paras. 126-150.

The RIAA model proposed using the purchase price of programming for

cable television networks to determine the price the Services would pay

for the right to publicly perform sound recordings, if negotiated in a

free market. RIAA's Proposed Findings of Fact and Conclusions of Law

(PF) para. 62; RIAA Proposed Conclusions (PC) para. 18. RIAA presented

two studies that illustrate the amount of money cable television

networks pay for their programming: (1) The Kagan study,4

and (2) the Wilkofsky Gruen Associates 5 study. RIAA

Exhibits (Exs.) 14 and 15, respectively. Both studies argued that the

analogy between cable television networks and the digital audio

services was apt because the digital audio services and the cable

television networks compete head-to-head for carriage on cable and DBS

systems, and for consumer time and discretionary income. Report para.

130.

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\4\ The Kagan study was prepared by Paul Kagan Associates, a

media research company that tracks and publishes financial data

concerning the media and entertainment industries.

\5\ Wilkofsky Gruen Associates is an economic consulting firm

that specializes in the communications and entertainment industries.

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The Kagan study analyzed data concerning the revenues and

programming expenses of 31 basic cable television networks from the

1985-96 period. It concluded that a cable television network spends, on

average, approximately 40% of its gross revenues for programming. RIAA

Exhibit (Ex.) 14 at 7. The Panel, however, discounted the 40% figure

because it represented the costs of license fees to all copyright

owners, and it included the costs of programming during the start-up

years, when a new cable television network may pay more than 100% of

its revenues in programming costs. Report Paras. 127, 129, 149. Failure

to adjust for these factors made it impossible for the Panel to assess

the costs for the right to publicly perform the sound recordings apart

from the costs of the other copyrighted works which make up the

program.

Their second study, prepared by Wilkofsky Gruen Associates (WGA),

analyzed only cable movie networks because Wilkofsky, the expert for

the study, claimed that the ``pricing characteristics and dynamics'' of

the cable movie networks were comparable in three fundamental ways: The

lack of commercials, the generation of revenues through subscriptions,

and the purchase of programming from third parties. Wilkofsky Written

Direct Testimony (W.D.T.) at 3-5. This study concluded that the cable

movie networks pay a weighted average of 41.5 % of their revenues for

programming that they acquire from outside sources and by analogy, the

Services should pay the same. Id. at 3.

The Panel rejected the conclusion of the WGA study because it

ignored the following fundamental differences in market demand and cost

characteristics between the cable movie networks and the digital audio

services. Report Paras. 133-145.

[[Page 25397]]

1. The study provided no evidence to show that any of the movie

networks directly compete with digital audio services. In fact, when

people watch a movie, they devote their entire attention to the film

for a period of time, and generally, do not repeat the experience with

the same movie. On the other hand, subscribers to digital audio

services choose to listen to the same music again and again while

engaged in other activities. In other words, the subscriber chooses

each service for different reasons, and therefore, they do not

represent choices in the same market. Report Paras. 143, citing

Rosenthal Written Rubuttal Testimony (W.R.T). at 13, Transcript (Tr).

1251 (Rubinstein).

2. The cable movie networks compete against other cable and

broadcast stations for exclusive rights to motion pictures. Exclusive

rights are highly prized, and consequently, command a premium price,

but they are not implicated in the market for digital audio

transmissions. Consequently, the Panel found that RIAA's failure to

adjust for this aspect grossly overstated the value of programming

costs in its cable movie network analogy. Report Paras. 137-142.

3. The Panel further discounted the analogy because RIAA ignored

the promotional benefit that flows to the record companies from the

constant airplay of their sound recordings. Report Paras. 144-145. See

also discussion infra.

The Panel's Determination of Reasonable Terms

In addition to establishing a reasonable rate for the sound

recording performance license, the Panel must also establish reasonable

terms for implementing the license. The Senate Committee Report makes

clear that terms include ``such details as how payments are to be made,

when, and other accounting matters.'' S. Rep. No. 104-128, at 30

(1995).

RIAA and the Services proposed specific terms concerning minimal

fees, payment schedules, late fees, statements of account, and audits.

From these, the Panel adopted the following terms:

1. RIAA shall have sole responsibility for the distribution of the

royalty fees to all copyright holders. Report Paras. 184, 205.

2. The license fee payments shall be due on the twentieth day after

the end of each month, beginning with the month succeeding the month in

which the royalty fees are set. Report Paras. 185, 206.

3. The Services shall make back payments over a 30-month period.

The first back payment, 1/30th of the total arrearage, shall be delayed

for six months. Report Paras. 187, 206(a).

4. A Service shall be subject to copyright liability if it fails to

make timely payments. Liability for copyright infringement shall only

come about for knowing and willful acts which materially breach the

statutory license terms. Report Paras. 188, 206(b).

5. A late fee of 1.5% per month or the highest lawful rate,

whichever is lower, will be imposed from the due date until payment is

received. Report Paras. 189, 206(a).

6. Services shall submit monthly statements of accounts and payment

to RIAA. Only information to verify the royalty payments need be

provided on the monthly statements of account. Report Paras. 190, 205,

207.

7. Safeguards must be established to protect against disclosure of

confidential financial and business information, which includes the

amount of the royalty payment. Access to this information shall be

limited to employees of RIAA, who are not employees or officers of the

performing their assigned duties during the ordinary course of

employment, and to independent auditors acting on behalf of RIAA.

Report Paras. 191, 208.

8. The digital audio services shall maintain accurate records on

matters directly related to the payment of the license fees for a

period of three years. Report Paras. 192, 209.

9. Interested parties may conduct only one audit of a digital audio

service during any given year. Report Paras. 193, 210(c).

Interested parties must file a Notice of Intent to Conduct

an Audit with the Copyright Office. Such notice shall be published in

the Federal Register. Report Paras. 193, 210(a)-(b).

RIAA must retain an auditor's report for a period of three

years. Report Paras. 193, 210(d).

An audit, including underlying paperwork, which was

performed in the ordinary course of business according to generally

accepted auditing standards by an independent auditor, may serve as an

audit for all interested parties. Report Paras. 194, 210(e).

Interested parties shall pay for the cost of the audit,

unless an independent auditor concludes that there was an underpayment

of five (5) percent or more. Report Paras. 195, 210(f).

The Panel chose not to adopt RIAA's minimum fee proposal and the

Services' proposed payment schedule for the distribution of royalties

to the featured artists and the nonfeatured musicians and vocalists.

The Panel found that the timing of payments to the performing artists

was not within the scope of the proceeding. Report Sec. 204; Report at

56 n.21.

The Panel's Evaluation of the RIAA Proposal To Adopt a Minimum Fee

RIAA proposed the imposition of a minimum fee as a means to insure

a fair return to the copyright owners in light of business practices

that might erode the value of the statutory license fee. RIAA PF

Paras. 126-147. Specifically, RIAA sought a minimum fee to minimize the

effect of discounts or credits, to address shifts in business models,

and to avoid diluting the value of the sound recording when audio

digital services add new channels to their offerings. Id. The Panel

ultimately rejected this suggestion because it found that the rationale

for a minimum fee was based on unsupported speculation about the

business structure of the Services. Report para. 204.

III. The Parties' Reaction to the Determination of the Panel

The regulations governing the CARP proceedings allow parties to

file petitions to modify or set aside the determination of the Panel

within 14 days of its filing date. The petition must state the reasons

for the petition, including relevant references to the parties'

proposed findings of fact and conclusions of law. Parties who wish to

file replies to a petition may do so within 14 days of the filing of

such petition. See 37 CFR 251.55(a), (b).

Accordingly, on December 12, 1997, RIAA filed a Petition to Reject

the Report of the CARP (Petition), contending that the Panel acted both

contrary to the Copyright Act and arbitrarily in reaching its

determination. In its petition, RIAA requests the Librarian to set

aside the Panel's determination and set a new rate that should not be

less than double the Services' 1996-2001 payments for the public

performance of the underlying musical works.

RIAA contends that the Panel's determination was arbitrary and

contrary to law for the following reasons:

1. The Panel disregarded precedent set by the former Copyright

Royalty Tribunal (CRT or Tribunal) in applying the statutory criteria

for determining a reasonable rate for the public performance right.

Petition at 6, 14-15.

2. The Panel used the rates set in a corporate partnership

agreement as a benchmark for establishing the new compulsory license

rate. This was inappropriate because the public performance in sound

recordings

[[Page 25398]]

license agreement was not negotiated independently, but as part of a

larger complex agreement. Id. at 20-27.

3. When the Services publicly perform a sound recording, two groups

of copyright owners receive royalties: The copyright owners in the

underlying musical works, and for the first time, the record companies

and performers. The Panel determined that the record companies and

performers were not entitled to more royalties for their public

performance right than those received by the copyright owners in the

underlying musical works for the public performance of their works.

RIAA contends that CRT precedent supports a determination that just the

reverse is true. Id. at 14-15.

4. The compulsory license allows the Services to perform sound

recordings publicly without infringing copyright prior to the setting

of the royalty rate, so long as the Services agree to pay their

accumulated royalty obligation once the rates are determined. The Panel

created a payment schedule that allows the Services to pay these fees

over a three year period. RIAA contends that this payment schedule is

contrary to law. Id. at 7 n.1.

5. RIAA also contends that the CARP failed to provide a reasoned

explanation for proper review, made conclusions inconsistent with its

findings, made findings without record support, and failed to make

findings in support of conclusions. Id. at 2.

RIAA, however, does not suggest that the Librarian disregard all

the findings of the Panel. Instead, it recommends adopting the Panel's

approach ``to determine a reasonable rate--provided that the Librarian

makes the necessary adjustments to account for the precedent and

considerations that the Panel ignored.'' Petition at 51-52. RIAA

further allows that the Librarian need not consider the cable network

benchmark in its analysis, since the Panel's analysis of the remaining

benchmarks supports an upward adjustment of the 5% rate of gross

revenues set by the CARP. Petition at 52 n.9.

On December 29, 1997, in response to the RIAA petition to reject

the CARP report, the Services filed a reply to RIAA's Petition to

Reject the CARP Report (Reply to Petition). The crux of the Services'

argument in support of adopting the Panel's report is that ``[w]hen

examined as a whole, the Panel's Report is eminently reasonable and

amply supported by the record.'' Reply to Petition at 12. Specific

arguments of the Services in support of the Panel's report are

discussed below in conjunction with RIAA's arguments to reject the

report.

IV. The Librarian's Scope of Review of the Panel's Report

The Copyright Royalty Tribunal Reform Act of 1993 (the Reform Act),

Public Law 103-198, 107 Stat. 2304, created a unique system of review

of a CARP's determination. Typically, an arbitrator's decision is not

reviewable, but the Reform Act created two layers of review that result

in final orders: the Librarian of Congress (Librarian) and the United

States Court of Appeals for the District of Columbia Circuit. Section

802(f) of title 17 directs the Librarian either to accept the decision

of the CARP or to reject it. If the Librarian rejects it, he must

substitute his own determination ``after full examination of the record

created in the arbitration proceeding.'' 17 U.S.C. 802(f). If the

Librarian accepts it, then the determination of the CARP becomes the

determination of the Librarian. In either case, through issuance of the

Librarian's Order, it is his decision that will be subject to review by

the Court of Appeals. 17 U.S.C. 802(g).

The review process has been thoroughly discussed in prior

recommendations of the Register of Copyrights (Register) concerning

rate adjustments and royalty distribution proceedings. Nevertheless,

the discussion merits repetition because of its importance in reviewing

each CARP decision.

Section 802(f) of the Copyright Act directs that the Librarian

shall adopt the report of the CARP ``unless the Librarian finds that

the determination is arbitrary or contrary to the applicable provisions

of this title.'' Neither the Reform Act nor its legislative history

indicates what is meant specifically by ``arbitrary,'' but there is no

reason to conclude that the use of the term is any different from the

``arbitrary'' standard described in the Administrative Procedure Act

(APA), 5 U.S.C. 706(2)(A).

Review of the case law applying the APA ``arbitrary'' standard

reveals six factors or circumstances under which a court is likely to

find that an agency acted arbitrarily. An agency action is generally

considered to be arbitrary when:

1. It relies on factors that Congress did not intend it to

consider;

2. It fails to consider entirely an important aspect of the problem

that it was solving;

3. It offers an explanation for its decision that runs counter to

the evidence presented before it;

4. It issues a decision that is so implausible that it cannot be

explained as a product of agency expertise or a difference of

viewpoint;

5. It fails to examine the data and articulate a satisfactory

explanation for its action including a rational connection between the

facts found and the choice made; and

6. Its action entails the unexplained discrimination or disparate

treatment of similarly situated parties.

Motor Vehicle Mfrs. Ass'n. State Farm Mutual Auto. Insurance Co.,

463 U.S. 29 (1983);

Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986);

Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).

Given these guidelines for determining when a determination is

``arbitrary,'' prior decisions of the District of Columbia Circuit

reviewing the determinations of the former CRT have been consulted. The

decisions of the Tribunal were reviewed under the ``arbitrary and

capricious'' standard of 5 U.S.C. 706(2)(A) which, as noted above,

appears to be applicable to the Librarian's review of the CARP's

decision.

Review of judicial decisions regarding Tribunal actions reveals a

consistent theme: while the Tribunal was granted a relatively wide

``zone of reasonableness,'' it was required to articulate clearly the

rationale for its award of royalties to each claimant. See National

Ass'n of Broadcasters v. Copyright Royalty Tribunal, 772 F.2d 922 (D.C.

Cir. 1985), cert. denied, 475 U.S. 1035 (1986) (NAB v. CRT); Christian

Broadcasting Network v. Copyright Royalty Tribunal, 720 F.2d 1295 (D.C.

Cir. 1983) (Christian Broadcasting v. CRT); National Cable Television

Ass'n v. Copyright Royalty Tribunal, 689 F.2d 1077 (D.C. Cir. 1982)

(NCTA v. CRT); Recording Indus. Ass'n of America v. Copyright Royalty

Tribunal, 662 F.2d 1 (D.C. Cir. 1981) (RIAA v. CRT). As the D.C.

Circuit succinctly noted:

We wish to emphasize * * * that precisely because of the

technical and discretionary nature of the Tribunal's work, we must

especially insist that it weigh all the relevant considerations and

that it set out its conclusions in a form that permits us to

determine whether it has exercised its responsibilities lawfully * *

Christian Broadcasting v. CRT, 720 F.2d at 1319 (D.C. Cir. 1983),

quoting NCTA v. CRT, 689 F.2d at 1091 (D.C. Cir. 1982).

Because the Librarian is reviewing the CARP decision under the same

``arbitrary'' standard used by the courts to review the Tribunal, he

must be presented by the CARP with a rational analysis of its decision,

setting forth

[[Page 25399]]

specific findings of fact and conclusions of law. This requirement of

every CARP report is confirmed by the legislative history to the Reform

Act which notes that a ``clear report setting forth the panel's

reasoning and findings will greatly assist the Librarian of Congress.''

H.R. Rep. No. 103-286, at 13 (1993). This goal cannot be reached by

``attempt(ing) to distinguish apparently inconsistent awards with

simple, undifferentiated allusions to a 10,000 page record.'' Christian

Broadcasting v. CRT, 720 F.2d at 1319.

It is the task of the Register to review the report and make her

recommendation to the Librarian as to whether it is arbitrary or

contrary to the provisions of the Copyright Act and, if so, whether,

and in what manner, the Librarian should substitute his own

determination. 17 U.S.C. 802(f).

V. Review and Recommendation of the Register of Copyrights

The law gives the Register the responsibility to review the CARP

report and make recommendations to the Librarian whether to adopt or

reject the Panel's determination. In doing so, she reviews the Panel's

report, the parties' post-panel motions, and the record evidence.

After carefully reviewing the Panel's report and the record in this

proceeding, the Register finds that the Panel's adoption of the DCR

negotiated license fee as the starting point for making its

determination is arbitrary. This conclusion compels the Register to set

aside the Panel's final determination and reevaluate the record

evidence before making a recommendation to the Librarian.

Section 802(f) states that ``(i)f the Librarian rejects the

determination of the arbitration panel, the Librarian shall, before the

end of that 60-day period, and after full examination of the record

created in the arbitration proceeding, issue an order setting the

royalty fee or distribution of fees, as the case may be.'' During that

60-day period, the Register reviewed the Panel's report and made a

recommendation to the Librarian not to accept the Panel's report, for

the reasons cited herein. The Librarian accepted this recommendation,

and on January 27, 1998, issued an order stating that the Panel's

report was still under review. See Order, Docket No. 96-5 CARP DSTRA

(January 27, 1998).

The full review of the Register and her corresponding

recommendations is presented herein. Within the limited scope of the

Librarian's review of this proceeding, ``the Librarian will not second

guess a CARP's balance and consideration of the evidence, unless its

decision runs completely counter to the evidence presented to it.''

Rate Adjustment for the Satellite Carrier Compulsory License, 62 FR

55757 (1997), citing 61 FR 55663 (October 28, 1996) (Distribution of

1990, 1991 and 1992 Cable Royalties). Accordingly, the Register accepts

the Panel's weighing of the evidence and will not question findings and

conclusions which proceed directly from the arbitrators' consideration

of factual evidence.

The Register also adopts the Panel's approach in setting reasonable

rates and terms for the digital performance license in sound recordings

pursuant to 17 U.S.C. 114(f)(2), but sets aside those findings and

conclusions that are arbitrary or contrary to law.

a. Methodology for Making Rate Determination

Use of a Marketplace Standard in Setting the Royalty Rate

The standard for setting the royalty rate for the performance of a

sound recording by a digital audio subscription service is not fair

market value, although CARPs and the Copyright Royalty Tribunal (CRT or

Tribunal) in prior rate adjustment proceedings under sections 115 and

116 considered comparable rates negotiated under marketplace conditions

when making their determinations.

In light of this practice, the Panel followed the same approach

established in prior rate adjustment proceedings conducted by the

Tribunal and the CARPs in making its determination. Namely, the Panel

considered the parties' presentations of different rates negotiated in

comparable marketplace transactions and first determined whether the

proposed models mirrored the potential market transactions which would

take place to set rates for the digital performance of sound

recordings. Report para. 123. These benchmarks were then evaluated in

light of the statutory objectives to determine a reasonable royalty

rate. Id.

The Panel noted that RIAA and the Services ``seem to agree that the

best proxy for reasonable compensation is to look to marketplace

rates.'' Report para. 124. The parties also agreed that the rates

should be based on gross revenues and further agreed on the definition

of ``gross revenues.'' Report para. 125; RIAA PF para. 55; Services

Joint Reply to RIAA's Proposed Findings of Fact and Conclusions of Law

(Services' RF) para. 51.

While the Panel agreed with the parties on these two points, it

noted that the statute requires the Panel to adopt reasonable rates and

terms, and that reasonable rates and terms are not synonymous with

marketplace rates. Report para. 124. Unlike a marketplace rate which

represents the negotiated price a willing buyer will pay a willing

seller, see Rate Adjustment for the Satellite Carrier Compulsory

License, 62 FR 55742 (1997) (applying a fair market standard, as set

forth at 17 U.S.C. 119(c)(3)(D), in setting royalty rates for the

retransmission of broadcast signals by satellite carriers), reasonable

rates are determined based on policy considerations. See RIAA v. CRT,

662 F.2d 1.6 Congress granted the record companies a limited

performance right in sound recordings in order to ``provide [them] with

the ability to control the distribution of their product by digital

transmissions,'' but it did so with the understanding that the

emergence of new technologies would not be hampered. S. Rep. No. 104-

128, at 15 (1995). Consequently, Congress specified that the terms were

to be reasonable and calculated to achieve the following four specific

policy objectives:

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\6\ In reviewing how the Tribunal analyzed the statutory

criteria, the court noted that ``other statutory criteria invite the

Tribunal to exercise a legislative discretion in determining

industry profits between the copyright owners and users.'' Id. at 8.

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1. To maximize the availability of creative works to the public;

2. To afford the copyright owner a fair return for his creative

work and the copyright user a fair income under existing economic

conditions;

3. To reflect the relative roles of the copyright owner and the

to relative creative contribution, technological contribution, capital

investment, cost, risk, and contribution to the opening of new markets

for creative expression and media for their communication; and

4. To minimize any disruptive impact on the structure of the

industries involved and on generally prevailing industry practices. 17

U.S.C. 114(f)(2) and 801(b)(1).

RIAA takes exception to this interpretation and argues that the

Panel failed to follow CRT precedent that ``interpreted the Section

801(b)(1) factors as requiring it to establish a market rate.''

Petition at 33. In support of its position, RIAA relies upon the 1982

CRT rate adjustment proceeding to determine reasonable rates and terms

for the statutory noncommercial broadcasting license, 17 U.S.C. 118,

where the CRT stated:

The Tribunal has consistently held that the Copyright Act does

not contemplate the Tribunal establishing rates below the

[[Page 25400]]

reasonable market value of the copyrighted works subject to a

compulsory license.

1982 Adjustment of Royalty Schedule for Use of Certain Copyrighted

Works in Connection with Noncommercial Broadcasting: Terms and Rates of

Royalty Payments, 47 FR 57924 (December 29, 1982). RIAA further

contends that the Panel not only ignored the CRT precedent requiring it

to set marketplace rates, but improperly shifted the emphasis to ensure

the financial viability of the copyright users. Petition at 33.

In response, the Services contend that the Panel's analysis

comports with CRT precedent on both points, noting that the CRT did

consider evidence on how a proposed rate would affect the user industry

in its proceedings to set rates under sections 111 and 116. Reply to

Petition at 26. For example, in the 1980 rate adjustment proceeding to

set the royalty rate for jukeboxes, the CRT considered the evidence and

found ``only that marginal jukebox owners would be threatened by the

new rate.'' Id. In fact, the Tribunal stated that it was ``satisfied

that adequate attention (had) been given to the small operator, * * *

(and adopted) an amendment to the proposed fee schedule that was

proposed for the benefit of such (small) operators.'' 1980 Adjustment

of the Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 888

(1981).

The Register finds that the Panel correctly analyzed how to

determine a reasonable rate under section 114. Section 801(b)(1) states

that one function of a CARP is to determine reasonable rates ``as

provided in sections 114, 115, and 116, and to make determinations as

to reasonable terms and rates of royalty payments as provided in

section 118.'' The provision further states that the CARP must

determine the rates under sections 114, 115, and 116 to achieve the

four statutory objectives. The law does not state that these objectives

are applicable in a rate adjustment proceeding to determine rates under

sections 111 or 118. Therefore, RIAA's reliance on CRT precedents for

setting rates under section 118 is without merit. Furthermore, the

Panel's analysis is consistent with the prior CRT determinations

establishing rates for the section 115 and 116 licenses.

In the 1980 jukebox rate adjustment proceeding, the CRT set the

rate ``[o]n the basis of the marketplace analogies presented during the

proceeding, taking the record as a whole, and with regard for the

statutory criteria. * * * That rate takes account both of what is paid

for music elsewhere under similar circumstances and, since it is a flat

rate, of the Tribunal's concern for the smaller, less profitable

operators.'' 46 FR 889 (1981). To recognize that this rate was not a

negotiated marketplace value, one need only read Commissioner James's

dissent admonishing the majority for setting a rate on ``an ability to

pay theory.'' He characterized the majority's actions as follows:

In essence, the majority reached a conclusion on the premise

that a true market value would result in too large an increase in

fees. The majority was set on course by what they deemed were the

guiding standards of the statute which referred to minimizing the

disruptive impact on the economic structure of the industries

involved. It was the majority view and opinion that a large increase

in fees would be oppressive to the industry and would ``impact on

small operators.''

Id. at 891 (footnote omitted).

The Court of Appeals upheld the Tribunal's approach in its 1980

jukebox rate adjustment proceeding, stating that:

In its decision, the Tribunal acknowledged that the rate which

it approved could not be directly linked to marketplace parallels,

but it found that such parallels served as appropriate points of

reference to be weighed together with the entire record and the

statutory criteria. Although we agree with ASCAP that the analogous

marketplace evidence is significant, we do not believe that the

Tribunal was bound by that evidence to select a fee rate within the

$70-$140 ``zone'' which, according to ASCAP, governs this case. The

Tribunal carefully weighed the evidence derived from the marketplace

analogies and other evidence specifically in light of the four

statutory criteria of section 801(b) and arrived at a royalty rate

for coin-operated phonorecord players of $50 per machine.

Amusement and Music Operators Ass'n v. Copyright Royalty Tribunal, 676

F.2d 1144, 1157 (7th Cir. 1982), cert. denied, 459 U.S. 907 (1982)

(AMOA v. CRT). The D.C. Court of Appeals engaged in a similar analysis

when it considered the Tribunal's determination to raise the royalty

rate for making and distributing phonorecords of copyrighted musical

works from 2 cents to 4 cents. In that case, the copyright owners

argued that Congress intended the Tribunal to set a high royalty rate

under a bargaining room theory, which would create a rate ceiling for

stimulating future negotiations outside the license. The D.C. Circuit

found that while Congress had considered this possibility, it chose not

to codify this approach, but rather to express its will through

specific statutory criteria and allow the Tribunal to interpret and

apply these objectives to the record evidence in a rate adjustment

proceeding. RIAA v. CRT, 662 F.2d at 8-9. Furthermore, the Court

ascertained that Congress did not rank the criteria in order of

importance so that the Tribunal, and subsequently, the CARP, could:

To the extent that the statutory objectives determine a range of

reasonable royalty rates that would serve all these objectives

adequately but to differing degrees, * * * choose among those rates,

and courts are without authority to set aside the particular rate

chosen by the Tribunal if it lies within a ``zone of

reasonableness.''

Id. at 9. See also Permian Basin Area Rate Cases, 390 U.S. 747, 767

(1968); Federal Power Commission v. Natural Gas Pipeline Co., 315 U.S.

575, 585-586 (1942); Hercules, Inc. v. Environmental Protection Agency,

598 F.2d 91, 107 (D.C. Cir. 1978).

b. Benchmarks

The Panel's Disposition of the Proposed Benchmarks

The Register has reviewed the analysis of the Panel and its

disposition of the three benchmarks and finds that the Panel's primary

reliance on and manipulation of the DCR negotiated license fee was

arbitrary. The Register also finds that the record evidence does not

support the Panel's calculation of a specific range of fees for the

public performance of the musical compositions. These flaws compel the

her analysis while providing deference, where appropriate, to the

findings of the Panel.

The Register, however, did not evaluate further the record evidence

concerning either the cable television network fee or the proposed

minimum fee in her deliberations to determine the appropriate rate

because no party to the proceeding challenged either of these findings

or continued to rely upon these matters in presenting its arguments to

the Librarian.7 Therefore, the Register forgoes a review of

the Panel's analysis in these areas. This does not mean, however, that

the Register and the Librarian will always forego an independent review

of a Panel's actions. See, e.g. Distribution of the 1992, 1993, and

1994 Musical Works Funds, 62 FR 6558 (February 12, 1997)

[[Page 25401]]

(recommending an upward adjustment to one party's award, although no

party made a request for the adjustment); Rate Adjustment for the

Satellite Carrier Compulsory License, 62 FR 55742 (1997) (recommending

the adoption of a zero rate for local retransmission of network signals

to unserved households).

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\7\ ``RIAA strongly disagrees with the CARP's conclusion that

the Services should devote a smaller percentage of their revenues to

license fees than do other cable networks. While the range of

percentages is large, there are no cable networks that consistently

spend as little as 5 percent. Nevertheless, RIAA has not challenged

the CARP's decision to reject the cable network analogy.'' Petition

at 52 n.9 (citations omitted). Furthermore, RIAA did not raise any

challenge to the Panel's decision not to grant a minimum fee.

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The Panel's Adoption of the DCR Negotiated License Fee and its

Subsequent Manipulations of This Rate to Establish a Range of Potential

Royalty Rates was Arbitrary 8

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\8\ Negotiated license fees and certain business information,

which the Register has considered throughout her review, are not

being published in the Register's review because the information is

subject to a protective order. See Order Docket No. 96-5 CARP DSTRA

(September 18, 1996).

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The Panel found that the digital performance license negotiated as

part of a larger partnership agreement between DCR and its two record

company partners, Warner Music and Sony Music, was a useful benchmark

for determining the section 114 royalty fee because it provided a

``useful precedent,'' although there were problems with using the rate

for this license fee since only 60% of the industry engaged in the

negotiations setting the rate.9 Report Paras. 166, 200. To

address this problem the panel adjusted the figure upward to reach a

base rate figure arguably applicable to 100% of the recording industry

market. Id. The Panel then doubled this number to account for the

statutory provision which requires an equal distribution of the

royalties collected pursuant to the compulsory license between the

record companies and the recording artists. Id.; also 17 U.S.C. 114(g).

While recognizing that a pure doubling of the base rate was

inappropriate, the Panel determined that these manipulations of a

``freely negotiated rate'' set a reasonable range of rates for further

consideration in light of the statutory criteria. Id.

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\9\ Sony Music and Warner Music signed a partnership agreement

with DCR in January 1993. A third record company, EMI, joined the

partnership in April 1994, under substantially the same terms.

Report para. 164.

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RIAA opposes the use of the negotiated license fee as a benchmark

for setting the compulsory license fee for the following reasons: (1)

It was merely one provision in a complex transaction involving eleven

interrelated agreements, RIAA PF para. 92; Petition at 22; Wildman

10 W.R.T. at 12-15; Transcript (Tr.) 2213-14 (Wildman); (2)

the record companies interested in investing in the digital audio

service would share the cost of a higher rate, thereby creating a

strong incentive to create a low rate; (3) the license fee was not for

the right to perform sound recordings publicly, but for the

acknowledgement that a right should exist, RIAA PF para. 84; Tr. 2102

(Vidich); 11 (4) the record companies never viewed the

established rate as precedential, citing the license provision that the

rate will be superseded if Congress establishes a performance right in

sound recordings, DCR Exs. 7, 8 & 15 at para. 9; Vidich W.R.T. at 7;

Tr. 2106-2107 (Vidich); Del Beccaro 12 W.D.T. at 9, and the

most favored nations clause, DCR Exs. 7, 8 & 15 at para. 6; (5) the

record companies did not enjoy the degree of leverage in setting the

rate that the Services imply in their proposed findings; (6) the fee

did not represent an industry-wide agreement on the value of the

performance right; instead, only three record companies, ``collectively

responsible for only about 35% of the sound recordings performed by

DCR,'' negotiated the rates, RIAA's Reply to Proposed Findings and

Conclusions of Law (RIAA RPF) ] 39; Tr. 1014 (McCarthy); 13

and (7) the DCR digital performance license differed in significant

ways from the statutory license. For example, the DCR license requires

the company to pay royalties on its revenues from international sources

which are not recoverable under the DPRSRA, RIAA PF para. 83; Tr. 965

(Del Beccaro); Tr. 1014 (McCarthy); Tr. 2137 (Vidich), and it did not

contemplate a distribution of a portion of the royalties to recording

artists as required under the new law, RIAA PF para. 82.

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\10\ Associate Professor of Communications Studies at

Northwestern University and Director of Northwestern's program in

Telecommunications Studies, Management, and Policy.

\11\ Senior Vice-President of Strategic Planning and Business

Development at Warner Music Group and a member of the Board of

Directors of Digital Cable Radio Associates.

\12\ President and Chief Executive Officer of Digital Cable

Radio Associates.

\13\ Senior Vice-President and Chief Financial Officer of

Digital Cable Radio Associates.

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In response, the Services assert that the Panel ``did not rely on

the DCR license rate in isolation,'' and argue that its determination

was informed by testimony from the parties who participated in the

negotiations. Reply to Petition at 20. More specifically, the Services

argue that the inclusion of the performance license within a larger,

complex commercial agreement makes it more meaningful, because DCR did

not purchase a license for the public performance of sound recordings.

Rather, in exchange for a partnership agreement, DCR acknowledged that

the right should exist for a particular rate. The Services neglect,

however, to discuss why this observation is important in their initial

findings. Services RF para. 75-77. Later, the Services argue that the

Panel's decision to use the DCR license fee as an appropriate benchmark

rested on a weighing of the evidence and invoke the Panel's discretion

to evaluate the testimony and fashion its decision accordingly. Reply

to Petition at 20-21. The Services, however, fail to address RIAA's

additional concerns about the negotiated license, except to note that

the partner record companies never operated a joint advertising venture

nor took advantage of the provisions which gave them some measure of

control over programming. Services RF Paras. 80-81.

While the Register agrees with the Services that the Panel

carefully considered the rationale for and the circumstances

surrounding the negotiations setting the DCR license rate, she finds

the Panel's adoption of this benchmark and its subsequent adjustments

arbitrary. In the first instance, the benchmark offered by the Services

cannot represent a license for a right to perform sound recordings,

because no such legal right existed at the time of the negotiations.

Woodbury 14 W.D.T. at 12; RIAA PF ] 84; Tr. 2102 (Vidich).

DCR allowed that, in fact, it did not negotiate for a performance

license in sound recordings; and instead, characterized the transaction

as selling ``to its record company partners the recognition they sought

`that the right existed for a particular rate.' '' Services PF para.

102. To underscore this distinction, DCR insisted on a clause which

stated that the United States law did not require DCR to pay a fee or

royalty for the public performance of any sound recording, even though

DCR agreed, as part of a complex commercial transaction, to pay its

partner record companies what it calls a public performance license

fee. Services PF Paras. 111, 136. An article in the press announcing

the deal echoed this distinction. It noted that not only did the

transaction allow DCR use of the record companies' repertoire, it also

required DCR to support a performance right in sound recordings. DCR

Ex. 27 (Paul Verna, Time Warner Breaks New Cable Ground; Enters Cable

Radio Venture With Sony, Billboard, Feb. 6, 1996, at 1).

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\14\ A vice-president at the economic consulting firm of Charles

River Associates, Inc.

---------------------------------------------------------------------------

Consequently, the Register rejects the Panel's premise that the

rate set for a nonexistent right would represent accurately the value

of the performance right once it came into existence, especially where

the parties

[[Page 25402]]

acknowledge that the agreement encompassed more than the purported

value of the coveted right, namely the recognition from the audio

service that a performance right in sound recordings should exist. RIAA

PF Paras. 94-95; Tr. 2209-12 (Wildman); Wildman W.R.T. at 9-12.

Arguably, that recognition was more valuable consideration to the

record companies than the license fee itself.

The conclusion that the DCR license fee may serve as the benchmark

for setting the section 114 rates is undermined further by the very

nature of the partnership agreement. All parties agree that the

agreement concerning the performance right was merely one of eleven

interdependent co-equal agreements which together constituted the

partnership agreement between DCR and the record companies. Such strong

ties between provisions in a negotiated document raise the question of

how much give-and-take occurred in negotiating the final terms. Courts

recognize that complex transactions encourage tradeoffs among the

various provisions and lead to results that most likely differ from

those that would result from a separately negotiated

transaction.15 While DCR freely entered into the partnership

agreement, the record contains no evidence that it would have freely

entered into a separate performance license for sound recordings. To

the contrary, the Service's own witness admits that it is unlikely that

a stand-alone performance license would have been negotiated. Woodbury

W.D.T. at 15. Accordingly, the Register concludes that it was arbitrary

for the Panel to rely on a single provision extracted from a complex

agreement where the evidence demonstrates that the provision would not

exist but for the entire agreement. Under similar circumstances, the

Southern District Court of New York found that ``plucking one term out

of the contract is likely to yield a fairly arbitrary result.''

American Society of Composers Authors and Publishers v. Showtime/The

Movie Channel, Inc. (ASCAP), published at 912 F.2d 572, 590 (S.D.N.Y.

December 20, 1989) (No. 13-95 (WCC)) (rejecting proposal to rely upon

provisions in guild agreement concerning payment of revenues where such

provisions were part of a set of terms governing compensation,

benefits, and working conditions). 16

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\15\ For example, in resolving a dispute between ASCAP and

Showtime/The Movie Channel, Inc. over the fee for a ``blanket''

license, the Southern District Court of New York stated that:

it is fair to assume that in any negotiation that encompasses as

many disparate issues as do the guild agreements, the negotiators

will agree to tradeoffs, among the various negotiated items, ... The

process of negotiation is thus likely to yield a complex pattern of

results, most of which would have been different if the individual

issue had been negotiated entirely separately from the others.

Accordingly, plucking one term out of the contract is likely to

yield a fairly arbitrary result.

ASCAP v. Showtime/The Movie Channel, Inc., published at 912 F.2d

572, 590 (S.D.N.Y. Dec. 20, 1989) (Civ. No. 13-95 (WCC) (footnote

omitted).

\16\ This is not to say that in any case in which a CARP relied

on a license fee that was part of a larger agreement containing a

number of provisions unrelated to the license fee, such reliance

would necessarily be arbitrary. But in light of the other

deficiencies in the CARP's reliance on the DCR license, discussed

herein, and especially in light of the fact that the license fee was

for the exercise of a nonexistent right, the Register is compelled

to conclude that in this case, the CARP's reliance on the DCR

license fee as its exclusive benchmark was arbitrary.

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Another problem with adopting the DCR license fee is that it is not

an industry-wide agreement, but rather the product of negotiations

among only three record companies, which together account for

approximately 35% of the sound recordings performed by DCR. RIAA PF

para. 82; RIAA RPF para. 39. The arbitrators understood the limited

nature of the negotiations and made an adjustment to the license fee

based on the mistaken assumption that the DCR license fee represented

the value of the sound recordings owned by the three record companies

party to the agreement, which purportedly represented 60% of the record

industry. Report Paras. 166, 200. This assumption arose from a

statement made by the Services in the summary statement contained in

the Services' joint reply to RIAA's proposed findings.17 The

statement, however, has no support in the record. See Petition at 21

n.3; Reply to Petition at 21-22. Consequently, the Panel's upward

adjustment of the base figure on the merits of this assertion was

arbitrary.

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\17\ ``DCR entered into a performance license with three record

companies that represent approximately 60% of all recorded music

sold in the United States.'' Services RF at 2.

---------------------------------------------------------------------------

This is not to say that the fact that the DCR license fee was

negotiated with companies owning rights to only 35% of the relevant

works renders that license fee irrelevant. It is, however, a further

deficiency which in combination with the other deficiencies discussed

herein, renders the Panel's reliance on the DCR license fee as its

exclusive benchmark inappropriate.

Furthermore, the Panel's decision to rely on the DCR license fee

deviates from CRT precedent where that agency refused to adopt, as an

industry-wide rate, a set of rates negotiated by only certain of the

affected parties as part of a general understanding involving issues in

addition to the rate of compensation. Use of Certain Copyrighted Works

in Connection with Noncommercial Broadcasting, 43 FR 25068 (June 8,

1978). While no Panel need slavishly adhere to the past practices of

the CRT, it must articulate a reasoned explanation for its deviation

from past precedent. Distribution of 1990, 1991, and 1992 Cable

Royalties, 61 FR 55653, 55659 (October 28, 1996). Otherwise, its

actions may be construed as arbitrary or contrary to law.18

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\18\ Section 802(c), of the Copyright Act, directs the CARP to

``act on the basis of a fully documented written record, prior

decisions of the Copyright Royalty Tribunal, prior copyright

arbitration panel determinations, and rulings by the Librarian of

Congress under section 801(c).''

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The Register also finds that even if the 60% figure had record

support, it would be arbitrary to adjust a negotiated license fee that

purports to represent the market value of the digital performance right

in sound recordings. Under the license agreement, DCR agreed to pay a

percentage of its gross revenues for the right to perform sound

recordings digitally, but only a portion of these fees were paid to

each of DCR's three record company partners, allocated on the basis of

the DCR playlist.19 Tr. 2123-24 (Vidich); Services PF para.

111. Therefore, the license fee--to the extent that it was a license

fee--already accounted for all copyright fees owed to the record

industry, and it was inappropriate for the Panel to make any further

adjustment. The Services seem to realize the Panel's error in this

respect and note that the Panel was under no obligation to make an

upward adjustment, since the license fee reflected the value of the

sound recording and not the sum of the percentage amount each partner

record company negotiated for use of its works. Reply to Petition at

22.

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\19\ For example, if the DCR license fee had been 5% of gross

receipts (equaling $100,000) and 40% of the sound recordings on

DCR's playlist were owned by DCR's record company partners, then DCR

would pay 40% of the license fees ($40,000) on a prorata basis to

these partners. The remaining 60% ($60,000) represents the value of

the digital performance of works owned by non-partnership record

companies performed during the relevant time period--a sum that DCR

would not actually pay under the terms of its license agreement.

The 5% license fee value does not represent the actual value of

the negotiated fee because this information is subject to a

protective order. See n.8 supra.

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Furthermore, the Register finds that the Panel's conclusion that

the DCR license fee ``provides a useful precedent for setting a royalty

rate in this proceeding'' was arbitrary. Report para. 200. The only

support for this finding was Woodbury's testimony that the trade

article announcing the deal between DCR and its new record company

partners, Sony and Warner, illustrated its precedential value, at least

for the record companies. Woodbury W.D.T. at

[[Page 25403]]

16. Mr. Woodbury's statements on the precedential value of the

agreement, however, are full of qualifications, and he readily

acknowledged that ``a successful negotiation may have required that

Warner and Sony compensate Music Choice for including the performance

rights payments as part of the partnership agreement. The effect of

this compensation may have restrained Warner and Sony in their choice

of a higher fee level.'' Id.

In addition, the partnership agreement itself fails to support the

Panel's finding. It includes material redacted subject to the

protective order, DCR Exs. 7, 8 & 15 at para. 6, and a provision that

the rate will be superseded if Congress establishes a performance right

in sound recordings. DCR Exs. 7, 8, & 15 at para. 9. Vidich W.R.T. at

7; Tr. 2106-2107 (Vidich); Del Beccaro W.D.T. at 9. Because the

partnership agreement included language that undermined any

precedential value of the digital performance license included therein,

the Register finds that the Panel's reliance on the DCR license fee as

precedent was an arbitrary action. See Motor Vehicle Mfrs. Ass'n v.

State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983) (agency

action is arbitrary where the agency offers an explanation for its

decision that runs counter to the record evidence).

In setting a range of possible rates for the section 114 license,

the Panel made further adjustments to the base figure to account for

the payments to the recording artists. Under the DPRSRA, recording

artists are entitled to half of the royalties collected under the

compulsory license. 17 U.S.C. 114(g). RIAA argues that the DCR license

fee must be adjusted to account for this provision in the law that

entitles recording artists to a share of the royalties, because the

record companies were under no obligation to share the royalties. RIAA

RPF para. 40; Petition at 28. RIAA also argued for additional upward

adjustments of the benchmark to compensate the record companies for

certain differences between the DCR license and the compulsory license,

including compensation for loss of royalties generated from foreign and

commercial subscribers, and loss of revenue due to a shift in how the

Services offer their product to subscribers.

RIAA anchors its arguments for these requested adjustments on the

presumption that the responsibility of the Panel was ``to determine the

royalty [rate] that would be produced through free market negotiations,

absent the compulsory license.'' RIAA RPF para. 41. This presumption,

however, misrepresents the Panel's duty, which is to establish

reasonable rates and terms. See discussion supra concerning the use of

a marketplace standard in setting the royalty rate. While RIAA may have

a reasonable expectation that a Panel would make appropriate

adjustments to a marketplace benchmark that the Panel adopts for

further consideration in light of the statutory objectives, and that is

not to say that the requested adjustments are appropriate, there is no

justification for making the adjustments where the benchmark value does

not fulfill that function. Therefore, having found that the DCR license

fee does not represent the marketplace value of sound recordings, the

For the reasons cited above, the Register finds that the Panel was

arbitrary in relying on the DCR license fee for the purpose of

establishing an accurate evaluation of the marketplace value for the

performance right.

The Panel's Determination of a Specific Range of Fees for the Public

Performance of the Musical Compositions Was Arbitrary

The Services pay separate license fees to Broadcast Music, Inc.

(BMI), the American Society of Composers, Authors, and Publishers

(ASCAP), and SESAC, Inc. for the public performance of the underlying

musical works in the sound recordings. The Services introduced evidence

on what they pay the performing rights organizations for the public

performance of the musical works to illustrate the industry practice

that ``licensing rates ordinarily paid in the recording and music

industries for the use of copyrighted works are far less than 41.5%,

and generally are within the low single digit range for use of

copyrighted music and sound recordings.'' Rosenthal 20

W.R.T. at 3; Tr. 1646, 1669-70, 1674 (Massarsky).21

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\20\ An attorney with the law firm of Berliner, Corcoran & Rowe,

L.L.P., in Washington, D.C., who represents recording artists,

writers, production companies, record companies, and multimedia

companies.

\21\ An economic consultant with the firm of Barry M. Massarsky

Consulting, Inc.

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Using the license fees DMX and DCR 22 pay for the right

to perform musical compositions in the BMI and SESAC repertories and

the anticipated payments that ASCAP will receive upon resolution of a

rate dispute between itself and the Services, and not the interim rates

that the Services currently pay ASCAP, which are usually lower than the

final determination of the rate court, the Panel set an upper limit on

the value of the performance right for the musical compositions. Report

Paras. 167(B)-(G). In making this determination, the Panel accepted

Massarsky's testimony that ASCAP license fees are ``generally greater

than, but at least no less than, BMI license fees,'' and made its

calculations accordingly. Report para. 167(E); see also RIAA PF

Paras. 106-108.23 In addition to setting an upper limit on

the amount the Services would pay for these performance licenses, the

Panel announced a lower limit for this benchmark but provided no

discussion on how it arrived at this figure.

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\22\ The Services pay an interim rate set in 1989 to ASCAP for

the performance of the musical works in its repertoire. Tr. 1029

(McCarthy); Tr. 1656 (Massarsky). DCR also pays an interim rate to

BMI. These rate disputes are currently the subject of adjudication

before the ``rate court'' in the Southern District of New York.

Services RF Paras. 52-53; 100-105. Pending the outcome of the rate

cases, DCR has agreed to pay BMI the same contractual rate that DMX

pays for the musical works performance license. Tr. 1653

(Massarsky).

\23\ CRT and judicial precedent supports the Panel's premise

that ASCAP usually receives slightly higher royalty fees for the

public performance of its works than does BMI. In American Society

of Composers, Authors, and Publishers v. Showtime/The Movie Channel,

912 F.2d 563 (2nd Cir. 1990), the court affirmed the rate court

decision that a ``blanket'' license rate for use of ASCAP works

should be set slightly higher than the rate the cable network pays

for a BMI license. This result reflected the agreed upon 55-45 ratio

that ASCAP and BMI adopted in dividing their share of the royalties

for compulsory licenses paid by cable system operators for

retransmissions of broadcast signals. See also 1978 Cable Royalty

Distribution Determination, 45 FR 63026 (Sept. 23, 1980) (CRT

determined that of the 4.5% royalty share awarded to the music

claimants' group in the 1978 cable distribution proceeding, ASCAP

would receive 54%, BMI, 43%, and SESAC, 3% of the royalties.); 1987

Cable Royalty Distribution Proceeding, 55 FR 11988 (March 30, 1990)

(CRT again adjusted the distribution percentages for cable royalties

so that ASCAP received a 58% share of the disputed royalties and BMI

received the remaining 42% share).

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RIAA accepts the Panel's determination for an upper limit valuation

for the performance right in musical works, but challenges the Panel's

determination of the lower limit of this value. Petition at 16-20. RIAA

contends that because the Panel had actual figures upon which to base

its calculation, it was arbitrary to set a lower limit. Id. at 17.

From an examination of the record, the Register cannot determine

how the Panel derived the lower limit figure, but she has identified at

least one way that the Panel could have settled upon the lower figure.

It entails the use of the interim rates which the Services pay ASCAP

currently, instead of relying on a figure equal to or greater than the

rate paid to BMI. Tr. 1669 (Massarsky), Tr. 1028-1029 (McCarthy). Use

of such an approach, however, is expressly

[[Page 25404]]

disavowed by two of the Services' own expert witnesses who agree that

it is inappropriate to rely on interim rates to determine competitive

market rates. Woodbury W.R.T. at 19 n.70; Tr. 2710-2711 (Woodbury); Tr.

1029 (McCarthy). The Register concurs with these witnesses's

assertions, and therefore rejects any figure which uses an interim rate

in calculating a value when specific evidence exists in the record

discounting this methodology and nothing supports its use.

Nor could the Panel consider just the individual license fees which

the Services pay to a single performing rights organization in setting

the lower limit, having rejected a similar argument when the Services

initially proposed making this comparison. Report para. 168. A single

license fee covers only those musical works under the control of the

individual performing rights organization granting the license.

Therefore, a Service must obtain a ``blanket'' license from every

performing rights organization in order to have the freedom to play

virtually any musical composition without infringing its copyright.

Hence, the total value attached to the performance of the underlying

musical works would be the sum of the license fees paid to each of the

performing rights organizations, just as the value of the digital

performance right in sound recordings would be the fees paid to all

record companies. See Report para. 168.

The Register perceives no rational connection between the Panel's

factual conclusions and its decision to set a lower limit for this

benchmark. Where the record provides clear evidence of what the

Services actually pay for the performance licenses, and the witnesses

agree that the interim rates which are currently being paid represent

de minimis value for these licenses, the Panel need not look beyond

this information to determine the value of the benchmark. For the

reasons discussed above, the Register does not consider the Panel's

lower limit on the performance license fees for musical compositions

when proposing a royalty rate for the section 114 license.

Use of Benchmarks Approximating Marketplace Value in Setting the

Section 114 Rate

A benchmark is a marketplace point of reference, and as such, it

need not be perfect in order to be considered in a rate setting

proceeding. In the 1980 rate adjustment proceeding for coin-operated

phonorecord players, the Tribunal considered different marketplace

models and found that each analogy had distinguishing characteristics,

but nevertheless considered them in conjunction with the record

evidence and the statutory objectives. 1980 Adjustment of the Royalty

Rate for Coin-Operated Phonorecord Players, 46 FR 884, 888 (1981)

(``While acknowledging that our rate cannot be directly linked to

marketplace parallels, we find that they serve as an appropriate

benchmark to be weighed together with the entire record and the

statutory criteria''). The U.S. Court of Appeals for the Seventh

Circuit approved the Tribunal's approach, stating that:

We think that the Tribunal could properly take cognizance of the

marketplace analogies while appraising them to reflect the

differences in both the respective markets (e.g., with respect to

volume and industry structure) and the regulatory environment. It is

quite appropriate and normal in this administrative rate

determination process to find distinguishing features among various

analogous situations affecting the weight and appropriate thrust of

evidence rather than its admissibility. No authority cited by AMOA

would require the Tribunal to reject the ASCAP/SESAC analogies.

Comparable rate analogies have been repeatedly endorsed as

appropriate ratemaking devices.

AMOA v. CRT, 676 F.2d at 1157. See also San Antonio v. United

States, 631 F.2d 831, 836-37 (D.C. Cir. 1980), clarified, 655 F.2d 1341

(D.C. Cir. 1981); Burlington Northern, Inc. v. United States, 555 F.2d

637, 641-43 (8th Cir. 1977).

When setting the rates for the statutory performance license in

sound recordings, the benchmarks are merely the starting point for

establishing an appropriate rate. The deciding body uses the

appropriate marketplace analogies,24 in conjunction with

record evidence, and with regard for the statutory criteria, to set a

reasonable rate.

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\24\ A Panel is free to reject a proposed benchmark that does

not reflect accurately the characteristics and dynamics of the

industries subject to the proposed rate. See e.g., Use of Certain

Copyrighted Works in Connection with Noncommercial Broadcasting, 43

FR 25068-69 (1978) (CRT found voluntary license between BMI, Inc.

and the public broadcasters, Public Broadcasting System and National

Public Radio, of no assistance in setting rate for use of ASCAP

repertoire); Adjustment of the Royalty Rate for Cable Systems;

Federal Communications Commission's Deregulation of the Cable

Industry, 47 FR 52146 (November 12, 1982).

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In this proceeding, the Register finds that both the negotiated DCR

license fee and the marketplace license fee for the performance of the

musical works are useful at least in circumscribing the possible range

of values under consideration for the statutory performance license in

sound recordings. While the DCR license fee purports to represent a

negotiated value for a right to which, by law, the record companies

were not entitled (in addition to the recognition that the right should

exist), the Register acknowledges that the value of the DCR license

provides minimal information as to the value of the performance right

ultimately granted in the DPRSRA, although it does provide some

guidance for assessing the proposed rate. See Adjustment of Royalty

Payable Under Compulsory License for Making and Distributing

Phonorecords; Rates and Adjustment of Rates (115 Rate Adjustment

Proceeding), 46 FR 10466, 10483 (Feb. 3, 1981) (``We find that the

foreign experience is relevant--because it provides one measure of

whether copyright owners in the United States are being afforded a fair

return'').

On the other hand, the second reference point--the negotiated

license fees for the performance of music embodied in the sound

recordings--offers specific information on what the Services actually

pay for the already-established performance right of one component of

the sound recording. The Panel recognized this reference point's

usefulness and used it to further support its choice of a royalty rate.

Report para. 201. The question, however, is whether this reference

point is determinative of the marketplace value of the performance

right in sound recordings; and, as the Panel determined, the answer is

no. Report Paras. 169, 201.

Initially, neither the Services nor RIAA placed much weight on this

marketplace reference point, although RIAA has consistently argued that

the value of the performance right in sound recordings is greater than

the value of the performance right in the underlying musical works.

RIAA RPF para. 16, Petition at 10-16. On the one hand, the Services

argue that the musical composition is the key to a successful

recording, Services RF para. 10-12, citing Tr. 1664 (Massarsky), and on

the other hand, RIAA contends that a song lacks feeling until the

recording artist breathes life into the song. Morris 25

W.D.T. at 1-2; Petition at 12-13. Because neither side presented

conclusive evidence on this point, the Panel observed only that both

groups are ``parents of the music.'' Report para. 169.

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\25\ A country music artist who has recorded 14 albums,

including five number one songs.

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RIAA faults the Panel for its lack of discussion on the question of

whose rights in the phonorecord are more valuable. Petition at 10-16.

While the Register agrees that the Panel did not make specific

citations to record evidence, its finding that ``[t]here was

insufficient and conflicting evidence to make a determination that the

[[Page 25405]]

performers and record companies deserve a larger percentage from the

Services than granted to the music works,'' was supported by the record

evidence. Report para. 169.

To make its point, RIAA presented an analysis of revenues from

record sales in support of its argument that the marketplace values the

contributions of the record companies and the performing artists more

than it values the contributions of the copyright owners in the musical

compositions. RIAA's PF Paras. 112-120; Petition at 10-16. This

evidence showed that copyright owners of the musical composition

receive between 5-20% of the wholesale price for the sound recordings

based on sales of CDs and cassette tapes--approximately 5% from the

average wholesale price for an average CD and 12% from an average

cassette.26 RIAA PF Paras. 115, 119. Recording artists, on

the other hand, receive 7-10% of the average wholesale price for a

typical CD and 15-20% for a typical cassette, leaving approximately

between 56-88% of the revenues from sales for the record companies.

RIAA para. PF 116.

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\26\ Interested parties are free to negotiate a rate below the

statutory rate for the mechanical license and often do. Tr. 1660

(Massarsky).

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The Services disagreed with RIAA's interpretation of the

marketplace data, contending that the reason the ``(r)ecord companies

receive a bigger percentage of revenues from the sale of sound

recordings (is) because they have a bigger monetary investment in the

record production costs, as well as the leverage to minimize the

royalties paid to songwriters, music publishers, and recording

artists.'' Services RF Paras. 118-120. They also oppose RIAA's

implication that the record companies should receive more value from

the performance right in sound recordings than the songwriters receive

for a similar right because the record companies garner more revenue

from the use of the mechanical license than do the songwriters and

composers.

The Services accurately note that the mechanical license and the

digital performance license represent different and distinct rights to

the copyright holders under the law, and they make no attempt to tie

the value of the rights associated with the mechanical license to the

value of the digital performance right, a right newly recognized with

the passage of the DPRSRA. Even RIAA, the proponent of the assertion,

fails to explain why the relative value of the mechanical license to

the various owners and users has any application to the determination

of the value of a digital performance license in sound recordings.

Consequently, where no clear nexus exists between the values of

different rights, the model serves no practical purpose in computing

the value of the digital performance right.

Hence, RIAA's contention that the data supports its assertion that

the marketplace places a higher value on the contributions of the

record companies and the recording artists in the creation of the

phonorecord fails, because it does not discuss the constraining effect

the mechanical license has on the copyright owners in setting a value

on their reproduction and distribution right. Record companies pay the

rate for the right to reproduce and distribute the musical composition

in a phonorecord. The record company then, in turn, sells the

phonorecord at a fair market price. Because both groups do not share

equal power to set rates in an unfettered marketplace, it is

unreasonable to compare the value of the reproduction and distribution

right of musical compositions--a rate set by the government at a level

to achieve certain statutory goals--with the revenues flowing to record

companies from a price set in the marketplace according to the laws of

supply and demand, and then to declare that the marketplace values the

sound recording more than the underlying musical composition.

Consequently, RIAA's evidence sheds no light on the relative value of

the sound recording performance right and the musical works performance

right.27

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\27\ Even if there was some value to the comparison, RIAA does

not appear to factor into its calculations the value of the sound

recordings in those phonorecords that do not show a profit.

According to the record, ``approximately 85 percent of all sound

recordings do not recoup the costs that are spent to make and to

market those recordings. Indeed, over two-thirds of all sound

recordings sell less than 1,000 copies.'' Report para. 105.

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In addition to the foregoing discussion, the Register notes that

Congress did not intend for the license fees paid under the new digital

performance license to ``diminish in any respect the royalties payable

to copyright owners of musical works for the public performance of

their works.'' S. Rep. No. 104-128, at 33 (1995) (emphasis added). See

also 17 U.S.C. 114(i). Although this statement does not express

Congress' intent that the license be set below the value of the public

performance right in the musical works, it indicates that Congress

considered the possibility that such would be the outcome, and sought

through express legislation to protect the current value of the

performance right in musical works.

Based on a review of the record evidence, the Register concurs with

the Panel's conclusion that there was insufficient evidence to

determine that the performers and record companies deserve a larger

percentage from the Services than that received by the copyright

holders in the musical works. That being so, the Register finds no

basis for making an upward adjustment to the musical works performance

license fees to establish a broader range of potential rates.

c. Statutory Objectives

Section 801(b)(1) of the Copyright Act states that the rates for

the section 114 license shall be calculated to achieve certain

statutory objectives. The Panel evaluated each statutory objective and

made a finding as to whether the Services or RIAA furthered that

objective. If the Services contributed more to furthering the

objective, the Panel gave more consideration to setting a rate at the

lower end of the possible range, and conversely, if the record

companies made the more significant contribution, the Panel found this

to favor a rate toward the upper end. Report para. 19((A)-(D).

The Panel's analysis led it to set a rate toward the low end of its

range, because a rate set toward the high end would thwart the

statutory objectives under current market conditions. Id. The Panel

expressly noted that a future Panel may reach an entirely different

result based on the then-current economic state of the industry and new

information on the Services' impact on the marketplace. Report para.

202.

RIAA contends that the Panel's findings that all factors favor

setting a low rate is contrary to CRT precedent. Petition at 32. This

contention relies on a statement from the D.C. Court of Appeals, which

upon reviewing the CRT's 1980 Mechanical Rate Adjustment Proceeding

concluded that the factors ``pull in opposing directions.'' Id., citing

RIAA v. CRT, 662 F.2d at 9. But in making this statement, the court

merely made an observation that the statutory objectives required the

Tribunal to weigh opposing factors in determining how best to achieve

each objective. It went on to say that the Tribunal had the

responsibility of reconciling these factors in setting a reasonable

rate, but the court did not preclude the possibility that the Tribunal

might find that the application of the factors to the evidence

consistently supported either a high rate or a low rate. RIAA v. CRT,

662 F.2d at 9.

[[Page 25406]]

The Register approves the Panel's basic approach in utilizing the

factors to determine its rate for the digital performance right and

adopts the Panel's findings where the evidence supports its

conclusions.

The Panel's determination that the statutory objectives supported

setting a rate favoring the Services was not arbitrary

The Panel's ultimate conclusion that the best way to achieve the

four statutory objectives was to set a low rate favoring the Services

is supported by the evidence presented in this proceeding. How much

weight to accord each objective is within the discretion of the Panel,

which may accord more weight to one objective over the others so long

as all objectives are served adequately. See RIAA v. CRT, 662 F.2d at

9. In RIAA v. CRT, the court reviewed the Tribunal's decision to raise

the rate for making and distributing phonorecords from two cents to

four cents. It found the copyright users' argument that the Tribunal

failed to give adequate consideration to certain factors over others

unavailing. In discussing the impact of the statutory objectives on the

ratemaking process, the court stated:

(T)he Tribunal was not told which factors should receive higher

priorities. To the extent that the statutory objectives determine a

range of reasonable royalty rates that would serve all these

objectives adequately but to differing degrees, the Tribunal is free

to choose among those rates, and courts are without authority to set

aside the particular rate chosen by the Tribunal if it lies within a

``zone of reasonableness.''

Id. at 9 (citations omitted). Hence, the Panel was free to find that a

rate on the low end was reasonable so long as that rate fell within the

``zone,'' and the ``zone'' was calculated to achieve the statutory

objectives.

The Panel's analysis and application of the statutory objectives,

however, are not without problems. The Register finds that on occasion,

the Panel either did not perceive or misinterpreted the precedential

underpinnings of the statutory objective.

A full discussion of the Panel's deliberations and the parties'

responses concerning the evaluation and application of the four

statutory objectives follows.

A. Maximize the Availability of Works. (17 U.S.C.801(b)(1)(A)).

The Panel found that the digital audio services ``substantially

increase the availability of recordings by providing many channels of

uninterrupted music of different genres,'' noting the diversity of the

music offered by the Services. Report Paras. 121-122. Based on this

finding, the Panel concluded at the end of its report that ``[t]o

maximize the availability of creative works to the public * * * the

rate should be set on the low side. A lower rate will hopefully ensure

the Services' continued existence and encourage competition so that the

greatest number of recordings will be exposed to the consumers.'' Id.

para. 198(A).

RIAA alleges that the Panel misinterpreted this statutory objective

because it focused on ``whether the Services promote the sale of sound

recordings,'' rather than ``whether the proposed rate will maximize the

availability of sound recordings.'' RIAA RPF para. 43; Petition at 37-

41. In support of its position, RIAA recalls the 1980 jukebox rate

adjustment proceeding, where the CRT concluded, in its discussion of

section 801(b)(1)(A), that jukeboxes were not crucial to assuring the

public of the availability of creative works. 1980 Adjustment of the

Royalty Rate for Coin-Operated Phonorecord Players, 46 FR 884, 889

(1981). The Tribunal, however, did find that ``reasonable payment for

jukebox performances will add incrementally to the encouragement of

creation by songwriters and exploitation by music publishers, and so

maximize availability of musical works to the public.'' Id. On the

strength of past CRT precedent and the courts' recurring observation

that compensation to the author or artist stimulates the creative

force, 28 RIAA disputes the Panel's conclusion, contending

that the best way to maximize the availability to the public is to

ensure that copyright owners receive fair compensation for their works.

Petition at 38.

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\28\ Sony Corp. of America v. Universal City Studios, Inc., 464

U.S. 417, 429 (1984), quoting United States v. Paramount Pictures,

334 U.S. 131, 158 (1948). (```[R]eward to the author or artist

serves to induce release to the public of the products of his

creative genius.'''); Twentieth Century Music Corp. v. Aiken, 422

U.S. 151, 156 (1975) (compensating authors ``serve[s] the cause of

promoting broad public availability of literature, music, and the

other arts''); 115 Rate Adjustment Proceeding, 46 FR 10479 (1981)

(In discussing section 801(b)(1)(A), the CRT looked to the purpose

of the section 115 license which was ``intended to encourage the

creation and dissemination of musical compositions.'' Therefore, the

Tribunal set the rate to ``afford songwriters a financial and not

merely a psychic reward for their creative efforts'' as a way to

maximize the availability of creative works).

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The Services support the Panel's findings and conclusion but offer

no legal support for their position except to note that ``[t]he Courts

have long held that under copyright law, reward to copyright owners is

a `secondary consideration' that ultimately serves the cause of

promoting public availability of copyrighted works.'' Reply to Petition

at 27 (citations omitted). The Services assert rightfully that the

primary rationale for the copyright law is to stimulate the creation of

artistic works for the benefit of the public. Twentieth Century Music

v. Aiken, 422 U.S. 151, 156 (1975), citing Fox Film Corp. v. Doyal, 286

U.S. 123, 127 (1932) (``The sole interest of the United States and the

primary object in conferring this monopoly * * * lie in the general

benefits derived by the public from the labors of authors''). But in

underscoring the primary purpose for the copyright law, the Court in

Aiken acknowledges that this aim is achieved by allowing the copyright

owners to receive a fair return for their labor, the position advanced

by RIAA. ld. (``The immediate effect of our copyright law is to secure

a fair return for an `author's' creative labor. But the ultimate aim

is, by this incentive, to stimulate artistic creativity for the general

public good''). See also Sony Corp. America v. Universal City Studios,

Inc., 464 U.S. 417 (1984); United States v. Paramount Pictures, 334

U.S. 131 (1948). The positive interplay between compensation and

creation is a basic tenet of copyright law, and as such, its

contribution to stimulating the creation of additional works cannot be

set aside lightly.

In such matters where the Panel failed to discuss any relevant case

law or past precedent construing the statutory objective before

rendering its determination, the Register finds the Panel acted in an

arbitrary manner. The finding is based on the Panel's failure to

consider CRT precedent and to provide a rational basis for its

departure from prior proceedings construing the same statutory

objective. See Pontchartrain Broad. v. FCC, 15 F.3d 183, 185 (D.C. Cir.

1994) (``an unexplained departure from Commission precedent would have

to be overturned as arbitrary and capricious''). Motor Vehicle Mfrs.

Ass'n v. State Farm Mutual Auto. Insurance Co., 463 U.S. 29 (1983);

Celcom Communications Corp. v. FCC, 789 F.2d 67 (D.C. Cir. 1986);

Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985).

There is no record evidence to support a conclusion that the

existence of the digital transmission services stimulates the creative

process. Instead, the Panel made observations concerning the

development of another method for disseminating creative works to the

public--a valid and vital consideration addressed in the statutory

objective concerning relative contributions from each party--but fails

to discuss how the creation of a new mode of distribution will itself

stimulate the creation of additional works.

[[Page 25407]]

Because the Panel failed to reconcile its determination with past

CRT precedent and case law, the Register rejects both the Panel's

findings and conclusions on this point as arbitrary. Instead, the

the greater contribution in maximizing the availability of the creative

works to the public, a conclusion consistent with past CRT precedent.

B. Relative Roles of the Copyright Owners and the Copyright Users

in Making Product Available to the Public. (17 U.S.C. 801(b)(1)(C)).

The statutory objective addressing the relative roles of the

parties contains five different factors, which the Panel evaluated

independently. In analyzing the first component of this objective, the

relative creative contribution, the Panel found that both the recording

companies and the performers make substantial creative contributions to

the release of a sound recording. Report para. 87. Its determination

credited the performers and the record companies for their work in

making the musical work come alive. Id. Paras. 81-83. The Services were

found to make no such significant contribution to the creation of the

sound recording. Instead, their contribution was seen as more limited,

since it merely enhanced the presentation of the final work through

unique programming concepts. Id. Paras. 84-86. On balance, the Panel

found ``that the artists and the record companies provide greater

creative contributions to the release of sound recordings to the public

than do the Services,'' id. para. 87, a finding supported by CRT

precedent. 29

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\29\ The CRT refused to award broadcasters a share of the cable

royalties for their role in formatting radio stations. The Tribunal

construed the claim as one for compilation which had a de minimis

value. The U.S. Court of Appeals for the D.C. Circuit upheld the

Tribunal's determination. NAB v. CRT, 772 F.2d at 931.

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The Panel continued its consideration of the relative contribution

of the owners vis-a-vis the users in making the product available to

the public and determined that the Services made the greater

contribution with respect to the four remaining factors: technological

contributions, capital investment, costs and risks to industry, and the

opening of new markets. Report Paras. 88, 93, 94, 97, 98, and 109.

In making this determination, the Panel focused on the

technological developments made by the Services in opening a new avenue

for transmitting sound recordings to a larger and more diverse

audience, including the creation of technology to uplink the signals to

satellites and transmit them via cable; technology to identify the name

of the sound recording and the artist during the performance; and

technology for programming, encryption, and transmission of the sound

recording. Id. Paras. 89-92. In contrast, the Panel found that the

record companies made no contributions in these areas. Id. para. 93.

The Panel also weighed the evidence presented in support of the

parties' relative roles in making capital investments in equipment and

technology, the third factor. The Panel determined that the Services

made a substantial showing of their $10 million investment in equipment

and technology, Report para. 95 and cites therein, whereas RIAA did not

suggest that any capital investment was required on its part. Id. para.

97.

And finally, the Panel found that the fourth factor, the relative

costs and risks incurred by the parties in making the product available

to the public, was greater for the Services than for the record

companies and the performing artists, even though the record companies

do incur substantial costs and risks in producing the product used by

the Services. Id. Paras. 98-108. In making its determination, the Panel

balanced the costs and risks involved in producing the sound recordings

against the cost and risks associated with bringing the creative

product to market in a new and novel way. Id. Paras. 99-107. In support

of its findings, the Panel noted that the Services have invested

significant start-up costs and are currently undergoing a shift in how

they market their services. Id. Paras. 55, 73-78, 99, and 102. In

addition, the Services contend, and the Panel agrees, that the Services

face new competition from the internet and digital radio. Consequently,

it is far from clear whether the Services can survive. Id. Paras. 72,

99.

The Panel also found that record companies face tremendous risks

when producing new sound recordings, citing the record companies'

submissions showing that record companies fail to recover the

production costs for approximately 85% of sound recordings, much less

show a profit. Id. para. 105. The Panel, however, went on to find that

the record companies have adapted to the vagaries of the music

business, and as an industry, have shown consistent growth in units

shipped and dollar value of records, CDs, and music videos from 1982-

1996. Id. para. 108.

The Panel's key finding from its analysis of the third objective

was that the Services contribute more to the opening of new markets for

creative expression through the development of the digital audio

services. Id. para. 109. The Panel credited the Services with opening

new markets for creative expression because they expose the public to a

broader range of music than does traditional over-the-air radio. Unlike

traditional radio, the Services offer multiple channels for classical,

jazz, traditional, alternative, and ethnic formats. Id. para. 110.

Because subscribers frequently purchase new music heard for the first

time on the service, the Panel found that record companies arguably

benefit directly from the expanded musical formats offered by the

Services. Id. para. 112. The Panel also found that the Services' future

plans to offer subscribers an opportunity to purchase the sound

recordings directly will ``undoubtedly'' open new markets for the

record companies. Id. Paras. 114-115.

The record companies do not accept the Panel's findings concerning

this statutory objective, and once again, take issue with the Panel's

interpretation, positing that the Panel impermissively focused on

``whether recording companies had made a particular contribution to the

Services operations--and wholly ignored the contributions that the

recording industry had made to the sound recordings themselves.''

Petition at 45-46. RIAA's predicate for its argument is its

interpretation that the statutory phrase, ``in the product made

available to the public,'' 17 U.S.C. 801(b)(1)(C), refers only to the

creation of the sound recordings and not to the Services' creation of a

new means for bringing the sound recordings to the listener. Petition

at 46.

In addition to this alleged fundamental flaw in interpretation,

RIAA contends that the Panel ``improperly collapsed (its cost/risk

analysis) into a risk only (analysis)'' and ignored empirical evidence

in the record discounting the promotional value of the Services'

offerings. Id. at 47-48. RIAA, however, fails to note that the Panel

did acknowledge that the record companies incur significant costs and

risks in their business. Report Paras. 105-107. But the Panel also

found that the Services presented no additional risk to the record

companies ``unless the customers of the Services record the sound

transmissions in lieu of purchasing these products at a retail store.''

Report para. 107 (emphasis added). Because the record companies

introduced no evidence showing decreased overall sales of records and

CDs, the Panel reasonably found that the record companies did not incur

additional risk from lost sales due to the Services' activities. Report

Paras. 107, 111.

[[Page 25408]]

If anything, the Panel believed that the Services decreased the

risk to the recording companies because the digital audio services have

substantial promotional value. The promotional value comes from the

constant airplay of new types of music not readily accessible in the

marketplace, which in turn stimulates record sales. Report para. 110.

In making this finding, the Panel relied on Simon's and Rubinstein's

testimony that ``subscribers frequently purchase new music precisely

because they heard it on one of the Services,'' Report para. 112 citing

Simon 30 W.D.T. at 1; Rubinstein W.D.T. at 34; Tr. 1442

(Rubinstein), and on the record industries' practice of supplying

complimentary copies of their products to the Services for use on the

air to promote the sales of an album. Tr. 1291 (Rubinstein); Tr. 1182-

83, 1201 (Talley) 31; DMX Ex. 3. See also Tr. 2248 (Wildman)

(``Is there a benefit to the record company from getting music exposed

that might become a hit that wouldn't get exposed otherwise? Of course

there is'').

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\30\ Senior Vice-President of Programming at Digital Cable Radio

Associates.

\31\ Executive Vice-President and Chief Technical Officer of

Digital Music Express who oversees research and development, and

technical operations worldwide.

---------------------------------------------------------------------------

Furthermore, RIAA's reliance on the preliminary DCR survey for the

proposition that the Services do not promote sound recording sales is

untenable where the record clearly shows that the record companies

provide promotional copies to the Services. In fact, RIAA's own expert

acknowledges ``there (are) promotional benefits to recording companies

from having their music played on radio stations or the digital music

services.'' Tr. 2220 (Wildman).

In contrast to RIAA's fundamental objection to the Panel's

interpretation of this statutory objective, the Services contend that

the Panel made a reasonable determination that the phrase, ``the

product made available to the public,'' applied to both the sound

recordings and the entire digital music service. Reply to Petition at

29. This finding is consistent with the 1980 rate adjustment proceeding

for the mechanical license, where the CRT credited the record

companies, the users of the musical compositions for purposes of the

mechanical license, with developing new markets through technological

innovations, and through the creation of record clubs, mail order

sales, and television advertising campaigns. 46 FR 10480-81 (1981).

In making her determination on this point, the Register reflects on

the statutory responsibilities of the Panel which is to set reasonable

rates and terms for the public performance of sound recordings by

certain digital audio services. (emphasis added). ``In deciding to

grant a new exclusive right to perform copyrighted sound recordings

publicly by means of digital audio transmission, the Committee was

mindful of the need to strike a balance among all of the interests

affected thereby.'' S. Rep. No. 104-128, at 15-16 (1995). By its very

nature, the section 114 license contemplates weighing the contributions

of the users in creating and expanding the market for the performance

of the sound recording in a digital technological environment. Without

dispute, the evidence reveals a large investment of capital by the

Services to create a new industry that expands the offerings of the

types of music beyond that which one receives over the radio, through

live performances, and other traditional means of public performance.

Report Paras. 44, 49, 52, 99, 102-104, 110, 113; Simon W.D.T. at 3-4;

Rubinstein W.D.T. at 13-14; Tr. 853-54 (Del Beccaro); Tr. 1237-40

(Rubinstein); Tr. 1476-78 (Funkhouser); DMX Ex. 32. Conversely, the

record companies offered little or no evidence on their contributions

relating to the key factors. Report Paras. 93, 97, 111.

From the foregoing analysis, the Panel concluded that the record

companies contributed more in only one of the five areas under

consideration in evaluating this statutory objective, and consequently,

the rate should be set at a minimum level in favor of the Services.

Report para. 198(C).

C. To Minimize Any Disruptive Impact on the Structure of the

Industries Involved. (17 U.S.C. 801(b)(1)(D)).

The Panel determined that a rate set too high could cause one or

all of the Services to abandon the business. Report Paras. 117-118;

Troxel 32 W.R.T. 1, 5-6; Tr. 2553-2554; DMX Ex. 49(b). The

Panel considered the nature of the Services' business, noting its need

to increase its subscriber base just to reach a break-even point

without the added obligation of paying an additional fee for a digital

performance right. Id. Paras. 119(a)-(d). The Panel also calculated

that the record companies would receive substantially less than a 1%

increase in their gross revenues even if the rate were set at the

highest proposed level (41.5% of gross revenues), underscoring the

lesser impact of the license fees on the record industry. Id. para.

119.

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\32\ Chief Executive Officer and President of Digital Music

Express since July 1997.

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RIAA implies that a low statutory rate for the digital performance

right will have a negative impact on their future negotiations with

other digital services. RIAA RPF Paras. 58, 105; Petition at 43. They

also object to the Panel's constant reference to revenues generated

from the distribution and reproduction rights and its alleged lack of

consideration of CRT precedent. Petition at 43-44.

In support of the Panel's evaluation, the Services note that RIAA

failed to introduce any evidence concerning the impact a low rate would

have on the record companies and performing artists, in direct contrast

to the abundance of financial information submitted by the Services in

support of their assertion that a high rate could devastate the

industry. Reply to Petition at 28.

While RIAA correctly states that the Panel considered the record

companies' revenues generated from the exercise of other rights granted

to them under the Copyright Act, the Panel's purpose was merely to

demonstrate the financial health of the industries. The Panel never

implied that the record companies should receive anything less than

reasonable compensation under the DPRSRA, nor that their revenues from

the exercise of the distribution and reproduction rights are meant to

compensate them for the use of their creative works under the new

statutory license. Rather, it determined that a reasonable rate for the

digital performance right should be set at a level to allow the three

companies currently doing business to continue to do so. This balance

in favor of the Services supports both the statutory objective to

consider the impact on the industries and Congressional intent not to

hamper the arrival of new technologies. S. Rep. No. 104-128, at 15-16

(1995). The law requires the Panel, and ultimately the Librarian, to

set a reasonable rate that minimizes the disruptive impact on the

industry. It does not require that the rate insure the survival of

every company. See 115 Rate Adjustment Proceeding, 46 FR 10486 (1981)

(``We conclude that while the Tribunal must seek to minimize disruptive

impacts, in trying to set a rate that provides a fair return it is not

required to avoid all impacts whatsoever'').

The Register acknowledges RIAA's uneasiness with the possibility

that the rate which is ultimately adopted may have precedential value

for their negotiations with other digital services, but such concern is

misplaced. The rate under consideration applies only to the non-

interactive digital audio subscription services, provided, of

[[Page 25409]]

course, that they are eligible under the law and comply with all legal

requirements. See 17 U.S.C. 114(d)(2). Congress, fully recognizing the

threat that interactive services pose to the record companies, crafted

the law so that they were ineligible for the compulsory license. The

result of this decision is that record companies have an opportunity to

negotiate an appropriate marketplace rate for a digital performance

license with these services.

Interactive services, which allow listeners to receive sound

recordings ``on-demand,'' pose the greatest threat to traditional

record sales, as to which sound recording copyright owners (of sound

recordings) must have the right to negotiate the terms of licenses

granted to interactive services.

S. Rep. No. 104-128, at 24 (1995). Congress also included provisions in

the DPRSRA to establish different rates for different types of digital

audio subscription services. Section 114(f)(1) states that ``(s)uch

terms and rates shall distinguish among the different types of digital

audio transmissions then in operation.'' This language gives the Panel

and the parties broad discretion in setting rates for different types

of digital audio services, when such distinction is warranted. Nor must

the record companies accept the final rate from this determination for

a new type of digital audio service which emerges before the next

regularly scheduled rate adjustment proceeding. The law expressly

allows for another rate-setting proceeding upon the filing of a

petition. 17 U.S.C. 114(f)(4)(A)(i). Together, these provisions provide

an opportunity to the record companies to make their case for a higher

rate, where circumstances support such a determination.

In addition, as the market conditions change and the industry shows

significant growth and profitability, another Panel will have an

opportunity to make adjustments to the rate, and may well find that the

changed circumstances favor an upward adjustment. In any event, the

current record before the Panel, which supports the Panel's

determination that the best way to minimize the disruptive impact on

the structure of the industries is to adopt a rate from the low range

of possibilities. Report para. 198(D).

D. To afford the copyright owner a fair return for his creative

work and the copyright user a fair income under existing economic

conditions. (17 U.S.C. 801(b)(1)(B)).

Usually this balance is struck in the marketplace through arms-

length negotiations; and even in the case of a statutory license,

Congress encourages interested parties to negotiate among themselves

and set a reasonable rate which inevitably affords fair compensation to

all parties. 17 U.S.C. 114(f)(1), (4); 115(c)(3); 116(b); 118(b); and

119(c). A statutory rate, however, need not mirror a freely negotiated

marketplace rate--and rarely does--because it is a mechanism whereby

Congress implements policy considerations which are not normally part

of the calculus of a marketplace rate. See 115 Rate Adjustment

Proceeding, 46 FR 10466 (1981) (determining that the mechanical license

regulates the price of music to lower the entry barriers for potential

users of that music).

The creation of the digital performance right embodied similar

considerations. It affords the copyright owners some control over the

distribution of their creative works through digital transmissions,

then balances the owners' right to compensation against the users' need

for access to the works at a price that would not hamper their growth.

In the current proceeding, the Panel considered proposed

marketplace benchmarks, including all the economic data, and weighed

the record evidence in light of the statutory objectives. This process

is structured so that it affords the copyright owners reasonable

compensation and the users a fair income--the purpose of the second

statutory objective. See 17 U.S.C. 801(b)(1)(B). Accordingly, a

recommended rate so calculated achieves this final statutory objective,

in that it reflects the balance between fair compensation for the

owners and a fair return to the users. As fully discussed above, the

(although she rejects as arbitrary the Panel's application of that

methodology in some respects) and has adopted the Panel's overall

approach in making her recommendation to the Librarian.

d. The Register's Recommended Rate

Rate setting is not a precise science. National Cable Television

Assoc. Inc., 724 F.2d 176, 182 (D.C. Cir. 1983). (``Ratemaking

generally `is an intensely practical affair.' The Tribunal's work

particularly, in both ratemaking and royalty distributions, necessarily

involves estimates and approximations. There has never been any

pretense that the CRT's rulings rest on precise mathematical

calculations; it suffices that they lie within a `zone of

reasonableness' ''). It requires evaluating the marketplace points of

reference and tempering the choice of any proposed rate with the policy

considerations underpinning the objectives of Congress in creating the

license. Because this process requires the consideration of numerous

factors, the CARPs, as the Tribunal before them, have considerable

discretion in setting rates designed to achieve specific statutory

objectives. See RIAA v. CRT, 662 F.2d at 9 (``To the extent that the

statutory objectives determine a range of reasonable royalty rates that

would serve all these objectives adequately but to differing degrees,

the Tribunal is free to choose among those rates, and courts are

without authority to set aside the particular rate chosen by the

Tribunal if it lies within a `zone of reasonableness' '').

Discretion in setting rates, however, assumes that the underlying

rationale for making a determination is sound--a finding which the

reliance on the rate in the DCR license agreement, and its subsequent

manipulation of the license fee, were arbitrary actions. See Permian

Basin Area Rate Cases, 390 U.S. 747 (1968) (Rate setting agency allowed

to use a variety of regulatory methods in setting rates provided that

the result is not arbitrary or unreasonable). Consequently, the

determination, which he did, and set a new rate.

In formulating her recommendation as to the appropriate rate for

the digital performance license, the Register, like the Panel,

considered the relevant marketplace points of reference offered into

evidence.33 These reference points guided the Register in

her task of setting a reasonable rate for the performance of digital

sound recordings. But unlike the Panel, the Register gave more

consideration to the rates paid for the performance right in the

musical compositions, because these rates represent an actual

marketplace value for a public performance right in the digital arena,

albeit not the digital performance right in sound recordings. The

license fee could not reflect accurately the

[[Page 25410]]

marketplace value of the digital performance right since no such legal

right existed at the time the rate was negotiated, and the negotiating

parties were unwilling to enter a licensing agreement for the digital

performance right absent a partnership agreement.

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\33\ The values of the relevant marketplace reference points,

the DCR negotiated license fee and the license fee for the

performance of the musical works, are subject to a protective order,

and hence, their numerical values have been omitted. Nevertheless,

the values of the performance rights embodied in these licenses

figure prominently in the determination of the value for the digital

performance right in sound recordings. In fact, the sum of these

license fees establishes the outer boundary of the ``zone of

reasonableness'' for this proceeding.

---------------------------------------------------------------------------

Nevertheless, the Register did take into account the negotiated

value of the digital performance right in the DCR license in making her

determination that the statutory rate should be less than the value of

the performance rights of the musical compositions. This determination

followed from a review of the evidence on the relative value of the

sound recording component and the musical works component of a

phonorecord, which failed to support the record industry's assertion

that the marketplace valued the sound recording component more than the

musical works component. This being so, the Register evaluated the only

other relevant marketplace point of reference, the negotiated DCR

license fee. Because this fee is considerably lower than the total

value of the marketplace license fees which each Service pays for the

right to publicly perform the musical works, and while not a true

marker for the value of the digital performance right, it supports a

determination that the value of the performance right in the sound

recording does not exceed the value of the performance right in the

musical works.

In addition to these factors, the Register considered the statutory

criteria and Congress' intent in creating the license. Unlike the

Panel, which found that all four factors support a low rate, the

availability of creative works to the public,'' see 17 U.S.C.

801(b)(1)(A), and should receive fair compensation for their

contributions in this area. However, the three remaining factors,

especially the fourth factor, which requires that the rate be set

``[t]o minimize any disruptive impact on the structure of the

industries involved,'' see 17 U.S.C. 801(b)(1)(D), compels the Register

to consider the economic health of the digital audio transmission

industry.

The evidence clearly shows that the Services have been facing an

uphill battle in their struggle to achieve profitability. At this time,

the digital audio industry is still struggling to create a sustainable

subscriber base, and as yet, no digital audio transmission service has

shown a profit nor does any service expect to reach profitability in

the near future. Unfortunately, the actual state of financial health

within the industry is difficult to ascertain from the projected

budgets put forward by the Services. Nevertheless, the 5% rate proposed

by the Panel did not draw an objection from the Services, indicating a

reasonable state of financial health to absorb at least a rate set at

this level.

For the foregoing reasons, the Register recommends a rate that will

not harm the industry at this critical point in its development and

finds that a 6.5% rate achieves this aim and meets all other statutory

objectives. This rate reflects the deference the Register accorded the

value of the performance right in the musical works, the consideration

of the financial health of the industry, and the recognition that

works for the public's enjoyment.

e. Terms

On June 2, 1997, the Services submitted general comments concerning

proposed terms and conditions for the digital performance license

later proposed specific terms concerning how the Services would make

payment, how often they would pay, and procedures for verifying the

accuracy of those payments, including terms on confidentiality,

recordkeeping, and audits. Services PF Paras. 122-128; 284-304.

Included in their submissions were proposed terms establishing a

payment schedule for the distribution of royalties to the featured

artists and the nonfeatured musicians and vocalists. Services PF Paras.

287-289. The Panel refused to adopt these terms because the Services

failed to present any evidence or testimony to support their proposal,

but more importantly, because the Panel found that ``the issue of the

timing of payments from the RIAA Collective to artists and other

performers is not within the scope of this proceeding.'' Report at 56

n.21.

RIAA made similar proposals on how to administer the royalty

payments, but offered two additional considerations, a minimum fee

``equivalent to the rate adopted in this proceeding'' and a late fee

for untimely payments. RIAA PF Paras. 125-160. The Panel rejected the

proposal to impose a minimum fee, see discussion supra, but accepted

the RIAA proposal to impose a 1.5% late fee.

The Register supports and adopts the Panel's decision to reject the

Services' proposed terms concerning further distribution of royalties

to certain copyright owners by RIAA on the grounds that no evidence was

introduced in support of the terms. Because this is a sufficient ground

on which to reject the Services' proposed term, the Register need not

address the Panel's determination that it lacked the authority to

consider a payment schedule for the performing artists. The Register

also need not address the Panel's rejection of the minimum fee because

no party chose to challenge the Panel's decision. See n. 7, supra.

The parties' reactions to the terms adopted by the Panel

The Services did not file a post-panel motion to modify or set

aside the Panel's determination, thereby signaling their acceptance of

the Panel's resolution of any conflict between the parties concerning

the terms. However, RIAA has raised two key items for further review by

the Librarian: The adoption of a term which defines when copyright

infringement occurs for purposes of the statutory digital performance

license and the creation of a payment schedule that allows the Services

to spread out their payment for the performances made between February

1996, the effective date of the Act, and November 1997, the month the

Panel filed its report with the Librarian of Congress.34

Petition at 7 n. 1.

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\34\ RIAA did not object to the Panel's refusal to grant its

request for a minimum fee in its petition, nor does the Register

find any reason to question the Panel's determination. As discussed

supra, the Register finds the Panel's disposition on this issue to

be well reasoned and supported by the evidence.

---------------------------------------------------------------------------

The Panel's adoption of two of its terms was either arbitrary or

contrary to law

The Register has determined that the Panel had no authority to set

terms which attempt to delineate the scope of copyright infringement

for the digital performance license, or alter a payment schedule

already set by law. See Report Paras. 187-189, 206(a), (b).

1. Payment of arrears. The Panel adopted a term which allowed the

Services to make back payments over a 30-month period for use of the

sound recordings between February 1, 1996, and the end of the month in

which the royalty rate is set and to delay the first payment for six

months. Report Paras. 187, 206(a). The Register has determined,

however, that adoption of this term is contrary to law.

Section 114(f)(5)(B) of the Copyright Act states that ``(a)ny

royalty payments in arrears shall be made on or before the twentieth

day of the month next succeeding the month in which the royalty fees

are set.'' The ``arrears'' referenced in the statute refers to the

made since February 1, 1996, the effective date of the Act, and the end

of the month in which the royalty rate is set.

[[Page 25411]]

In spite of the express statutory language, the Panel fashioned a

payment schedule to ease the burden on the Services in meeting this

obligation.

The Panel found support for its action in the 1980 jukebox rate

adjustment proceeding, in which the CRT raised the rate from $8 to $50,

but did so in a progressive fashion. Report para. 186. The

determination required the jukebox operators to make the first

increased payment of $25 per jukebox per year on January 1, 1982, and a

second $25 annual payment the following year. The CRT did not require

the full $50 annual rate to be paid until January 1, 1984,

approximately three years after setting the rate. 46 FR 884, 888, 890

(1981). The Tribunal adopted the phase-in payment schedule relying on

its duty to set rates in accordance with the statutory objectives. It

found that the gradual increase in payments furthered the objective

concerned with minimizing the disruptive impact on the industries. Id.

at 889. The Panel relied upon this CRT decision in adopting its phase-

in program for payment of the arrears over a 30-month period.

The Services embrace the Panel's reliance on past CRT precedent for

the inclusion of the phase-in payment term and claim that RIAA also

agreed to allow the Services to make the ``back payments'' over a

period of time. Reply to Petition at 14 n. 5. This assertion, however,

is inaccurate. RIAA agreed that a phase-in schedule would be

appropriate for the minimum fee, but never posited such a payment

schedule for the arrears. See Tr. 2829 (RIAA closing argument). By

comparing RIAA's statement on the proposal for making payments of a

minimal fee,

The recording industry proposes that the minimum fee be phased

in to help minimize any disruptive effect from the fact that, for

the first time, the services are going to be paying a fair fee--in

fact, any fee at all for the performance of sound recordings,

Id. at 2829, see also RIAA PF Paras. 150-152, with its statement

concerning the timing of the payment of arrears,

In terms of the timing of the back payment, the statute leaves

absolutely no question as to when the back payment from the services

is due for the period from the Act's effective date through the date

on which the Panel issues its decision.

Section 114(f)(5)(B) says that ``any royalty payment in arrears

shall be made on or before the 20th day of the month next succeeding

the month in which the royalty fees are set.''

Id. at 2829-2830, see also RIAA PF para. 157, it is absolutely

clear that RIAA never agreed to a payment scheme for the arrears that

would allow the Services to make partial payments over a 30-month

period.

In another attempt to support the Panel's conclusion, the Services

construe the statutory provision broadly and argue that arrears refers

to ``any royalty payment in arrears'' and ``does not specifically cover

the back payment for the extended period between the 1995 Act's

February 1, 1996, effective date and the time the Panel sets the

performance rate.'' Services RF para. 157. This assertion, however, is

inconsistent with the legislative history and the plain language of the

statute.

Thus, the Panel had no authority to create a graded payment

schedule for the payment of the arrears because the statute expressly

stated when payment was to occur. Section 114(f)(5)(B) states, without

qualification, that ``[a]ny royalty payments in arrears shall be made

on or before the twentieth day of the month next succeeding the month

in which the royalty fees are set.'' (emphasis added). It is a well-

established principle that, in interpreting the meaning of a statute,

the language of the law is the best evidence of its meaning. United

States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989); Norman

S. Singer, Sutherland Statutory Construction sec. 46.01 (5th ed. 1992

rev.) Because the statutory language is clear on its face, the Register

finds that the Panel's and the Services' reliance on the CRT 1980

jukebox decision is arbitrary and contrary to well-established

principles of law. And even if the statutory language were ambiguous,

the legislative history supports the Register's and RIAA's

interpretation of section 114(f)(5)(B).35

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\35\ S. Rep. No. 104-128, at 30 (1995) (``If the royalty fees

have not been set at the time of performance, the performing entity

must agree to pay the royalty fee to be determined under this

subsection by the twentieth day of the month following the month in

which the rates are set'').

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Because the Panel's action exceeded its authority, the Register

recommends that the Librarian reject the proposed term because its

adoption would be contrary to law.

2. Copyright infringement. The Panel adopted a term which stated

that ``[i]f a Service fails to make timely payments, it will be subject

to liability for copyright infringement. Such liability will only come

about, however, for knowing and willful acts which materially breach

the statutory license terms.'' Report para. 206(b). The Register has

determined that this term is contrary to law.

RIAA contends that the Panel ``usurped the authority of Article III

courts by attempting to define the circumstances where the Services are

liable for copyright infringement.'' Petition at 7 n.1. In response,

the Services argue that the DPRSRA supports the Panel's suggestion that

minor technical violations should not result in an infringement action.

Services Reply to Petition at 14 n.5. Specifically, the Services point

to section 114(j)(7)(B) which limits complement to the performance of

sound recordings from a single album, which Congress included ``[t]o

avoid imposing liability for programming that unintentionally may

exceed the complement.'' S. Rep. No. 104-128, at 35 (1995).

The Register acknowledges that Congress made provisions to protect

users from copyright liability for programming that unintentionally

exceeds the complement, see 17 U.S.C. 114(j)(7), but she finds it

impermissible to expand a particular provision of the copyright law

which limits copyright liability under one set of circumstances to

include additional limitations not contemplated by Congress. Fame

Publishing Co. v. Alabama Custom Tape, Inc., 507 F.2d 667, 670 (5th

Cir.) cert. denied, 423 U.S. 841 (1975) (``We begin by noting that the

compulsory license provision is a limited exception to the copyright

holder's exclusive right to decide who shall make use of his

composition. As such, it must be construed narrowly, lest the exception

destroy, rather than prove, the rule. Thus we should neither expand the

scope of the compulsory license provision beyond what Congress intended

in 1909, nor interpret it in such a way as to frustrate that

purpose'').36

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\36\ Congress defined the scope of the digital performance right

granted to the copyright owner and under what circumstances a

digital audio service infringes that right. See, e.g., 17 U.S.C. 114

(d) and (e)(5).

---------------------------------------------------------------------------

But more importantly, in examining the legislative history, it is

clear that Congress meant for the CARP to have limited authority in

adopting reasonable terms.

By terms, the Committee means generally such details as how

payments are to be made, when, and other accounting matters (such as

are prescribed in section 115). In addition, the Librarian is to

establish related terms under section 114(f)(2). Should additional

terms be necessary to effectively implement the statutory license,

the parties may negotiate such provisions or the CARPs may prescribe

them.

S. Rep. No. 104-128, at 30 (1995). This language clearly indicates that

the CARP had authority to set reasonable terms only so far as those

terms insured the smooth administration of the license. There is no

indication in the statutory language or in the legislative history that

the scope of the terms should go

[[Page 25412]]

beyond the creation of a workable administrative system and reach

substantive issues, such as defining the scope of copyright

infringement for those availing themselves of the statutory license.

Congress carefully delineated the scope of the digital performance

right and the limitations on that right within the provisions of the

statute. Section 114(d), entitled ``Limitations on Exclusive Right,''

states with specificity when a performance by means of a digital audio

transmissions is not an infringement, just as section 114(f)(5) defines

when a public performance of a sound recording by means of a nonexempt

subscription digital transmission is not an infringement. For the Panel

to fashion a term further delineating the issue of copyright

infringement when Congress has already acted is an improper exercise of

authority beyond that granted under the statute.

Accordingly, the Register finds that the Panel had no authority to

set a term construing the meaning of copyright infringement for

purposes of section 114. See Report Paras. 188, 206(b). Because the

Panel's action exceeded its authority, the Register recommends that the

Librarian reject the proposed term because its adoption would be

contrary to law.

f. Other Issues

1. Effective date. Section 114(f)(5)(B) states that payments in

arrears for the performance of sound recordings prior to the setting of

a royalty rate are due on a date certain in the month following the

month in which the rate is set. Both the Panel and RIAA assume that the

``date the royalty rate is set'' is the date the Panel submits its

report to the Librarian of Congress. See Report para. 186; Petition at

7 n.1. The Register disagrees with this assessment.

Section 802(g) governs judicial review of the Librarian's decision

with respect to CARP determinations. The section allows an aggrieved

party 30 days to file an appeal with the United States Court of Appeals

for the District of Columbia Circuit, but does not relieve a party of

his or her obligation to make royalty payments during the pendency of

the appeal. In the event that no appeal is taken, the section states

that ``the decision of the Librarian is final, and the royalty fee * *

* shall take effect as set forth in the decision.'' 17 U.S.C. 802(g).

Neither section 114 nor chapter 8 makes further reference to the

possible effective date of royalty rates.

As discussed in an earlier order setting a rate for the satellite

compulsory license, 17 U.S.C. 119, the Register interprets the decision

referenced in section 802(g) ``to mean the decision of the Librarian,

and not the decision of the CARP, since section 802(g) only refers to

the decision of the Librarian. Consequently, the Register concludes

that only the Librarian of Congress has the authority to set the

effective dates of the royalty rates in this proceeding.'' Rate

Adjustment for the Satellite Carrier Compulsory License, 62 FR 55754

(1997). See also RIAA v. CRT, 662 F.2d at 14 (``When the statute

authorizing agency action fails to specify a timetable for

effectiveness of decisions, the agency normally retains considerable

discretion to choose an effective date'') (footnote omitted). This

reasoning applies equally to the current proceeding, since no other

guidance for setting the effective date is to be found in the statute

or the legislative history.

The Register has pondered the question of an appropriate effective

date and believes that the Panel's concern with minimizing the

disruptive impact on the structure of the industries involved was well

founded. See discussion supra concerning the economic health of the

Services. Consequently, the Register proposes an effective date of June

1, 1998, which would require the Services to make full payment of the

arrears on July 20, 1998, in addition to the payment for the month of

June 1998, with subsequent payments to RIAA on the 20th day of each

subsequent month. This date provides the Services with a measured

amount of time to provide for any necessary adjustments in their

business operations to meet their copyright obligations.

The Tribunal took a similar course when it set the effective date

for implementing the rate increase for making and distributing

phonorecords approximately six months after publication of its final

rule. Section 115 Rate Adjustment Proceeding, 46 FR 10486 (1981). The

Tribunal chose not to implement the rate change immediately in order to

minimize the effect of the upward adjustment on the copyright users.

The United States Court of Appeals for the District of Columbia Circuit

upheld the Tribunal's decision to postpone the effective date because:

The Tribunal's opinion demonstrates its concern ``to minimize

disruptive impacts'' on the recording industry, and its view that

the effective date of a royalty adjustment should be arranged so as

to be ``less disruptive to the industries.'' Although the Tribunal

concluded that a single increase to the full four-cent rate would

not be unduly disruptive, it was within the Tribunal's discretion to

give the industry adequate lead time to prepare for the increase.

RIAA v. CRT, 662 F.2d at 14 (citations omitted).

2. Value of an individual performance of a sound recording.

The Register notes that the Panel stopped prematurely in its

consideration of the value of the public performance of a sound

recording. Its entire inquiry focused on the value of the ``blanket

license'' for the right to perform the sound recording, without once

considering the value of the individual performance--a value which must

be established in order for the collecting entity to perform its

function not only to collect, but also to distribute royalties.

Consequently, the Register has made a determination that each

performance of each sound recording is of equal value and has included

a term that incorporates this determination.

To do otherwise requires the parties to establish criteria for

establishing differential values for individual sound recordings or

various categories of sound recordings. Neither the Services nor RIAA

proposed any methodology for assigning different values to different

sound recordings. In the absence of an alternative method for assessing

the value of the performance of the sound recording, the Register has

no alternative but to find that the value of each performance of a

sound recording has equal value. Furthermore, the structure of the

statute contemplates direct payment of royalty fees to individual

or more copyright owner and one or more digital audio service. To

accommodate this structure in the absence of any statutory language or

legislative intent to the contrary, each performance of each sound

recording must be afforded equal value.

This determination does not alter the statutory provision that

specifies how the copyright owner of the right to publicly perform the

sound recording must allocate the statutory fees among the recording

artists. See 17 U.S.C. 114(f)(2).

3. Audit of the designated collective. Although the membership of

the collective represented by RIAA includes over 275 record labels

which create more than 90 percent of all legitimate sound recordings

sold in the United States, it does not represent the record companies

responsible for the creation of the remaining 10% of the sound

recordings. Report para. 20. Nevertheless, the Panel found, and the

entity to collect and to distribute the royalty fees creates an

efficient administrative mechanism. Report para. 184.

[[Page 25413]]

It is common practice, however, for the government body making such

designations to implement safeguards to monitor the functions of the

collective.37 To this end, the Register recommends new terms

that afford the copyright holders a right to audit the collective's

practices in handling the royalty fees. The Register takes this step to

insure copyright holders access to the records of the organization

charged with the fiduciary responsibility of making an equitable

distribution among those entitled to receive a portion of the funds,

while at the same time preserving the confidentiality of the

organization's business records. These terms mirror those formulated by

the parties and adopted by the Panel which allow the collective to

audit the business records of the Services to insure proper payment of

the royalties.

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\37\ A government's general policy toward the regulation of

collective administration should be to limit government intervention

to only ``that which is necessary to facilitate the effective

operations of the collective administration organization, consistent

with the private character of the rights involved, while checking

possible abuses by that collective in the least intrusive manner

possible within'' the overall context of the society involved. David

Sinacore-Guinn, Collective Administration of Copyrights and

Neighboring Rights, 544 (1993).

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4. Deduction of administrative costs. Neither the parties nor the

Panel gave any consideration to the manner in which the collecting

entity would deduct from payments to copyright owners its costs of

administering the funds it receives and disburses. Nevertheless, the

Panel should have addressed this key term of the compulsory license.

Therefore, the Register finds it necessary to establish an additional

term that permits the collecting entity to deduct from the royalties it

pays to copyright owners the costs it incurs in administering the

funds, so long as the costs deducted are reasonable and are no more

than the actual costs incurred by the collecting entity.

5. Unknown copyright owners. The digital audio services will pay

royalties on all sound recording performances without regard to the

further disbursement of these fees to the numerous copyright holders.

The collective will have little difficulty in identifying and locating

the overwhelming majority of the copyright holders entitled to receive

a portion of the fees, since the membership of the collective

represents the interests of the copyright holders in over 90% of all

sound recordings. Problems may arise, however, as RIAA attempts to

identify and locate the copyright holders to the remaining 10% of the

sound recordings. In anticipation of the likelihood that RIAA will not

be able to locate all copyright holders, the Register recommends the

adoption of a term that segregates the fees for unknown copyright

owners into a separate trust account for future distribution to the

rightful owner, or in the event that the owner is not found, allows the

collective to use the funds after a period of three years, see 17

U.S.C. 507(b), to offset its administrative costs associated only with

the collection and distribution of royalty fees collected under the

statutory license.

6. Rates for other types of digital audio services. The rates and

terms announced in this notice apply to DCR, DMX, and Muzak, the three

digital audio transmission services participating in this proceeding,

and to any other digital audio transmission service that avails itself

of the compulsory license, provided that the service is of the same

type. The Register raises this point to avoid any confusion over the

Panel's statement which implies that the rates and terms set in this

proceeding ``shall be binding on all copyright owners of sound

recordings and entities performing sound recording[s].'' Report para.

1, citing 17 U.S.C. 114(f)(2). A general provision, however, must be

read in conjunction with more specific statutory language; in this

case, section 114(f)(4)(A), which provides for additional rate

adjustment proceedings upon petition from any copyright owner or entity

performing sound recordings when a new type of digital audio

transmission becomes or is about to become operational.

VI. Conclusion

In considering the evidence in the record, the contentions of the

parties, and the statutory objectives, the Register of Copyrights

recommends that the Librarian adopt a statutory rate for the digital

performance of sound recordings, pursuant to 17 U.S.C. 114, of 6.5% of

gross revenues from subscribers residing within the United States.

In addition, the Register recommends that the Librarian adopt the

reasonable terms propounded by the Panel except for those terms

concerning the payment schedule for arrears and potential limitations

on the scope of copyright infringement. The Register also recommends

setting June 1, 1998, as the effective date for implementing the new

rate and terms in order to ease the burden on each Service on meeting

its initial obligations under the statutory license.

VII. The Order of the Librarian of Congress

Having duly considered the recommendations of the Register of

Copyrights regarding the Report of the Copyright Arbitration Royalty

Panel in the matter to set reasonable terms and rates for the digital

performance right in sound recordings, 17 U.S.C. 114, the Librarian of

Congress fully endorses and adopts her recommendation to set the rate

for the statutory license at 6.5% of gross revenues from U.S.

residential subscribers. This rate shall apply to those digital audio

services represented in this proceeding and any other eligible digital

audio service of the same type that subsequently enters the market and

makes use of the statutory license. The Librarian of Congress also

adopts the Register's recommendation to reject the terms concerning

potential limits on what constitutes copyright infringement and the

proposed schedule for the payment of the arrears.

For the reasons stated in the Register's recommendation, the

Librarian is exercising his authority under 17 U.S.C. 802(f) and is

issuing this order which adopts new Copyright Office regulations

setting reasonable terms and rates for the digital performance right in

sound recordings.

List of Subjects in 37 CFR Part 260

Recordings

Final Regulation

In consideration of the foregoing, part 260 of 37 CFR is added to

read as follows:

PART 260--USE OF SOUND RECORDINGS IN A DIGITAL PERFORMANCE

Sec.

260.1 General.

260.2 Royalty fees for the digital performance of sound recordings.

260.3 Terms for making payment of royalty fees.

260.4 Confidential information and statements of account.

260.5 Verification of statements of account.

260.6 Verification of royalty payments.

260.7 Unknown copyright owners.

Authority: 17 U.S.C. 114, 801(b)(1).

Sec. 260.1 General.

(a) This part 260 establishes terms and rates of royalty payments

for the public performance of sound recordings by nonexempt

subscription digital transmission services in accordance with the

provisions of 17 U.S.C. 114 and 801(b)(1).

[[Page 25414]]

(b) Upon compliance with 17 U.S.C. 114 and the terms and rates of

this part, a nonexempt subscription digital transmission service may

engage in the activities set forth in 17 U.S.C. 114.

Sec. 260.2 Royalty fees for the digital performance of sound

recordings.

(a) Commencing June 1, 1998, the royalty fee for the digital

performance of sound recordings by nonexempt subscription digital

services shall be 6.5% of gross revenues resulting from residential

services in the United States.

(b) A nonexempt subscription digital transmission service (the

``Licensee'') shall pay a late fee of 1.5% per month, or the highest

lawful rate, whichever is lower, for any payment received after the due

date. Late fees shall accrue from the due date until payment is

received.

(c)(1) For purposes of this section, gross revenues shall mean all

monies derived from the operation of the programming service of the

Licensee and shall be comprised of the following:

(i) Monies received by Licensee from Licensee's carriers and

directly from residential U.S. subscribers for Licensee's programming

service;

(ii) Licensee's advertising revenues (as billed), or other monies

received from sponsors if any, less advertising agency commissions not

to exceed 15% of those fees incurred to recognized advertising agency

not owned or controlled by Licensee;

(iii) Monies received for the provision of time on the Programming

Service to any third party;

(iv) Monies received from the sale of time to providers of paid

programming such as infomercials;

(v) Where merchandise or anything or service of value is received

by licensee in lieu of cash consideration for the use of Licensee's

programming service, the fair market value thereof or Licensee's

prevailing published rate, whichever is less;

(vi) Monies or other consideration received by Licensee from

Licensee's carriers, but not including monies received by Licensee's

carriers from others and not accounted for by Licensee's carriers to

Licensee, for the provision of hardware by anyone and used in

connection with the Programming Service;

(vii) Monies or other consideration received for any references to

or inclusion of any product or service on the programming service; and

(viii) Bad debts recovered regarding paragraphs (c)(1) (i) through

(vii) of this section.

(2)Gross revenues shall include such payments as are in paragraphs

(c)(1) (i) through (viii) of this section to which Licensee is entitled

but which are paid to a parent, subsidiary, division, or affiliate of

Licensee, in lieu of payment to Licensee but not including payments to

Licensee's carriers for the programming service. Licensee shall be

allowed a deduction from ``gross revenues'' as defined in paragraph

(c)(1) of this section for affiliate revenue returned during the

reporting period and for bad debts actually written off during

reporting period.

(d) During any given payment period, the value of each performance

of each digital sound recording shall be the same.

Sec. 260.3 Terms for making payment of royalty fees.

(a) All royalty payments shall be made to a designated agent(s), to

be determined by the parties through voluntary license agreements or by

a duly appointed Copyright Arbitration Royalty Panel pursuant to the

procedures set forth in subchapter B of 37 CFR, part 251.

(b) Payment shall be made on the twentieth day after the end of

each month for that month, commencing with the month succeeding the

month in which the royalty fees are set.

statements of account shall have the responsibility of making further

distribution of these fees to those parties entitled to receive such

payment according to the provisions set forth at 17 U.S.C. 114(g).

(d) The designated agent may deduct reasonable costs incurred in

the administration of the distribution of the royalties, so long as the

reasonable costs do not exceed the actual costs incurred by the

collecting entity.

(e) Commencing June 1, 1998, and until such time as a new

designation is made, the Recording Industry Association of America,

Inc. shall be the agent receiving royalty payments and statements of

accounts.

Sec. 260.4 Confidential information and statements of account.

(a) For purposes of this part, confidential information shall

include statements of account and any information pertaining to the

statements of account designated as confidential by the nonexempt

subscription digital transmission service filing the statement.

Confidential information shall also include any information so

designated in a confidentiality agreement which has been duly executed

between a nonexempt subscription digital transmission service and an

interested party, or between one or more interested parties; Provided

that all such information shall be made available, for the verification

proceedings provided for in Secs. 260.5 and 260.6 of this part.

(b) Nonexempt subscription digital transmission services shall

submit monthly statements of account on a form provided by the agent

designated to collect such forms and the monthly royalty payments.

is necessary to verify the accompanying royalty payment. Additional

information beyond that which is sufficient to verify the calculation

of the royalty fees shall not be included on the statement of account.

(d) Access to the confidential information pertaining to the

royalty payments shall be limited to:

(1) Those employees of the designated agent who are not also

employees or officers of a sound recording copyright owner or

performing artist, and who, for the purpose of performing their

assigned duties during the ordinary course of business, require access

to the records; and

(2) An independent and qualified auditor who is not an employee or

officer of a sound recording copyright owner or performing artist, but

is authorized to act on behalf of the interested copyright owners with

respect to the verification of the royalty payments.

(e) The designated agent shall implement procedures to safeguard

all confidential financial and business information, including but not

limited to royalty payments, submitted as part of the statements of

account. Confidential information shall be maintained in locked files.

(f) Books and records relating to the payment of the license fees

shall be kept in accordance with generally accepted accounting

principles for a period of three years. These records shall include,

but are not limited to, the statements of account, records documenting

an interested party's share of the royalty fees, and the records

pertaining to the administration of the collection process and the

further distribution of the royalty fees to those interested parties

entitled to

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