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Monday, July 8, 2002 Part III Library of Congress Copyright Office 37 CFR Part 261 Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings; Final Rule VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 45240 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations LIBRARY OF CONGRESS Copyright Office 37 CFR Part 261 [Docket No. 2000–9 CARP DTRA 1&2] Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings and Ephemeral Recordings AGENCY: Copyright Office, Library of Congress. ACTION: Final rule and order. SUMMARY: The Librarian of Congress, upon recommendation of the Register of Copyrights, is announcing the determination of the reasonable rates and terms for two compulsory licenses, permitting certain digital performances of sound recordings and the making of ephemeral recordings. EFFECTIVE DATE: July 8, 2002. ADDRESSES: 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 Memorial Building, Room LM–403, First and Independence Avenue, SE., Washington, DC 20540. The report is also posted on the Copyright Office website at http:// www.copyright.gov/carp/ webcasting_rates.html. FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or Tanya Sandros, Senior Attorney, Copyright Arbitration Royalty Panel (CARP), P.O. Box 70977, Southwest Station, Washington, DC 20024. Telephone (202) 707–8380. Telefax: (202) 707–8366. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. The CARP Proceeding to Set Reasonable Rates and Terms A. The Parties B. The position of the parties at the commencement of the proceeding 1. Rates proposed by Copyright Owners 2. Rates proposed by Services C. The Panel’s determination of reasonable rates and a minimum fee III. The Librarian’s Scope of Review of the Panel’s Report IV. The CARP Report: Review and Recommendation of the Register of Copyrights A. Establishing Appropriate Rates 1. The ‘‘Willing Buyer/Willing Seller Standard’’ 2. Hypothetical Marketplace/Actual Marketplace VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 3. Benchmarks for setting market rates: voluntary agreements vs. musical works fees a. Fees paid for use of musical works b. Voluntary agreements 4. Alternative methodology: Percentage-ofrevenue 5. The Yahoo! rates—evidence of a unitary marketplace value 6. Are rates based on the Yahoo! agreement indicative of marketplace rates? 7. Should a different rate be established for commercial broadcasters streaming their own AM/FM programming? 8. Methodology for calculating the statutory rates for the webcasting license a. Calculation of the unitary rate b. The 150-mile exemption 9. Rates for other webcasting services and programming a. Business to business webcasting services b. Listener-influenced services c. Other types of transmissions 10. Rates for transmissions made by nonCPB, noncommercial stations 11. Consideration of request for diminished rates and long song surcharge 12. Methodology for estimating the number of performances 13. Discount for Promotion and Security 14. Ephemeral recordings for services operating under the section 114 license 15. Minimum fees 16. Ephemeral recordings for business establishment services (‘‘BES’’) a. Rates for use of the statutory license b. Minimum fee 17. Effective period for proposed rates B. Terms 1. Disputed terms a. Definitions b. Designated Agent for Unaffiliated Copyright Owners c. Gross proceeds 2. Terms Not Disputed by the Parties a. Limitation of Liability b. Deductions from Royalties for Designated Agent’s Costs c. Ephemeral Recording d. Definition of ‘‘Listener’’ e. Timing of Payment by Receiving Agent to Designated Agent f. Allocation of Royalties among Designated Agents and Among Copyright Owners and Performers g. Choice of Designated Agent by Performers h. Performer’s Right to Audit i. Effective date V. Conclusion VI. The Order of the Librarian of Congress I. Background In 1995, Congress enacted the Digital Performance Right in Sound Recordings Act (‘‘DPRA’’), Public Law 104–39, which created an exclusive right for copyright owners of sound recordings, subject to certain limitations, to perform publicly their sound recordings by means of certain digital audio transmissions. Among the limitations on the performance right was the creation of a new compulsory license for nonexempt, noninteractive, digital PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 subscription transmissions. 17 U.S.C. 114(f). The scope of this license was expanded in 1998 upon passage of the Digital Millennium Copyright Act of 1998 (‘‘DMCA’’ or ‘‘Act’’), Public Law 105–304, in order to allow a nonexempt eligible nonsubscription transmission 1 (the ‘‘webcasting license’’) and a nonexempt transmission by a preexisting satellite digital audio radio service to perform publicly a sound recording in accordance with the terms and rates of the statutory license. 17 U.S.C. 114(a). In addition to expanding the section 114 license, the DMCA also created a new statutory license for the making of an ‘‘ephemeral recording’’ of a sound recording by certain transmitting organizations (the ‘‘ephemeral recording license’’). 17 U.S.C. 112(e). The new statutory license allows entities that transmit performances of sound recordings to business establishments, pursuant to the limitations set forth in section 114(d)(1)(C)(iv), to make an ephemeral recording of a sound recording for purposes of a later transmission. The new license also provides a means by which a transmitting entity with a statutory license under section 114(f) can make more than the one phonorecord permitted under the exemption set forth in section 112(a). 7 U.S.C. 112(e). The statutory scheme for establishing reasonable terms and rates is the same for both of the new licenses. The terms and rates for the two new statutory licenses may be determined by voluntary agreement among the affected parties, or if necessary, through compulsory arbitration conducted pursuant to Chapter 8 of the Copyright Act. In this case, interested parties were unable to negotiate an industry-wide agreement. Therefore, a Copyright Arbitration Royalty Panel (‘‘CARP’’) was convened to consider proposals from interested parties and, based upon the written record created during this process, to recommend rates and terms for both the webcasting license and the ephemeral recording license. 1 An ‘‘eligible nonsubscription transmission’’ is a noninteractive, digital audio transmission which, as the name implies, does not require a subscription for receiving the transmission. The transmission must also be made a part of a service that provides audio programming consisting in a whole or in part of performances of sound recordings; the purpose of which is to provide audio or entertainment programming, but not to sell, advertise, or promote particular goods or services. E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations II. The CARP Proceeding to Set Reasonable Rates and Terms These proceedings began on November 27, 1998, when the Copyright Office announced a six-month voluntary negotiation period to set rates and terms for the webcasting license and the ephemeral recording license for the first license period covering October 28, 1998–December 31, 2000. 63 FR 6555 (November 27, 1998). During this period, the parties negotiated a number of private agreements in the marketplace, but no industry-wide agreement was reached. Consequently, in accordance with the procedural requirements, the Recording Industry Association of America, Inc. (‘‘RIAA’’) petitioned the Copyright Office on July 23, 1999, to commence a CARP proceeding to set the rates and terms for these licenses. The Office responded by setting a schedule for the CARP proceeding. See 64 FR 52107 (Sept. 27, 1999). However, the schedule proved unworkable for the parties. RIAA filed a motion with the Copyright Office on November 23, 1999, requesting a postponement of the date for filing direct cases. It argued that the Office should provide more time for the parties to prepare their cases in light of the complexity of the issues and the record number of new participants. The Office granted this request and held a meeting to clarify the procedural aspects of the proceeding, especially for the new participants, and to discuss a new schedule for the arbitration phase of the process. Order in Docket No. 99–6 CARP DTRA (dated December 22, 1999). In the meantime, the Office commenced the six-month negotiation period for the second license period, covering January 1, 2001–December 31, 2002. 66 FR 2194 (January 13, 2000). Ultimately, the Copyright Office consolidated these two proceedings into a single proceeding in which one CARP would set rates and terms for the two license periods for both the webcasting license and the ephemeral recording license. See Order in Docket Nos. 99–6 CARP DTRA and 2000–3 CARP DTRA 2 (December 4, 2000). The 180-day period for the consolidated proceeding began on July 30, 2001, and on February 20, 2002, the panel submitted its report (the ‘‘CARP Report’’ or ‘‘Report’’), in which it proposed rates and terms to the Copyright Office. It is the decision of this Panel that is the basis for the Librarian’s decision today.2 2 Section 802 (e) of the Copyright Act requires the CARP to report its determination concerning the royalty fee to the Librarian of Congress 180 days after the initiation of a proceeding. In this particular VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 A. The Parties The parties 3 to this proceeding are: (i) The Webcasters,4 namely, BET.com, Comedy Central, Echo Networks, Inc., Listen.com, Live365.com, MTVi Group, LLC, Myplay, Inc., NetRadio Corporation, Radio Active Media Partners, Inc.; RadioWave.com, Inc., Spinner Networks Inc. and XACT Radio Network LLC; (ii) the FCC-licensed radio Broadcasters,5 namely, Susquehanna Radio Corporation, Clear Channel Communications Inc., Entercom Communications Corporation, Infinity Broadcasting Corporation, and National Religious Broadcasters Music License Committee (collectively ‘‘the Broadcasters’’); (iii) the Business Establishment Services,6 namely, DMX/ AEI Music Inc. (also referred to as ‘‘Background Music Services’’); (iv) American Federation of Television and Radio Artists (‘‘AFTRA’’); 7 (v) American Federation of Musicians of the United States and Canada instance, the Panel submitted its report approximately three weeks later than anticipated under this provision due to a suspension of the proceedings during the period November 9, 2001, through December 2, 2001. The Copyright Office granted the suspension at the parties’ request in order to allow them to engage in further settlement discussions. At the same time, the Office granted the Panel an additional period of time, commensurate with the suspension period, for hearing evidence and preparing its report. See Order, Docket No. 2000–9 CARP DTRA 1&2 (November 9, 2001). Additional details concerning the earlier procedural aspects of this proceeding are set forth in the CARP Report at pp. 10–18. 3 At the outset of the proceeding, Webcaster parties also included Coollink Broadcast Network, Everstream, Inc., Incanta, Inc., Launch Media, Inc., MusicMatch, Inc., Univision Online, and Westwind Media.com, Inc., which have since withdrawn or been dismissed from the proceeding. Late in the proceeding, National Public Radio (‘‘NPR’’) reached a private settlement with RIAA and withdrew prior to the conclusion of the 180-day hearing period. Because RIAA, AFTRA, AFM, and AFIM propose the same rates and take similar positions on most issues, they are sometimes referred to collectively as ‘‘RIAA’’ or ‘‘Copyright Owners and Performers’’ for convenience. Similarly, Webcasters, Broadcasters, and the Business Establishment Services are sometimes referred to collectively as ‘‘the Services.’’ 4 The Webcasters are Internet services that each employ a technology known as ‘‘streaming,’’ but comprise a range of different business models and music programming. 5 The Broadcasters are commercial AM or FM radio stations that are licensed by the Federal Communications Commission (‘‘FCC’’). 6 The Business Establishment Services, DMX/AEI Music, deliver sound recordings to business establishments for the enjoyment of the establishments’ customers. See Knittel W.D.T. 4. DMX/AEI Music is the successor company resulting from a merger between AEI Music Network, Inc. (‘‘AEI’’) and DMX Music, Inc. (‘‘DMX’’). 7 AFTRA, the American Federation of Television and Radio Artists, is a national labor organization representing performers and newspersons. See Tr. 2830 (Himelfarb). PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 45241 (‘‘AFM’’) ;8 (vi) Association For Independent Music (‘‘AFIM’’) ;9 and (vii) Recording Industry Association of America, Inc. (‘‘RIAA’’).10 Music Choice, a Business Establishment Service, was initially a party to this proceeding, but on March 26, 2001, it filed a motion to withdraw from the proceeding. Its motion was unopposed and, on May 9, 2001, its motion to withdraw was granted. B. The Position of the Parties at the Commencement of the Proceeding 1. Rates Proposed by Copyright Owners RIAA proposed rates derived from an analysis of 26 voluntarily negotiated agreements between itself and individual webcasters. RIAA claims that these agreements ‘‘involve the same buyer, the same seller, the same right, the same copyrighted works, the same time period and the same medium as those in the marketplace that the CARP must replicate.’’ CARP Report at 26, citing RIAA PFFCL 11 (Introduction at 8). Based upon these agreements, RIAA proposed the following rates for DMCA compliant webcasting services: (i) For basic ‘‘business to consumer’’ (B2C) webcasting services: 0.4c for each transmission of a sound recording to a single listener, or 15% of the service’s gross revenues. (ii) For ‘‘business to business’’ (B2B) webcasting services, where transmissions are made as part of a service that is syndicated to third-party websites: 0.5c for each transmission of a sound recording to a single listener (iii) For ‘‘listener-influenced’’ webcasting services: 0.6c for each transmission of a sound recording to a single listener (iv) Minimum fee (subject to certain qualifications): $5,000 per webcasting service 8 AFM, the American Federation of Musicians, is a labor organization representing professional musicians. See Bradley W.D.T. 1. 9 AFIM, the Association For Independent Music, is a trade association representing independent record companies, wholesalers, distributors and retailers. See Tr. 2830 (Himelfarb) 10 RIAA is a trade association representing record companies, including the five ‘‘majors’’ and numerous ‘‘independent’’ labels. 11 Hereinafter, references to proposed findings of fact and conclusions of law shall be cited as ‘‘OFFCK’’ preceded by the name of the party that submitted the filing followed by the paragraph number. References to written direct testimony shall be cited as ‘‘W.D.T.’’ preceded by the last name of the witness and followed by a page number. References 9to written rebuttal testimony shall be cited as ‘‘W.R.T.’’ preceded by the last name of the witness and followed by a page number. References to the transcript shall be cited asd ‘‘TR.’’ followed by the page number and the last name of the witness. E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 45242 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations (v) Ephemeral license fee: 10% of each service’s performance royalty fee payable under (i), (ii), or (iii). For the section 112 license applicable to the business establishment services, the copyright owners proposed a rate set at 10% of gross revenues with a minimum fee of $50,000 a year. 2. Rates Proposed by Services Webcasters proposed per-performance and per-hour sound recording performance fees, based upon an economic model, that considered the aggregate fees paid to the three performance rights organizations (ASCAP, BMI, and SESAC) that license the public performances of musical works for radio programs that are broadcast over-the-air by FCC-licensed broadcasters, by 872 radio stations during 2000. From this model, the webcasters derived a per-song and a perlistener hour base rate of 0.02¢ per song and 0.3¢ per hour, respectively. These figures were then adjusted to account for a number of factors, including the promotional value gained by the record companies from the performance of their works. This adjustment resulted in a fee proposal of 0.014¢ per performance or 0.21¢ per hour. At the end of the proceeding, Webcasters suggested in their proposed findings of fact and conclusions of law an alternative method for calculating royalty fees, namely, a percentage-ofrevenue fee structure. Specifically, Webcasters proposed a fee of 3% of a webcaster’s gross revenues for all services. The alternative proposal was made with the understanding that the service would be able to elect either option. Webcasters proposed no additional fee for the making of ephemeral recordings and a minimum fee of $250 per annum for each service operating under the section 114 license. The Business Establishment Services who need only an ephemeral recording license proposed a flat rate of $10,000 per year for each company. C. The Panel’s Determination of Reasonable Rates and a Minimum Fees In this proceeding, the Panel had to establish rates and terms of payment for digital transmissions of sound recordings made by noninteractive, nonsubscription services and rates for the making of ephemeral phonorecords made pursuant to the section 112(e) license; either to facilitate those transmissions made or by business establishments which are otherwise exempt from the digital performance right. VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 The proposed rates are set forth in Appendix A of the CARP Report, which is posted on the Copyright Office website at: http://www.copyright.gov/ carp/webcasting_rates_a.pdf. The proposed terms of payment may be found in Appendix B of the CARP Report, which is posted on the Copyright Office website at: http:// www.copyright.gov/carp/ webcasting_rates_b.pdf. III. The Librarian’s Scope of Review of the Panel’s Report The Copyright Royalty Tribunal Reform Act of 1993 (the Reform Act), Pub. L. No. 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: one by the Librarian of Congress (Librarian) and a second by the United States Court of Appeals for the District of Columbia Circuit. Section 802(f) of title 17 directs the Librarian on the recommendation of the Register of Copyrights 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. See, e.g., Distribution of 1990, 1991, and 1992 Cable Royalties, 61 FR 55653 (1996); Rate Adjustment for the Satellite Carrier Compulsory License, 62 FR 55742 (October 28, 1997). 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). PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 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). In reviewing the CARP’s decision, the Librarian has been guided by these principles and the prior decisions of the District of Columbia Circuit in which the court applied the ‘‘arbitrary and capricious’’ standard of 5 U.S.C. 706(2)(A) to the determinations of the former Copyright Royalty Tribunal (hereinafter ‘‘CRT or Tribunal’’). See, e.g, National Cable Tele. Ass’n v. CRT, 724 F.2d 176 (D.C. Cir. 1983) (applying the Administrative Procedure Act’s standard authorizing courts to set aside agency action found to be arbitrary, capricious, and abuse of discretion, or otherwise in accordance with law.’’); see also, Recording Industry Ass’n of America v. CRT, 662 F.2d 1, 7–9 (D.C. Cir. 1981); Amusement and Music Operators Ass’n v. CRT, 676 F.2d 1144, 1149–52 (7th Cir.), cert denied, 459 U.S. 907 (1982); National Ass’n of Broadcasters v. CRT, 675 F.2d 367, 375 n. 8 (D.C. Cir. 1982). 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. CRT, 772 F.2d 922 (D.C. Cir. 1985), cert. denied, 475 U.S. 1035 (1986) (NAB v. CRT); Christian Broadcasting Network v. E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations CRT, 720 F.2d 1295 (D.C. Cir. 1983) (Christian Broadcasting v. CRT); National Cable Television Ass’n v. CRT, 689 F.2d 1077 (D.C. Cir. 1982) (NCTA v. CRT); Recording Indus. Ass’n of America v. CRT, 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 specific findings of fact and conclusions of law. This requirement of every CARP report is confirmed by the legislative history of 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). IV. The CARP Report: 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 submissions, and the record evidence. After carefully considering the Panel’s report and the record in this proceeding, the Register has concluded that the rates proposed by the Panel for use of the webcasting license do not reflect the rates that a willing buyer and willing seller would agree upon in the marketplace. Therefore, the Register has made a recommendation that the VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 Librarian reject the proposed rates ($0.14 per performance for Internet-only transmissions and $0.07 per performance for radio retransmissions) for the section 114 license and substitute his own determination (0.07c per performance for both types of transmissions), based upon the Panel’s analysis of the hypothetical marketplace, and its reliance upon contractual agreements negotiated in the marketplace. These changes necessitate an adjustment to the proposed rates for non-CPB, noncommercial broadcasters 12 for Internet-only transmissions as well. The adjusted rate for archived programming subsequently transmitted over the Internet, substituted programming and up to two side channels is 0.02¢, reflecting a downward adjustment from the 0.05¢ rate proposed by the Panel. The new rate for all other transmissions made by non-CPB, noncommercial broadcasters is 0.07¢ per performance per listener. Using this methodology, the Register recommends that the Librarian also reject the Panel’s determination of a rate for the making of ephemeral recordings by those Licensees operating under the webcasting license. Because the Panel had made an earlier determination not to consider 25 of the 26 contracts submitted by RIAA for the purpose of setting a rate for the webcasting license, it was arbitrary for the Panel to use these same rejected licenses to set the Ephemeral License Fee. See section IV.13 herein for discussion. Consequently, the Register proposes a downward adjustment—from 9% of the performance royalties paid to 8.8%—to the Ephemeral License Fee to remove the effect of the discarded licenses. In determining the Ephemeral License Fee for Business Establishment Services operating under an exemption to the digital performance right, the CARP considered separate licenses negotiated in the marketplace between individual record companies and these services. Its reliance on these agreements as an adequate benchmark for purposes of setting the rate for the section 112 license was well-founded and supported by the record. Therefore, the Register recommends adopting the Panel’s proposal of setting the Ephemeral License Fee for Business Establishment Services at 10% of the service’s gross proceeds. However, the Register cannot support the Panel’s recommendation to set the minimum fee applicable to these 12 A non-CPB, noncommercial broadcaster is a Public Broadcasting Entity as defined in 17 U.S.C. 118(g) that is not qualified to receive funding from the Corporation for Public Broadcasting pursuant to the criteria set forth in 47 U.S.C. 396. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 45243 services for its use of the ephemeral license at $500 when clear evidence exists in the contractual agreements to establish a much higher range of values for setting the minimum fee. Consequently, the Register evaluated the contracts and proposed a minimum fee consistent with the record evidence. The result is a minimum fee of $10,000 per license pro rated on a monthly basis. Section 802(f) states that ‘‘[i]f the Librarian rejects the determination of the arbitration panel, the Librarian shall, before the end of that 90-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 90-day period, the Register reviewed the Panel’s report and made a recommendation to the Librarian to accept in part and reject in part the Panel’s report, for the reasons cited herein. The Librarian accepted this recommendation and, on May 21, 2002, he issued an order rejecting the Panel’s determination proposing rates and terms for the webcasting license and the ephemeral recording license. See Order, Docket No. 2000–9 CARP DTRA 1&2 (dated May 21, 2002). The full review of the Register and her corresponding recommendations are 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, however, may reject a finding of the Panel where it is clear that its determination is not supported by the evidence in the record. A. Establishing Appropriate Rates 1. The ‘‘Willing Buyer/Willing Seller Standard’’ Sections 112(e)(4) and 114(f)(2)(B), of title 17 of the U.S.C., provide that ‘‘the copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller,’’ and enumerate two factors that the panel shall consider in making its decisions: (1) The effect of E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 45244 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations the use of the sound recordings on the sale of phonorecords, and (2) the relative contributions made by both industries in bringing these works to the public. In applying this standard, the Panel determined that it was to consider the enumerated factors along with all other relevant factors identified by the parties, but that it was not to accord the listed factors special consideration. Report at 21; see also Final Rule and Order, Rate Adjustment for the Satellite Carrier Compulsory License, Docket No. 96–3 CARP SRA, 62 FR 55742, 55746 (October 28, 1997). Nevertheless, when the Panel considered the record evidence offered to establish a marketplace rate, it paid close attention to the two factors set forth in the statute. In analyzing the first factor, which focuses on the interplay between webcasting and sales of phonorecords, the panel found that the evidence offered during the proceeding was insufficient to demonstrate whether webcasting promoted or displaced sales of sound recordings. RIAA’s evidence to demonstrate that performances of their sound recordings over the Internet displace record sales consisted of unsupported opinion testimony and consequently, the Panel afforded it no weight. Report at 33. Similarly, the Panel rejected the Webcasters’ contention that webcasting promoted sales, affording little weight to its empirical studies. It concluded that the Sounddata survey 13 was not useful for purposes of this proceeding because it focused on the promotional value of traditional radio broadcasts and not the promotional value of webcasting. Id. Likewise, the Panel rejected a study by Professor Michael Mazis 14 because the 13 Michael Fine is an expert witness for the Webcasters and Broadcasters. He was the chief executive officer to Soundata, SoundScan and Broadcast Data Systems until December 31, 2000, and is now a management consultant to the firms operating these services. He analyzed data collected by these services to determine the promotional effect upon record sales from radio retransmissions and Internet-only transmissions and the displacement effect of record sales due to copying of sound recordings from Internet transmissions. Fine’s W.D.T. at 1. 14 Professor Mazis is a Professor in the Kogod School of Business, American University, who testified on behalf of the Webcasters and Broadcasters. He designed a survey study to analyze usage patterns of people who listen to simulcast of a radio station’s over-the-air broadcast programming and transmissions made by services transmitting solely over the Internet. Specifically, the study was designed to measure: a. The effect listening to transmissions over the Internet had on a listener’s music purchases; b. the extent to which listeners to radio retransmissions are either listeners from the broadcaster’s local market or non-local listeners; c. the amount of time spent listening to programming on the Internet and the proportion of VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 response rates in the survey study fell below generally acceptable standards. All in all, the evidence on either side was not persuasive. Consequently, the Panel concluded that, for the time period under consideration, ‘‘the net impact of Internet webcasting on record sales [was] indeterminate.’’ Id. at 34. Broadcasters, however, disagree with the Panel’s conclusions. They argue that the Panel should have made an adjustment for the promotional value of the transmissions, noting that the statute singled out this factor for consideration when setting the rates. Broadcasters Petition at 38. They further contend that the record demonstrates that ‘‘the promotional value of radio play should be far and away the most significant factor in determining the fair market value of broadcasters simulcast rates.’’ Id. at 39–40. But all the evidence cited in the record references the interrelationship between radio stations and record companies in the analog world. As noted above, the Panel considered the evidence but did not find it persuasive. Where the Panel makes a decision based upon its weighing of the evidence, the Register will not disturb its findings and conclusions that proceed directly from the Panel’s consideration of the factual evidence. Thus, the Register accepts the Panel’s conclusion that performances of sound recordings over the Internet did not significantly stimulate record sales. More importantly, though, the Panel correctly found that promotional value is a factor to be considered in determining rates under the willing buyer/willing seller model, and does not constitute an additional standard or policy consideration to be used after rates are set to adjust a base rate upwards or downwards. Report at 21. Therefore, the effect of any promotional value attributable to a radio retransmission would already be reflected in the rates for these transmissions reached through armslength negotiations in the marketplace. As for the second factor, the Panel found that both copyright owners and licensees made significant creative, technological and financial contributions. It concluded, however, that it was not necessary to gauge with specificity the value of these contributions in the case where actual agreements voluntarily negotiated in the marketplace existed, since such that time spent listening to music programming versus non-music programming; and d. the reasons why people visit radio station websites and the activities they engage in when they visit these sites. Mazis’ W.D.T. at 1–2. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 considerations, including any significant promotional value of the transmissions, would already have been factored into the agreed upon price. Id. at 35–36. This is not a contested finding. It is also important at the outset of this review to distinguish the willing buyer/willing seller standard to be used in this proceeding from the standard that applies when setting rates for subscription services that operated under the section 114 license. They are not the same. Section 114(f)(1)(B), governing subscription services, requires a CARP to consider the objectives set forth in section 801(b)(1), as well as rates and terms for comparable types of digital audio transmission services established through voluntary negotiations. See Final Rule and Order, 63 FR 25394, 25399 (May 8, 1998). This standard for setting rates for the subscription services is policy-driven, whereas the standard for setting rates for nonsubscription services set forth in section 114(f)(2)(B) is strictly fair market value—willing buyer/willing seller. Thus, any argument that the two rates should be equal as a matter of law is without merit. See, e.g., Webcasters Petition at 4 (comparing rates set for preexisting subscription services under the policy driven standard with the proposed marketplace rates for nonsubscription services and inferring that the rates should be similar). 2. Hypothetical Marketplace/Actual Marketplace To set rates based on a willing buyer/ willing seller standard, the CARP first had to define the relevant marketplace in which such rates would be set. It determined, and the parties agreed, that the rates should be those that a willing buyer and willing seller would have agreed upon in a hypothetical marketplace that was not constrained by a compulsory license. The CARP then had to define the parameters of the marketplace: the buyers, the sellers, and the product. In this configuration of the marketplace, the willing buyers are the services which may operate under the webcasting license (DMCA-compliant services), the willing sellers are record companies, and the product consists of a blanket license from each record company which allows use of that company’s complete repertoire of sound recordings. Report at 24. Because of the diversity among the buyers and the sellers, the CARP noted that one would expect ‘‘a range of negotiated rates,’’ and so interpreted the statutory standard as ‘‘the rates to which, absent special circumstances, most willing buyers and E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations willing sellers would agree’’ in a competitive marketplace.15 Id. at 25. The Services take issue with the Panel’s analysis of the hypothetical marketplace. They argue that the willing sellers should be considered as a group of hypothetical ‘‘competing collectives each offering access to the range of sound recordings required by the Services,’’ and not, as the Panel contends, viewed as individual record companies. Broadcasters Petition at 9; Webcasters Petition at 9–10. It is hard to see, however, how competition would be stimulated in a marketplace where every seller offers the exact same product and where more likely than not, the sellers would act in concert to extract monopolistic prices. Possibly sellers would choose to undercut each other, but at some point the price would stabilize. In any event, the Services failed to explain how such collectives would operate in a competitive marketplace. Consequently, the Register rejects the Webcasters’ challenge to the Panel’s definition on this point and adopts the Panel’s characterization of the relevant marketplace, recognizing that for purposes of this proceeding, the major record companies are represented by a single entity, the RIAA. Turning next to the actual marketplace in which RIAA negotiated agreements with individual services, the Services voice a number of objections to the Panel’s decision to rely on the 26 voluntary agreements offered into evidence by RIAA. Specifically, the Services object to the use of the voluntary agreements because they fail to exhibit a range of negotiated rates among diverse buyers and sellers. Broadcasters Petition at 10; Webcasters Petition at 10. They also question the validity of relying on agreements negotiated during the early stages of a newly emerging industry, noting the Panel’s admonition to approach such agreements with caution. Report at 47. The reason for the warning was Dr. Jaffe’s 16 stated concern that such licenses ‘‘may not reflect fully educated assessments of the nascent businesses’’ long-term prospects.’’ The Services also argue that the existence of the antitrust exemption in the statutory license gave RIAA an 15 The panel used the same analysis for setting the rates for the ephemeral recording license because the statutory language defining the standard for setting rates for the ephemeral recording license is nearly identical to the standard set forth in section 114. 16 Adam Jaffe is a Professor of Economics at Brandeis University. He is also the Chair of the Department of Economics and the Chair of the University Intellectual Property Policy Committee. He testified on behalf of the Webcasters and the Broadcasters. VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 unfair bargaining advantage over the Services because RIAA represented the five major record companies who together owned most of the works. They contend that RIAA used its superior market power to negotiate supracompetitive prices with Services who could not match either RIAA’s power in the marketplace or its sophistication in negotiating contracts. Moreover, they utterly reject the Panel’s determination that RIAA’s perceived market power was tempered by the existence of the statutory license, which, for purposes of negotiating a fair rate for use of sound recordings, leveled the playing field. Webcasters Petition at 12. Not surprisingly, RIAA agrees with the Panel on this issue. It maintains that the statutory license offers the Services two clear advantages which more than offset any perceived advantage the RIAA may have had in negotiating a voluntary agreement. First, the license eliminates the usual transaction costs associated with negotiating separate licenses with each of the copyright owners. Second, services may avoid litigation costs associated with setting the rates for a statutory license provided they choose not to participate in the CARP process. RIAA reply at 12. In essence, both sides articulate valid positions which are supported by the record. RIAA is clearly an established market force with extensive resources and sophistication. In fact, the Panel found that when RIAA negotiated with less sophisticated buyers who could not wait for the outcome of this proceeding, the rates were above-market value, and therefore, not considered by this CARP. Report at 54–56. Nevertheless, it would make no sense for RIAA to take any other position in a marketplace negotiation. Sellers expect to make a profit and will extract from the market what they can, just as buyers will do everything in their power to get the product at the lowest possible price. These are the fundamental principles guiding marketplace negotiations. Such negotiations, however, were few. For the most part, webcasters chose not to enter into negotiations for voluntary agreements, knowing that they could continue to operate and wait for the CARP to establish a rate. Such actions on the part of the users clearly impeded serious negotiations in the marketplace and support the CARP’s observation that the statutory license had a countervailing effect on the negotiation process and limited the ability of RIAA to exert undue marketplace power. See Tr. 9075–77, 9490–94 (Marks) (explaining the difficulties of bringing webcasters to the negotiating table due to the statutory PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 45245 license). Thus, the CARP could only consider negotiated rates for the rights covered by the statutory license that were contained in an agreement between RIAA and a Service with comparable resources and market power. The only agreement that met these criteria was the Yahoo!17 agreement. The Panel found that both parties to that agreement entered into negotiations in good faith and on equal footing. Moreover, RIAA’s negotiating advantage disappeared. RIAA could not extract super-competitive rates because Yahoo! brought comparable resources, sophistication, and market power to the negotiating table. Moreover, Yahoo! could have continued to operate under the license and wait for the outcome of this proceeding. Yet, Yahoo!, unlike most of the other Services, did not take this course of action. It wanted a negotiated agreement so that it could fully develop its business model based on certainty as to the costs of the use of the sound recordings. Consequently, it had every incentive to negotiate a rate that reflected its perception of the value of the digital performance right in light of its needs and position in the marketplace. Had RIAA insisted upon a super competitive rate, Yahoo! could have walked away and waited for the CARP to set the rates. RIAA Reply at 13. Thus, it was not arbitrary for the Panel to consider the negotiated agreement between Yahoo! and RIAA. It met all the criteria identified by the CARP (discussed above) that characterized the hypothetical marketplace: Yahoo! was a DMCA-compliant Service; RIAA represented the interests of five independent record companies, and the license granted the same rights as those offered under the webcasting and the ephemeral recording licenses. The Webcasters make one final argument concerning use of licenses negotiated in the marketplace. They fault the Panel for its reliance on a contract for which there was no prior marketplace precedent for setting a rate. Webcasters Petition at 15. Yet, that alone cannot be a reason to reject 17 Yahoo! is a streaming service which provides a retransmissions of AM/FM radio stations and programming from other webcaster sites. Report at 61. Yahoo! is also a global Internet communications, commerce and media company, offering comprehensive services to more than 200 million users each month. Content for its features like Yahoo! Finance, Yahoo! News, and Yahoo! Sports, are typically licensed from third parties. Mandelbrot W.D.T. ¶ 3–5. The Panel was well aware of the many faces of Yahoo! Nevertheless, it found no reason to reject the Yahoo! agreement merely because it offered other business services. See Report at 76, in 53. E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 45246 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations consideration of agreements negotiated in the marketplace, albeit at an early stage in the development of the industry. At some point, rates must be set. Such rates then become the baseline for future market negotiations. RIAA recognized an opportunity to participate in this initial phase and moved forward to negotiate contracts with users with the intention of using these contracts to indicate what a willing buyer would pay in the marketplace. However, that was easier said than done. As discussed above, most Webcasters chose not to enter into marketplace agreements, preferring to wait for the outcome of the CARP proceeding in the hope of getting a low rate. Clearly, such resistance to enter into good faith negotiations made it difficult for the copyright owners to gauge the market accurately and find out just what a willing buyer would be willing to pay for the right to transmit a sound recording over the Internet. 3. Benchmarks for Setting Market Rates: Voluntary Agreements vs. Musical Works Fees The parties offer two very different methods for setting the webcasting rates. RIAA argued that the best evidence of the value of the digital performance right is the actual rates individual services agreed to pay for the right to transmit sound recordings over the Internet. In support of its position, it offered into evidence 26 separate agreements it had negotiated in the marketplace prior to the initiation of the CARP proceeding. The Services take a different approach. They dispute the validity of the contracts as a bases for marketplace rates and offer in their place a theoretical model (the ‘‘Jaffe model’’) predicated on the fees commercial broadcasters pay to use musical works in their over-the-air AM/ FM broadcast programs. The Jaffe model builds on the premise that in the hypothetical marketplace, copyright owners would license their digital performance rights and ephemeral recording rights at a rate no higher than the rates music publishers currently charge over-the-air radio broadcasters for the right to publicly perform their musical works.18 Report at 28, citing Webcasters PFFCL ¶¶ 276–78; Jaffe W.D.T. 16–19. To find the rate copyright owners would charge under this model, Webcasters calculated a per performance and a per hour rate by using the aggregate fees that 872 over18 A ‘‘musical work’’ is a musical composition, including any words accompanying the music. A ‘‘sound recording’’ is a work that results from the fixation of a series of musical, spoken, or other sounds, other than those accompanying a motion picture or other audiovisual work. VerDate May2002 18:26 Jul 05, 2002 Jkt 197001 the-air radio stations paid in 2000 to the performing rights organizations BMI, ASCAP, and SESAC.19 It combined the fee data with data on listening audiences obtained from Arbitron to generate an average fee paid by an overthe-air broadcaster per ‘‘listening hour.’’ From this value, Webcasters calculated a per performance fee by dividing the ‘‘listener hour’’ fee by the average number of songs played per hour by music-intensive format stations. Id. These calculations yielded a per song fee of 0.02¢ or, in the alternative, a per listener hour fee of 0.22¢. For purposes of webcasting, these values were adjusted upward to reflect the fact that, on average, webcasters play 15 songs per hour, as compared to the 11 perhour played on over-the-air radio. The webcaster per hour rate works out to be 0.3 instead of 0.2¢ per hour. After carefully considering both approaches, the Panel chose to focus on the RIAA agreements. In rejecting Dr. Jaffe’s theoretical model, the panel cited three reasons for its conclusion. First, the Panel expressed strong concern regarding the construct of the model, including: 1. The difficulty in identifying all the factors that must be considered in setting a price, and 2. The inherent error associated with predicating a prediction on a ‘‘string of assumptions,’’ especially where the level of confidence in many of the assumptions is not high. Second, the Panel was wary of analogizing the market for the performance of musical works with the market for the performance of sound recordings, finding instead that the two marketplaces are distinct based upon the difference in cost and demand characteristics. And finally, the Panel determined that the Jaffe model was basically unreliable. It could not be used to predict accurately the amount of royalty fees owed to the performing rights societies by a particular radio station. It came to this conclusion after using the model to predict the royalty fees owed by a particular station and comparing that figure to the amount the radio station actually paid. For some radio stations, the model severely underestimated the amount owed to the performing rights societies, thus, drawing into serious question the reliability of the model. Report at 42. 19 BMI, Inc., American Society for Composers, Authors and Publishers, and SESAC, Inc. are performing rights organizations that represent songwriters, composers and music publisehrs in all genres of music. These societies offer licenses and collect and distribute royalty fees for the nondramatic public performances of the copyrighted works of their members. PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 a. Fees paid for use of musical works. The Broadcasters and the Webcasters fault the Panel for disregarding the fees paid for musical works as a viable benchmark. Webcasters Petition at 15, 47. They maintain that Dr. Jaffe’s analysis proves that the value of the performance of the sound recording is no higher than the value of the performance of the musical work. Webcasters argue that the fees for musical works constitute a valid benchmark because these rates are the result of transactions between willing buyers and willing sellers over a long period of time, in a marketplace that shares economic characteristics with the marketplace for sound recordings. Webcasters Petition at 48. The Broadcasters agree. They maintain that even under the willing buyer/willing seller standard, ‘‘the over-the-air musical works license experience * * * has resulted in fees ‘to which most willing buyers and willing sellers [have] agree[d]’ and constitute ‘comparable agreements negotiated over a longer period, which ha[ve] withstood ‘the test of time.’ ’’ Broadcasters Petition at 45– 46, citing Report at 25, 47. Broadcasters and Webcasters also object to the Panel’s characterization of its proposed benchmark as merely a theoretical model. Webcasters Petition at 51. They maintain that Dr. Jaffe’s model was much more than a theoretical model because it used actual data from the musical works marketplace to calculate an analogous rate for use of sound recordings in the digital marketplace. Consequently, these Services contend that the Panel gave inadequate consideration to their proposed benchmark and rejected the model out of hand because it was purported to be only a theoretical model based upon a number of untested assumptions. Broadcasters Petition at 18–19; Webcasters Petition at 18–20, 52. Finally, the Services argue that the statute does not compel the Panel to consider only negotiated agreements. They also contend, that the reliance on the fees paid for use of the musical works in a prior CARP proceeding to establish rates for subscription services operating under the same license required the panel to give more consideration to the musical works benchmark. Broadcaster’s Petition at 1– 2; Webcasters Petition at 1–2, 15, 17, 47. Webcasters find support for this last argument in an Order of the Copyright Office issued in this proceeding, dated July 18, 2001. In that order, the Office acknowledged that in 1998 it had adopted the rates paid for musical works fees as a relevant benchmark for setting rates for E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations subscription services. It stated, however, that the evidence in that case did not support a conclusion that the value of the sound recording exceeded the value of the musical work. Moreover, and directly to the point, the Register’s recommendation in the earlier proceeding concurred with the earlier Panel’s determination that the musical works benchmark is NOT determinative of the marketplace value of the performance right in sound recordings. The relevant passage states: ‘‘The question, however, is whether this reference point (the musical works benchmark) is determinative of the marketplace value of the performance in sound recordings; and, as the Panel determined, the answer is no.’’ 63 FR 25394, 25404 (May 8, 1998). The July 18 Order went on to note that in the subscription service proceeding, ‘‘[h]ad there been record evidence to support the opposite conclusion, [namely, that the value of sound recordings exceeds the value of musical works], the outcome might have been different.’’ This statement was an invitation to the parties to provide whatever evidence they could adduce in this proceeding to establish the value of the sound recording. It was not to be read as an absolute determination, that the value of the sound recording in a marketplace unconstrained by a compulsory license is less than the value of the underlying musical work. Instead, the Order stated that ‘‘the musical work fees benchmark identified in a previous rate adjustment proceeding as the upper limit on the value of the performance of a sound recording may or may not be adopted as the outer boundary of the ‘‘zone of reasonableness’’ in this proceeding. This is a factual determination to be made by the CARP based upon its analysis of the record evidence in this proceeding.’’ It is also important to note that in the prior proceeding, the only reason the Register and the Librarian focused on the musical works benchmark was because it was the only evidence that remained probative after an analysis of the Panel’s decision. Each of the other benchmarks possessed at least one fatal deficiency and, consequently, each was rejected as a reliable indicator of the value of the performance of a sound recording by a subscription service. Of equal importance is the fact that the musical works benchmark had never been fully developed in the record, nor had any party relied on it to any great extent in making its case to that Panel. Consequently, it was not arbitrary for the Panel to reject the Services’ invitation to anchor its decision for setting rates for nonsubscription VerDate May2002 17:45 Jul 05, 2002 Jkt 197001 services on the prior decision setting rates for preexisting subscription services. Moreover, the Panel is not required to justify why the rates it ultimately recommended here are greater than the rates preexisting subscription services pay for use of the musical works. That is merely the result of the analysis of the written record before this Panel, and its decision flows naturally from its reliance upon contractual agreements negotiated in the relevant marketplace for the right at issue. This difference in the rates is also attributable to the different standards that govern each rate setting proceeding. As discussed previously in section IV.1, the standard for setting rates for subscription services is policy based and not dependent upon market rates. Consequently, it is more likely that the rates set under the different standards will vary markedly, especially when rates are being set for a new right in a nascent industry. Nevertheless, the Register agrees with the Services on a number of theoretical points. Certainly, the Panel could have utilized Dr. Jaffe’s model in making its decision, either alone or in conjunction with the voluntary agreements, provided that it considered the model’s deficiencies, and made appropriate adjustments for the fact that the model required reliance on a string of assumptions to perform the conversion of a rate for the public performance of a musical work in an analog environment, into a comparable rate for the public performance of a sound recording in a digital format. See AMOA v. CRT, 676 F2d 1144 (7th Cir. 1982). But the fact remains that it was not required by law to do so. The Panel was free to choose any of the benchmarks offered into the record or to rely on each of them to the degree they aided the Panel in reaching its decision. See, e.g., Use of Certain Copyrighted Works in Connection with Noncommercial Broadcasting, 43 FR 25068–69 (CRT found voluntary license between BMI, Inc., and the public broadcasters, Public Broadcasting System and National Public Radio, of no assistance in setting rates for use of ASCAP repertoire). The Register also rejects the Services’ contentions that the Panel failed to consider fully Dr. Jaffe’s model. See Webcasters Petition at 20, 52. The Panel did consider Jaffe’s model and concluded that it need not consider alternative benchmarks that are at best analogous when it had actual evidence of marketplace value of the performance of the sound recordings in the record. Report at 42. It also rejected the offer to utilize the model because the underlying assumptions were in many PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 45247 instances questionable. For example, the Panel did not accept the assumptions that a percentage of revenue model could be converted accurately to a per performance metric, or that the buyers and sellers in the two marketplaces are analogous. Broadcasters assert that they had established that the value of the musical work is higher than the comparable right for sound recording based on the fees paid for use of these works in movies and television programs. Broadcasters Petition at 24. In addition, they offered a study of the fees paid for these rights in twelve foreign countries where the Services claim these rights are valued more or less equally. Id. at 24, 49. Because the Panel failed to analyze this information, the Services argue, the Panel’s rejection of the musical benchmark was arbitrary. RIAA responds that the information offered on the fees paid for the public performance of sound recordings fails to establish that in these countries sound recordings are valued according to a ‘‘willing buyer/willing seller’’ standard. RIAA Reply at 20, fn 36. In fact, many of the countries surveyed evidently use an ‘‘equitable remuneration’’ standard, which courts have held not to be equivalent to a fair market value. Because it is not possible to ascertain whether any of the rates offered in the survey of foreign countries represented a fair market rate, or that the rights in these countries are equivalent to the rights under U.S. law, the Panel was not arbitrary in its decision to disregard this evidence. The Register also concludes that the Panel’s decision not to consider master use and synchronization licenses for use of musical works and sound recordings in motion pictures and television was not arbitrary. At best, these licenses offered potential benchmarks for evaluating the digital performance right for sound recordings, and they may well have been useful had not actual evidence of marketplace value of the sound recordings existed. In any event, they did not represent better evidence than the voluntary agreements negotiated in the marketplace for the sound recording digital performance right. b. Voluntary agreements. On the other hand, the Panel articulated two affirmative reasons for its focus on the negotiated agreements. First, the statute invites the CARP to consider rates and terms negotiated in the marketplace. Second, the Panel accepted the premise that the existence of actual marketplace agreements pertaining to the same rights for comparable services offers the best evidence of the going rate. Report at 43, citing Jaffe Tr. at 6618. E:\FR\FM\08JYR3.SGM pfrm17 PsN: 08JYR3 45248 Federal Register / Vol. 67, No. 130 / Monday, July 8, 2002 / Rules and Regulations But in choosing this approach, the Panel did not accept the 26 voluntary agreements at face value. It evaluated the relative bargaining power of the buyers and sellers, scrutinized the negotiating strategy of the parties, considered the timing of the agreements, discounted any agreement that was not implemented, eliminated those where the Service paid little or no royalties or the Service went out of business, and evaluated the effect of a Service’s immediate need for the license on the negotiated rate. See Report at 45–59.20 Ultimately, it gave little weight to 25 of the 26 agreements for these reasons and because the record demonstrated that the rates in these licenses reflect abovemarketplace rates due to the superior bargaining position of RIAA or the licensee’s immediate need for a license due to unique circumstances. At best, the Panel concluded that the rates included in these agreements establish an upper limit on the price of the digital performance right, and where included, the right to make ephemeral copies. Report at 59. RIAA objects to the Panel’s decision to reject 25 of the 26 agreements on the grounds that the Panel’s criticisms were overbroad. RIAA Petition at 34. Specifically, it claims that the Panel mischaracterized its agreement with www.com/OnAir (‘‘OnAir’’), arguing that this Licensee paid substantial royalties and its decision to enter into