Justice and Law Enforcement:

In a Previous Rate-Setting Proceeding for Some Sound Recordings, the Standard Addressing the Disruptive Impact on the Industries Contributed to a Lower Copyright Royalty Rate, but the Effect of Its Proposed Removal Is Unclear

GAO-10-828R: Published: Aug 4, 2010. Publicly Released: Aug 4, 2010.

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Every day, thousands of AM/FM radio stations, as well as satellite radio, cable radio, and Webcasters, use sound recordings to provide music to their listeners. As a form of intellectual property, sound recordings are protected by copyright law. The copyright holder (e.g., a record company or performer) may use a license to grant third parties permission to use sound recordings, in return for compensation and compliance with other conditions of the license. Congress established a statutory copyright regime, including a statutory license, which among other things, avoids the potential problems associated with thousands of music service providers seeking licenses from many copyright holders. Under this regime, a party may invoke a statutory license to allow it to use sound recordings under certain conditions and according to specific requirements, in exchange for payment of a set royalty amount. Since 1976, the Copyright Royalty Tribunal, Copyright Arbitration Royalty Panels, and Copyright Royalty Judges have been responsible, successively, for recommending or setting rates, terms, and conditions for statutory licenses. In the Copyright Act of 1976, Congress established the Copyright Royalty Tribunal. The Copyright Royalty Tribunal operated until 1993, when Congress abolished it and authorized the Librarian of Congress, upon the recommendation of the Register of Copyrights, to appoint and convene Copyright Arbitration Royalty Panels. The Copyright Arbitration Royalty Panel system consisted of ad hoc arbitration panels; each Copyright Arbitration Royalty Panel was selected for a particular proceeding. In the Copyright Royalty and Distribution Reform Act of 2004, Congress replaced the Copyright Arbitration Royalty Panel system with the Copyright Royalty Judges. The three Copyright Royalty Judges are housed in the Copyright Royalty Board, an establishment created within the Library of Congress. The Copyright Royalty Judges are now responsible for establishing and adjusting the rates and terms of statutory licenses, among other things. When establishing or adjusting royalty rates for statutory licenses, the Copyright Royalty Judges gather evidence and hear relevant testimony, and consider standards codified in law. The judges may consult the Register of Copyrights, whose timely decision on questions of copyright law is binding on the judges. The Copyright Royalty Judges establish or adjust royalty rates for statutory licenses using one of two standards: 1) Willing buyer-willing seller, and 2) Section 801(b)(1). Congress is considering legislation that would alter copyright law as it pertains to sound recordings. As requested, this report examines how the section 801(b)(1)(D) standard has been applied in previous rate setting proceedings.

The Copyright Royalty Tribunal (Tribunal) and a Copyright Arbitration Royalty Panel (Panel) applied the section 801(b)(1) standards three times. The Tribunal applied the section 801(b)(1) standard twice in 1981. In both cases, the Tribunal first determined a royalty rate and then applied the section 801(b)(1) standards. In the first decision, the Tribunal determined the rate was consistent with each standard, commenting only briefly on each, and in the second decision, it applied the evidence to each of the four standards, sections 801(b)(1)(A)-(D), and made no adjustment to the rate. In 1997, the Librarian of Congress convened a Panel that made a royalty determination for subscription services for digital performances of sound recordings. While the Panel applied the section 801(b)(1) standards, it relied heavily on a benchmark rate submitted as part of the evidence gathering process to establish the value of a performance right that, among other things, did not exist at the time the benchmark came into existence. The Librarian of Congress subsequently reviewed the Panel's rate determination and on recommendation of the Register of Copyrights, rejected the rate, and placing some emphasis on the section 801(b)(1)(D) standard, established a new rate. The Librarian faulted the Panel for its application of the section 801(b)(1)(A) standard and for its failure to reconcile its conclusion with the Tribunal's 1981 decision. Subsequently, a petition for review of the Librarian's decision was denied with respect to these rate-setting issues but granted and remanded on other issues. The Copyright Royalty Judges (Judges) applied the section 801(b)(1)(D) standard in 2008 during the satellite digital audio radio services (SDARS) rate-setting proceeding, and determined that to avoid disruption of the satellite radio industry, this standard warranted that satellite radio providers pay a lower royalty rate than might be appropriate as the industry is established.

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