This is the accessible text file for GAO report number GAO-10-828R 
entitled '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' which was released on 
August 4, 2010. 

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United States Government Accountability Office: 
Washington, DC 20548: 

August 4, 2010: 

The Honorable Arlen Specter: 
Subcommittee on Crime and Drugs: 
Committee on the Judiciary: 
United States Senate: 

Subject: 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: 

Dear Mr. Chairman: 

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.[Footnote 1] 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.[Footnote 2] The Copyright Arbitration Royalty Panel 
system consisted of ad hoc arbitration panels; each Copyright 
Arbitration Royalty Panel was selected for a particular proceeding. 
Finally, in the Copyright Royalty and Distribution Reform Act of 2004, 
Congress replaced the Copyright Arbitration Royalty Panel system with 
the Copyright Royalty Judges.[Footnote 3] 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: 

* Willing buyer-willing seller.[Footnote 4] Under this standard, the 
Copyright Royalty Judges establish rates that most clearly represent 
the fees that would have been negotiated in the marketplace. The 
Copyright Royalty Judges base their decision on economic, competitive, 
and programming information presented by the parties. In establishing 
such rates and terms, the Copyright Royalty Judges may also consider 
the rates and terms from voluntary license agreements. 

* Section 801(b)(1). Under the standards established in 17 U.S.C. § 
801(b)(1), the Copyright Royalty Judges adjust rates and terms of 
royalty payments to achieve reasonable rates in accord with 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 or her creative work and the copyright user a fair income 
under existing economic conditions; (C) to reflect the relative roles 
of the copyright owner and the copyright user in the product made 
available to the public with 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; and (D) to minimize any 
disruptive impact on the structure of the industries involved and on 
generally prevailing industry practices. 

Congress is considering legislation that would alter copyright law as 
it pertains to sound recordings. Specifically, the proposed 
Performance Rights Act[Footnote 5] would extend the coverage of 
copyright law and the statutory licensing provisions to apply to the 
use of sound recordings by AM/FM radio stations;[Footnote 6] 
currently, copyright protection does not extend to the performance of 
sound recordings played over AM/FM radio stations and therefore a 
license and royalty payment are not required. Further, the proposed 
act would alter the standard under which the Copyright Royalty Judges 
determine statutory license royalties. Under the proposed act, AM/FM 
radio stations and Webcasters would be brought under the section 
801(b)(1) standards and the section 801(b)(1)(D) standard—which 
addresses the disruptive impact on the industries involved—would no 
longer be considered for setting any rates for certain licenses. 

As requested, this report examines how the section 801(b)(1)(D) 
standard has been applied in previous rate setting proceedings. To 
address this objective, we reviewed relevant literature, as well as 
legislation pertinent to the establishment of the Copyright Royalty 
Judges and their responsibilities. We also reviewed previous rate-
setting proceedings and spoke with relevant government stakeholders, 
including the Chief Copyright Royalty Judge and representatives from 
the U.S. Copyright Office of the Library of Congress. We conducted our 
work from March 2010 through August 2010 in accordance with all 
sections of GAO's Quality Assurance Framework that are relevant to our 
objectives. The framework requires that we plan and perform the 
engagement to obtain sufficient and appropriate evidence to meet our 
stated objectives and to discuss any limitations in our work. We 
believe that the information and data obtained, and the analysis 
conducted, provide a reasonable basis for any findings and conclusions. 

In a Previous Rate-Setting Proceeding, the Section 801(b)(1)(D) 
Standard Contributed to a Lower Royalty Rate, but the Effect of Its 
Proposed Removal on Future Proceedings Is Unclear: 

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,[Footnote 7] 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. 
[Footnote 8] 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.[Footnote 9] 

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.[Footnote 10] The Judges 
identified a "zone of reasonableness" for the royalty rate; the Judges 
set the lower bound of the zone of reasonableness at 2.35 percent of 
gross revenue and the upper bound at 13 percent of gross revenue. 
[Footnote 11] The Judges subsequently considered the section 801(b)(1) 
standards. Because of the state of the satellite industry at the time, 
the Judges determined that the cost of a royalty could have a negative 
impact on the ability of the satellite radio industry to continue 
operating. Specifically, the Judges determined that based upon the 
evidence presented in the proceeding, the satellite radio industry did 
not have enough of a subscriber base to reach profitability and that 
adopting the rate at the upper bound might delay the industry becoming 
profitable and might prevent the industry from making investments in 
technology that would allow it to continue serving customers. 
Therefore, the Judges adjusted the royalty down from the upper bound 
to 6 percent of revenue for 2007 and 2008, with the rate increasing 
0.5 percentage points per year thereafter until 2012.[Footnote 12] 
Although the decision considered the negative impact on the investment 
of the satellite radio industry under section 801(b)(1)(D), the judges 
expressed their belief that it might have been weighed alternatively 
as a market rate discount or under section 801(b)(1)(C).[Footnote 13] 

It is unclear how the proposed removal of the fourth standard from the 
section 801(b)(1) standards would impact future rate-setting 
proceedings. Government experts with whom we spoke said that the third 
and fourth standards, sections 801(b)(1)(C) and 801(b)(1)(D) 
respectively, are closely related and ensure that the industries 
involved have the ability to continue operating after the imposition 
of a royalty. As discussed previously, in the SDARS proceeding, the 
Judges viewed the standards as intertwined. Based on the previous rate-
setting decisions, the application of the standards depends upon the 
evidence and relevant testimony. While the section 801(b)(1) standards 
may have contributed to a lower royalty rate in proceedings to date, 
the Chief Judge said that application of standards could act to lower 
or raise the rate. Therefore, it is difficult to determine how the 
proposed modified section 801(b)(1) standards might be applied in 
future rate-setting proceedings or how the removal of the section 
801(b)(1)(D) standard might affect the outcome of a proceeding before 
evidence and testimony are presented at a proceeding before the Judges. 

Agency Comments: 

We provided a draft of this report to the Federal Communications 
Commission (FCC) and the Copyright Office of the Library of Congress. 
FCC provided no comments on the draft and the Copyright Office 
provided technical comments, which we incorporated as appropriate. 

We are sending copies of this report to the Chairman, FCC; Register of 
Copyrights, Library of Congress; and interested congressional 
committees. This report will also be available at no charge on the GAO 
Web site at [hyperlink,]. 

If you or your staff have questions about this report, please contact 
me at (202) 512-2834 or Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report were 
Mike Clements (Assistant Director), Alison Hoenk, Eric Hudson, Bert 
Japikse, and Jonathon Oldmixon. 

Sincerely yours, 

Signed by: 

Mark L. Goldstein: 
Director, Physical Infrastructure Issues: 

[End of section] 


[1] Pub. L. 94-553 (1976), adopting as positive law 17 U.S.C. § 801(a). 

[2] The Copyright Royalty Tribunal Reform Act of 1993, Pub. L. 103-198 

[3] Pub. L. 108-419, § 3 (2004). 

[4] 17 U.S.C. §§ 112(e)(4) and 114(f)(2)(B). 

[5] 5.379, 111th Cong. (2009). 

[6] The House has a companion bill—H.R. 848, 111th Cong., as marked by 
the House Committee on the Judiciary (2009). 

[7] Petition for review denied, Amusement and Music Operators Ass'n v. 
Copyright Royalty Tribunal, 676 F.2d 1144 (7th Cir. 1982). 

[8] On review, affirmed in material part, and reversed and remanded in 
part on other issues, Recording Industry Ass'n of America v. Copyright 
Royalty Tribunal, 662 F.2d 1 (D.C. Cir. 1981). 

[9] Recording Industry Association of America v. Librarian of 
Congress, 176 F.3d 528 (D.C. Cir. 1999). 

[10] The rate-setting proceeding pertained to both preexisting 
subscription services and SDARS. See 73 Fed. Reg. 4080 (Jan. 24, 
2008). But, the preexisting subscription services rate was settled and 
published as a Final Rule in December 2007. See 72 Fed. Reg. 71795 
(Dec. 19, 2007). Additionally, in 2009, the Judges applied the 
801(b)(1)(D) standard during a rate-setting proceeding for the use of 
the music works. In this proceeding, the Judges found no reason to 
adjust the rate due to the potential disruption to the relevant 
industries. See 74 Fed. Reg. 4510 (Jan. 26, 2009). 

[11] The Judges set the lower bound at 2.35 percent of gross revenue—
the rate paid by SDARS for the musical work license—and the upper 
bound at 13 percent of gross revenue—a rate paid by other digital 

[12] Petition for review denied in part, and granted in part and 
remanded on other issues, Sound Exchange, Inc. v. Librarian of 
Congress, 571 F.3d 1220 (D.C. Cir. 2009). 

[13] 73 Fed. Reg. 4080, 4096-4097 (Jan. 24, 2008). 

[End of section] 

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