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Music Choice v. Copyright Royalty Bd.

United States Court of Appeals, District of Columbia Circuit

December 19, 2014

MUSIC CHOICE, APPELLANT
v.
COPYRIGHT ROYALTY BOARD, APPELLEE, SIRIUS XM RADIO INC. AND SOUNDEXCHANGE, INC., INTERVENORS

Argued September 15, 2014.

Page 1001

[Copyrighted Material Omitted]

Page 1002

On Appeals From a Final Determination of the Copyright Royalty Judges.

Matthew S. Hellman argued the cause for appellant SoundExchange, Inc. With him on the briefs were David A. Handzo, Michael B. DeSanctis, and Erica L. Ross.

Paul M. Fakler argued the cause for appellant Music Choice. With him on the briefs was Martin F. Cunniff.

Sonia K. McNeil, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief were Stuart F. Delery, Assistant Attorney General, and Mark R. Freeman, Attorney. Scott R. McIntosh, Attorney, entered an appearance.

Todd D. Larson argued the cause for intervenor Sirius XM Radio Inc. With him on the brief was R. Bruce Rich.

Paul M. Fakler and Martin F. Cunniff were on the brief for intervenor Music Choice in support of appellee.

Matthew S. Hellman, David A. Handzo, Michael B. DeSanctis, and Erica L. Ross were on the brief for intervenor SoundExchange, Inc. in support of appellee.

Before: SRINIVASAN, Circuit Judge, EDWARDS and SENTELLE, Senior Circuit Judges.

OPINION

Page 1003

Sentelle, Senior Circuit Judge:

In 2013, the Judges of the Copyright Royalty Board issued a determination setting royalty rates and defining terms for statutorily defined satellite digital audio radio services (SDARS) and preexisting subscription services (PSS). SoundExchange, an organization that collects and distributes royalties to copyright owners, appeals the Judges' determination, arguing that the Judges arbitrarily set SDARS and PSS rates too low. SoundExchange also contends that the Judges erred in defining " Gross Revenues" and eligible deductions for SDARS. Music Choice, a PSS that provides music-only television channels, also appeals the determination, arguing that the Judges arbitrarily set PSS rates too high. Concluding that the Judges acted within their broad discretion and on a sufficient record, we affirm the Copyright

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Royalty Judges' determination of royalty rates and terms for both SDARS and PSS.

I. Background

A. Statutory and Regulatory Framework

Statutory law creates two types of copyrights in musical recordings. First, 17 U.S.C. § 106(4) covers the underlying " musical work" and protects the owner's exclusive right to perform the work in public. See SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 1220, 1222, 387 U.S.App.D.C. 137 (D.C. Cir. 2009) (citing 17 U.S.C. § 106(4)). Broadcast of a musical work is a performance of the work and therefore requires a license from the copyright owner. Id. Second, since 1972, the law has also protected a limited copyright in a " sound recording," the musical work as preserved in a recording medium. The law, however, did not recognize an exclusive right in the public performance of a sound recording until 1995. Id. As we noted in SoundExchange, the 1995 amendments to the Copyright Act afford the owner of a copyright of a sound recording " the narrow but exclusive right 'to perform the copyrighted work publicly by means of a digital audio transmission.'" Id. (quoting § § 106(6), 114(d)). When Congress recognized this exclusive right, it also enacted a detailed statutory scheme providing for the administration of this protected right, codified in Title 17 of the United States Code. See 17 U.S.C. § § 114, 801-804. The statutory scheme requires " certain digital music services . . . to pay recording companies and recording artists when they transmit[] sound recordings." Recording Industry Ass'n of America v. Librarian of Congress (" R.I.A.A." ), 176 F.3d 528, 530, 336 U.S.App.D.C. 102 (D.C. Cir. 1999).

The statute provides for the appointment of three Copyright Royalty Judges by the Librarian of Congress. 17 U.S.C. § 801(a). If the owners of sound recording copyrights are unable to negotiate a mutually acceptable royalty with digital music services, the statute empowers the Judges to set " reasonable rates and terms of royalty payments." Id. § 114(f)(1)(A).

The statute mandates that the rates " 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 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.
(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

Id. § 801(b)(1).

The statute includes a special compulsory statutory license for the benefit of preexisting subscription services and preexisting satellite digital audio radio services to protect the investment of noninteractive services that had come into existence before the recognition of the digital performance right. Id. § 114(f)(1); see also H.R. Rep. No. 105-796, at 80-81 (Conf. Rep.). The statute directs the Copyright Royalty Judges to " make determinations and adjustments of reasonable terms and rates" for preexisting services based on the enumerated policy factors set forth above. 17 U.S.C. § 801(b)(1). As to newer noninteractive

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services, the Judges are to determine rates that " most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller." Id. § 114(f)(2)(B); see also R.I.A.A., 176 F.3d at 533 (discussing difference between statutory licenses for preexisting services and newer noninteractive services).

B. The Proceedings Below

Then-current SDARS and PSS rates were scheduled to expire in 2013. In January 2011, the Copyright Royalty Board scheduled a proceeding to establish PSS and SDARS royalty rates and terms for the years 2013 through 2017. See Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 78 Fed. Reg. 23,054, 23,054 (Apr. 17, 2013) (" Final Determination " ), as corrected, 78 Fed. Reg. 31,842 (May 28, 2013) (codified at 37 C.F.R. § 382.1 et seq.). SoundExchange, Music Choice, and Sirius XM successfully petitioned to participate. Thirteen months of discovery and motion practice culminated in a 19-day administrative trial, at which the Judges heard from 32 fact and expert witnesses. In April 2013, the Judges issued their Final Determination.

1. Setting the SDARS Rate

At the time of the proceeding, the current SDARS rate was 8% of gross revenues, established by the Judges in the last preceding ratemaking and affirmed by this court against challenge by SoundExchange. SoundExchange, 571 F.3d at 1223-25. In the current proceeding, SoundExchange proposed rates beginning at 12% in 2013, rising to 20% in 2017. Sirius XM, the only satellite provider currently subject to the rate, proposed rates in the 5% to 7% range. Final Determination, 78 Fed. Reg. at 23,061.

In proceedings to determine rates for the digital performance of sound recordings, the parties unsurprisingly introduced evidence of royalty agreements covering analogous services such as webcasting, interactive subscription rates, or non-preexisting, noninteractive services. Sirius XM supported its rate proposal with evidence of direct license agreements between Sirius XM and independent record labels for the performance of sound recordings. Final Determination, 78 Fed. Reg. at 23,061-62.

SoundExchange based its rate proposal on its expert witness's analysis of interactive streaming agreements. Interactive services, in contrast to satellite radio and preexisting subscription services, allow an end user to hear a particular song on demand, and do not benefit from a compulsory license. See 17 U.S.C. § § 114(d)(2)-(3); H.R. Rep. No. 105-796, at 87-88 (Conf. Rep.). SoundExchange's expert witness, Dr. Janusz Ordover, examined " seven market agreements for digital music between certain interactive subscription services that stream music over the Internet and each of the four major record labels" which included royalty rates ranging from 50% to 70%. Final Determination, 78 Fed. Reg. at 23,062. Ordover then adjusted these rates to account for " the fact that the Sirius XM satellite radio service . . . ...


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