Recording Industry Ass'n of America v. Librarian of Congress

• Decision Date: 21 May 1999
• Docket Number: No. 98-1263,98-1263
• Citation: 176 F.3d 528
• Parties: RECORDING INDUSTRY ASSOCIATION OF AMERICA, Petitioner, v. LIBRARIAN OF CONGRESS, Respondent. Digital Cable Radio Associates, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 528

176 F.3d 528

50 U.S.P.Q.2d 1768

RECORDING INDUSTRY ASSOCIATION OF AMERICA, Petitioner, v. LIBRARIAN OF CONGRESS, Respondent.

Digital Cable Radio Associates, et al., Intervenors.

No. 98-1263.

United States Court of Appeals,

District of Columbia Circuit.

Argued March 19, 1999.

Decided May 21, 1999.

On Petition for Review of an Order from the Librarian of Congress.

Robert A. Garrett argued the cause for petitioner. With him on the briefs was Cary H. Sherman. Eric A. Rubel entered an appearance.

Mark W. Pennak, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief were Frank W. Hunger, Assistant Attorney General, and William Kanter, Deputy Director.

Bruce D. Sokler, Fernando R. Laguarda, Joni Lupovitz and Jon L. Praed were on the brief for intervenors.

Before: EDWARDS, Chief Judge, SENTELLE and TATEL, Circuit Judges.

Opinion for the Court filed by Chief Judge HARRY T. EDWARDS.

HARRY T. EDWARDS, Chief Judge:

Under § 114(f) of the Copyright Act ("Act"), 17 U.S.C. §§ 101-1332, the Librarian of Congress is charged with establishing the rates and terms for compulsory licenses of certain subscription transmissions of digital audio music. In this first-ever proceeding under § 114, the Librarian determined that three music services subject to the terms of the license must pay the Recording Industry Association of America ("RIAA") 6.5 percent of their gross domestic residential revenues in exchange for the right to transmit digital audio music. The Librarian also imposed certain terms and conditions of operation on both RIAA and the music services. RIAA now challenges the 6.5 percent rate set by the Librarian, claiming that it is too low. RIAA also challenges the additional conditions imposed by the Librarian, i.e., conditions imposed on RIAA in its capacity as the collection agent for copyright owners.

The rate set by the Librarian survives challenge, because the Librarian's interpretation and application of the statute are permissible and consistent with established law. We reject the additional conditions imposed by the Librarian, however, for want of support in the record. The petition for review is denied in part and granted in part, and the case is hereby remanded.

I. BACKGROUND

In 1990, digital audio services began transmitting sound recordings in the United States. At that time, United States copyright law did not recognize a performance right for sound recordings. As a result, digital audio services were not required to pay recording companies and recording artists for their performances; only the copyright owners of the notes and lyrics underlying sound recordings received a royalty for the transmission of any performance.

In 1995, Congress changed the copyright landscape by enacting the Digital Performance Right in Sound Recordings Act of 1995, Pub.L. No. 104-39, 109 Stat. 336, amending the Copyright Act. The new law afforded copyright owners a separate right to the performance of sound recordings via digital audio transmissions. See 17 U.S.C. § 106(6). This meant that certain digital music services would be required to pay recording companies and recording artists when they transmitted sound recordings. Although copyright owners now have protected interests under the 1995 law, they are nonetheless required to give licenses to those who seek to transmit sound recordings. The terms of licenses are either negotiated by the parties or set pursuant to arbitration. See id. § 114(f)(1).

Section 114 was amended on October 28, 1998 by the Digital Millennium Copyright Act, Pub.L. No. 105-304, 112 Stat. 2860, to distinguish between transmissions by preexisting subscription services, such as those operated by the services in this case, and eligible nonsubscription transmissions and new subscription services. However, the only changes brought by the 1998 law that are relevant to this proceeding are that § 114(f)(1) and (2) were renumbered to § 114(f)(1)(A) and (B), and the license period was extended from December 31, 2000 to December 31, 2001. See 17 U.S.C. § 114(f)(1)(A), (B).

On December 1, 1995, the Librarian published a notice signaling the commencement of a six-month period during which the parties could negotiate license agreements for the performance of sound recordings by digital audio transmission. See Digital Performance Right in Sound Recordings, 60 Fed.Reg. 61,655 (Dec. 1, 1995). If an understanding was reached, the Librarian could then issue a license reflecting the terms of the parties' agreement. See 17 U.S.C. § 114(f)(1)(A). In the absence of an agreement, those parties with a significant interest in the establishment of reasonable terms and rates for a § 114 license were to file a petition with the Copyright Office no later than August 1, 1996, requesting an arbitration before a copyright arbitration royalty panel pursuant to Chapter 8 of the Copyright Act. See Digital Performance Right in Sound Recordings, 60 Fed.Reg. at 61,656. Under the statute, an arbitration panel is authorized to set a "reasonable copyright royalty rate," which is "calculated to achieve" four statutory objectives. 17 U.S.C. § 801(b)(1). The four statutory objectives are:

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

(B) To afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions;

(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.

When the parties in this case failed to reach an agreement during the six-month negotiation period, RIAA filed a petition with the Copyright Office seeking arbitration. After determining that RIAA had a significant interest in the proposed proceeding, the Librarian convened a copyright arbitration royalty panel. Before the panel, RIAA sought a rate of 41.5 percent of the digital services revenue. The three music services appearing in the case, Digital Music Express, Digital Cable Radio Associates, and Muzak, L.P., urged a rate of 2.0 percent or less. After considering the evidence presented in light of the aforecited statutory objectives, the arbitration panel recommended a royalty rate of 5.0 percent of the services' gross domestic residential revenues and certain terms for payment and accounting for payments. See Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 63 Fed.Reg. 25,394, 25,396 (May 8, 1998).

The Register of Copyrights then reviewed the panel's determination. See 17 U.S.C. § 802(f) (requiring Register to review panel's decision and make recommendations to Librarian). The Register rejected the rate set by the panel, because she found that the use of a certain negotiated license fee as a starting point was arbitrary. See 63 Fed.Reg. at 25,399. The Register therefore reevaluated the record evidence and recommended a rate of 6.5 percent. See id. at 25,410. When setting this rate, the Register, like the panel, "considered the relevant marketplace points of reference offered into evidence." Id. at 25,409. She rejected RIAA's contention, however, that she must adopt "marketplace rates." See id. at 25,399-400. Moreover, unlike the panel, the Register "gave more consideration to the rates paid for the performance right in the musical compositions, because these rates represent an actual marketplace value for a public performance right in the digital arena, albeit not the digital performance right in sound recordings." Id. at 25,409.

In addition to finding the 6.5 percent rate appropriate, the Register accepted the panel's recommendation to designate a single entity, RIAA, to collect and distribute all royalty fees. See id. at 25,412. She also determined that there must be safeguards in place to monitor the functions of RIAA, since 10 percent of the affected copyright owners were not RIAA members. See id. She therefore recommended that the Librarian adopt terms that: (1) required each performance to be valued equally when royalties are paid to copyright owners, (2) permitted the copyright owners to audit RIAA's practices in handling the royalty fees, (3) specified the nature of the costs that RIAA may deduct from royalties before distribution, and (4) specified how "unknown copyright owners" should be treated in the distribution of royalties. See id. at 25,412-13.

On May 8, 1998, the Librarian accepted the Register's recommendations and, in accordance with those recommendations, adopted new regulations. See id. at 25,413-15 (adopting 37 C.F.R. §§ 260.1 to 260.7). Particularly important here are the regulations that impose conditions on RIAA in its capacity as the sole collection and disbursement agent. Section 260.2(d) requires RIAA to value each performance equally when distributing royalties, § 260.3(d) dictates what costs RIAA may deduct from the royalties, § 260.6(b) allows "interested parties" to audit RIAA, and § 260.7 prescribes the way in which RIAA must deal with unknown copyright owners.

II. ANALYSIS

A. Standard of Review

We review the Librarian's interpretation of the relevant statutory provisions under the familiar two-step analysis of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984).

Chevron is principally concerned with whether an agency has authority to act under a statute. See Chevron, 467 U.S. at 842-45. Thus, a reviewing court's inquiry under Chevron is rooted in statutory analysis and is focused on discerning the boundaries of Congress' delegation of authority to the agency; and as long...