Soundexchange, Inc. v. Librarian of Congress

• Decision Date: 07 July 2009
• Docket Number: No. 08-1078.,08-1078.
• Citation: 571 F.3d 1220
• Parties: SOUNDEXCHANGE, INC., Appellant v. LIBRARIAN OF CONGRESS, Appellee. Sirius XM Radio Inc., Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

571 F.3d 1220

SOUNDEXCHANGE, INC., Appellant v. LIBRARIAN OF CONGRESS, Appellee.

Sirius XM Radio Inc., Intervenor.

No. 08-1078.

United States Court of Appeals, District of Columbia Circuit.

Argued March 24, 2009.

Decided July 7, 2009.

On Appeal of an Order of the Copyright Royalty Judges.

David A. Handzo argued the cause for appellant. With him on briefs were Mark D. Schneider and Michael B. DeSanctis.

Sarang Vijay Damle, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Michael F. Hertz, Acting Assistant Attorney General, and Scott R. McIntosh and Mark R. Freeman, Attorneys.

R. Bruce Rich argued the cause and filed the brief for intervenor. Karyn K. Ablin, Bruce G. Joseph, and Michael L. Sturm entered appearances.

Before GINSBURG, HENDERSON and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

Concurring opinion filed by Circuit Judge KAVANAUGH.

GINSBURG, Circuit Judge:

In 2008 the Copyright Royalty Judges (CRJ) set the royalty rate that satellite radio services must pay to copyright owners for the use of sound recordings during the years 2007-2012. SoundExchange, an organization established to collect and distribute royalties to the copyright owners, appeals the CRJ's determination, arguing it is arbitrary, capricious, and not supported by substantial evidence. We affirm the CRJ's determination with respect to the royalty rate for the use of sound recordings but reverse with respect to the CRJ's failure to set a royalty rate for "ephemeral copies" of sound recordings.

I. Background

The Congress has created two types of copyrights in a musical recording. One is for the underlying "musical work," that is, the written music; a copyright in the musical work affords the owner the exclusive right to perform the work in public. 17 U.S.C. § 106(4). The broadcast of a song (whether recorded or performed live) over terrestrial or satellite radio is a performance of the musical work and therefore requires a license from the copyright owner. A "sound recording" is a performance of a musical work that is affixed to a recording medium; until 1995 the owner of the copyright to a sound recording did not enjoy an exclusive performance right. In that year the Congress afforded the owner of the copyright to a sound recording the narrow but exclusive right "to perform the copyrighted work publicly by means of a digital audio transmission," id. §§ 106(6), 114(d); in effect, this assured the copyright owner the ability to charge a royalty for a license to play its work on a satellite radio service (SRS). If a mutually agreeable royalty cannot be negotiated between an SRS company and a copyright owner, then the Copyright Royalty Judges — an agency comprising three members appointed by the Librarian of Congress — is to set "reasonable rates and terms of royalty payments," id. § 114(f)(1)(A), "calculated to achieve the following [four] 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 SRS Companies — Sirius Radio and XM Radio — and a predecessor to SoundExchange agreed upon a rate in 2003 that would remain in effect until the end of 2006. In 2004 the Congress provided that, if SoundExchange and the Companies had not already agreed upon the royalty to be paid thereafter, then in January 2006 the CRJ would begin ratemaking proceedings for the six-year period 2007-2012. Id. § 804(b)(3)(B). The three principals did not agree upon a rate and the proceeding here under review duly followed.

For a starting point from which to consider the four objectives, the CRJ looked to "comparable marketplace royalty rates as `benchmarks,' indicative of the prices that prevail for [other, e.g., online] services purchasing similar music inputs for use in digital programming." Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 73 Fed.Reg. 4080, 4088/2 (Jan. 24, 2008) (Determination of Rates). The agency considered the record evidence reflecting various experts' opinions and concluded that a rate equal to 13% of SRS gross revenue, as proposed by SoundExchange, "marks the upper boundary for a zone of reasonableness for potential marketplace benchmarks from which to identify a rate that satisfies" the objectives in § 801. Id. at 4094/1. The agency set the lower bound at the 2.35% of gross revenue the Companies were then paying for the right to use musical works, but found "a rate close to the upper boundary is more strongly supported than one close to the lower boundary." Id. at 4094/1-2.

The CRJ then turned to the four statutory objectives in order to locate a specific rate within the zone of reasonableness. With respect to the first two objectives — maximizing the availability of creative works to the public and ensuring copyright owners and users a fair rate of return — the agency found the record did not support a thumb on the scale in favor of either SoundExchange or the SRS Companies. The CRJ then determined the third and fourth objectives — reflecting the relative roles of the owner and the user in making the product available and minimizing the disruptive impact upon the industries involved — each warranted a royalty rate somewhat lower than 13%:

[G]iven that the current rates paid by the [SRS Companies] for these [licenses] are in the range of 2.0 to 2.5% of revenues, an immediate increase to the upper boundary of the zone of reasonableness (i.e., 13%) would be disruptive inasmuch as the [Companies] have not yet attained a sufficient subscriber base nor generated sufficient revenues to reach consistent Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") profitability or positive free cash flow.

Id. at 4097/2. The agency also found the 13% rate would endanger the SRS Companies' planned investment in new satellites. Weighing the conflicting evidence in the record, the CRJ chose an initial rate equal to 6.0% of revenue, increasing to 8.0% over the six-year term of the license.

After setting a royalty rate for the Companies' transmission of musical works, the CRJ considered what portion of that rate should be attributed to their right to make "ephemeral copies" of musical works. An ephemeral copy is a digital copy of a sound recording stored on a computer; an SRS creates an ephemeral copy as an intermediate step toward satellite transmission of the sound recording.

Under 17 U.S.C. § 112, the CRJ is to set the royalty rate for an ephemeral copy at the level "most clearly represent[ing] the fees that would have been negotiated in the marketplace between a willing buyer and a willing seller." Id. § 112(e)(4). Finding them to be of little value, however, the CRJ decided not to set a separate royalty rate for ephemeral copies, but rather deemed the § 112 rate for an ephemeral copy "embodied" in the rate set for the § 114 license.

II. Analysis

We may set aside the CRJ's decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A); see 17 U.S.C. § 803(d)(3) ("Section 706 of title 5 shall apply with respect to review by the court of appeals under this subsection"), or if the facts relied upon by the agency have no basis in the record, Recording Indus. Ass'n of Am. v. Copyright Royalty Tribunal, 662 F.2d 1, 8 (D.C.Cir.1981). Although we have not yet issued a decision in a case involving the CRJ, we have reviewed a decision of its predecessor applying the four objectives in § 801(b)(1). In RIAA v. Copyright Royalty Tribunal we held "three distinct aspects of [§ 801] increase the deference" we owe the agency. Id. First, the agency is required "to estimate the effect of the royalty rate on the future of the music industry," which requires a "forecast of the direction in which the future public interest lies ... based on the expert knowledge of the agency." Id. Second, the agency has "legislative discretion in determining copyright policy in order to achieve an equitable division of music industry profits between the copyright owners and users." Id. Finally, "the statutory factors pull in opposing directions, and reconciliation of these objectives is committed to the [agency] as part of its mandate to determine `reasonable' royalty rates." Id. at 9; see Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965, 971 (D.C.Cir.1999) ("When an agency must balance a number of potentially conflicting objectives ... judicial review is limited to determining whether the agency's decision reasonably advances at least one of those objectives and its decisionmaking process was regular").

SoundExchange argues the CRJ's decision was arbitrary and capricious because the agency misapplied the four objectives in § 801 and because the decision was internally inconsistent. The Librarian of Congress, in turn, argues the CRJ's decision is supported by substantial evidence and that SoundExchange has failed to point to any convincing evidence showing the decision was inconsistent. SoundExchange, the Librarian, and Intervenor Sirius-XM agree the CRJ erred by failing to set a rate for the § 112 license, although each advocates a different remedy.

A. The § 114 Rate

SoundExchange first argues the CRJ erred by using the third and fourth objectives as "trump cards" to reduce the...