[Federal Register: July 23, 2001 (Volume 66, Number 141)]

[Proposed Rules]               
[Page 38226-38229]



Copyright Office

37 CFR Part 260

[Docket No. 96-5 CARP DSTRA]

Determination of Reasonable Rates and Terms for the Digital 
Performance of Sound Recordings

AGENCY: Copyright Office, Library of Congress.

ACTION: Notice of proposed rulemaking.


SUMMARY: The Copyright Office is requesting comment on proposed 
regulations that will govern the RIAA collective when it functions as 
the designated agent receiving royalty payments and statements of 

[[Page 38227]]

from nonexempt, subscription digital transmission services which make 
digital transmissions of sound recordings under the provisions of 
section 114 of the Copyright Act.

DATES: Comments are due no later than August 22, 2001.

ADDRESSES: An original and five copies of any comment shall be 
delivered to: Office of the General Counsel, Copyright Office, James 
Madison Building, Room LM-403, First and Independence Avenue, SE., 
Washington, DC; or mailed to: Copyright Arbitration Royalty Panel 
(CARP), P.O. Box 70977, Southwest Station, Washington, DC 20024-0977.

FOR FURTHER INFORMATION CONTACT: David O. Carson, General Counsel, or 
Tanya M. Sandros, Senior Attorney, Copyright Arbitration Royalty Panel, 
P.O. Box 70977, Southwest Station, Washington, DC 20024. Telephone: 
(202) 707-8380. Telefax: (202) 252-3423.



    Section 106(6) of the Copyright Act, title 17 of the United States 
Code, gives copyright owners of sound recordings an exclusive right to 
perform the copyrighted work publicly by means of a digital audio 
transmission. This right is limited by section 114(d), which allows 
certain non-interactive digital audio services to transmit sound 
recordings under a compulsory license, provided that the services pay a 
reasonable royalty fee and comply with the terms of the license.
    Section 114(f)(1)(A) outlines the procedural steps for setting 
these rates and terms for subscription transmissions by preexisting 
subscription services. The first step requires the Librarian of 
Congress to initiate a voluntary negotiation period to give the 
interested parties the initial opportunity of establishing the 
applicable rates and terms. If the parties are unable to reach an 
agreement, then section 114(f)(1)(B) directs the Librarian of Congress 
to convene a three-person Copyright Arbitration Royalty Panel 
(``CARP'') for the purpose of determining the rates and terms for the 
compulsory license upon receipt of a petition filed in accordance with 
17 U.S.C. 803(a)(1).
    The first proceeding to set rates and terms for the section 114 
license for preexisting subscription services began in 1995 and 
concluded with the issuance of a final rule and order by the Librarian 
of Congress on May 8, 1998. See 63 FR 25394 (May 8, 1998). The parties 
in this proceeding numbered four: The Recording Industry Association of 
America (``RIAA''); Digital Cable Radio Associates, now known as Music 
Choice; DMX Music, Inc. (``DMX''); and Muzak, L.P. (``Muzak'') 
(collectively, ``the parties''). In this proceeding, the parties 
proposed, and the CARP adopted, a term which gave the RIAA the 
responsibility for collecting and distributing the royalty fees to all 
copyright owners. Id. at 25397. The Librarian adopted this term, then 
crafted additional regulations that afforded copyright owners a means 
to verify the accuracy of the royalty payments made by the RIAA 
collective,\1\ established the value of each performance, specified the 
nature of the costs that RIAA may deduct from the royalty fees prior to 
distribution, and set forth a procedure for handling royalty fees in 
the case where the collective is unable to identify or locate a 
copyright owner who is entitled to receive royalties collected under 
the statutory license.

    \1\ In November 2000, RIAA formed ``Sound Exchange,'' an 
unincorporated division of RIAA, to administer statutory licenses, 
including the section 114 statutory license. See, Memorandum in 
Support of RIAA Petition to Establish Terms Governing the RIAA 
Collective at 2.

    RIAA appealed both the rate set by the Librarian and the additional 
conditions imposed on the RIAA collective in its capacity as the 
collection agent for copyright owners. See, Recording Industry Ass'n v. 
Librarian of Congress, 176 F.3d 528 (D.C. Cir. 1999). The United States 
Court of Appeals for the District of Columbia Circuit upheld the rate 
set by the Librarian and found that the Librarian has the authority to 
impose terms on copyright owners or their agents. However, it remanded 
for further consideration certain terms imposed on RIAA under 37 CFR 
260.2(d), 260.3(d), 260.6(b), and 260.7, because the CARP had not 
considered these issues, leaving the record devoid of any evidence upon 
which to fashion any terms concerning the collection and distribution 
of the royalty fees. Id. at 536.
    On February 13, 2001, the Copyright Office issued a scheduling 
order, directing the parties to this proceeding to file their direct 
cases with the Office on April 17, 2001. See, Order in Docket No. 96-5 
CARP DSTRA (February 13, 2001). On that date, RIAA filed a petition to 
establish terms governing the RIAA collective and to suspend the 
scheduled proceeding.\2\ DMX and Muzak, two of the three other parties 
to the original proceeding, authorized RIAA to inform the Office that 
they consent to the proposed terms offered by RIAA in its petition. The 
third party, Music Choice, had already informed the Office by letter 
dated February 26, 2001, of its intent not to participate further in 
this proceeding and that it did not object to the terms proposed by 

    \2\ A copy of the RIAA Petition to Establish Terms Governing the 
RIAA Collective and To Suspend CARP Proceedings, its memorandum in 
support of its petition, and its letter requesting a revision of the 
terms proposed in its petition may be found on the Copyright Office 
website at: http://www.copyright.gov/carp#114remand.

    On June 22, 2001, RIAA requested a revision to the terms offered in 
its petition to remove a reference to the section 112 statutory license 
for the making of ephemeral copies and to make clear that membership in 
the collective is open only to those copyright owners whose works are 
subject to statutory licensing and thus generate the funds to be 
distributed by the collective. Neither DMX nor Muzak had any objections 
to the proposed changes. Music Choice, having previously withdrawn from 
the proceeding, took no position on the proposed changes. There being 
no objection from any party with a direct interest in this proceeding, 
the Copyright Office has incorporated the revision into the terms set 
forth in the petition.
    Pursuant to Sec. 251.63(b) of title 37 of the Code of Federal 
Regulations, the Librarian can adopt the parties' proposed terms 
without convening a CARP, provided that the proposed terms are 
published in the Federal Register and no party with an intent to 
participate in the proceeding files a comment objecting to the proposed 
terms. In other words, unless there is an objection from a party with 
an interest in the proceeding who is prepared to participate in a CARP 
proceeding, the purpose of which is to adopt terms governing the RIAA 
collective in its handling of royalty fees collected from the three 
subscription services, these terms will be adopted. This procedure to 
adopt negotiated rates and terms in the case where an agreement has 
been reached has been specifically endorsed by Congress.

If an agreement as to rates and terms is reached and there is no 
controversy as to these matters, it would make no sense to subject 
the interested parties to the needless expense of an arbitration 
proceeding conducted under [section 114(f)(2) (1995)]. Thus, it is 
the Committee's intention that in such a case, as under the 
Copyright Office's current regulations concerning rate adjustment 
proceedings, the Librarian of Congress should notify the public of 
the proposed agreement in a notice-and-comment proceeding and, if no 
opposing comment is received from a party with a substantial 
interest and an intent to participate in an arbitration proceeding, 
the Librarian of Congress should adopt the rates

[[Page 38228]]

embodied in the agreement without convening an arbitration panel.

S. Rep. No. 104-128, at 29 (1995)(citations omitted).
    The proposed terms shall govern the RIAA collective solely in its 
capacity as the agent designated to receive royalty payments from the 
three subscription services that were parties to this proceeding and 
operate under the section 114 statutory license. These terms have been 
developed to protect the interest of those copyright owners who are not 
members of the RIAA collective and who did not participate in this 
proceeding. Thus, due to the circumstances under which these terms are 
being promulgated, if they are adopted, they shall have no precedential 
value in any future CARP. Terms governing the administrative functions 
of any future collective shall be decided in future rate adjustment 
proceedings either through negotiations or after a hearing before a 
CARP based upon a fully developed written record. For this reason, 
parties must limit their comments to the terms offered in the context 
of the proceeding to set rates and terms for the three subscription 
services--Music Choice, DMX, and Muzak--for the period from the 
effective date of the Digital Performance Act through December 31, 
    Accordingly, the Copyright Office is granting RIAA's request to 
suspend further CARP proceedings and is publishing for public comment 
RIAA's proposed terms concerning the operations of the collective. Any 
party who objects to the proposed terms must file a written objection 
with the Copyright Office and an accompanying Notice of Intent to 
Participate, if the party has not already done so. However, it is 
unclear whether any party who did not participate in the early stages 
of the rate adjustment proceeding the purpose of which was to set rates 
and terms applicable to the three subscription services can join the 
proceedings at this stage. Any proceeding convened to consider these 
terms would be a continuation of the prior CARP proceeding, Docket No. 
96-5 CARP DSTRA, on remand from the United States Court of Appeals for 
the District of Columbia Circuit. See, 17 U.S.C. 802(g). If a party 
does file an objection to the proposed terms, it must state why it 
believes the law permits a new party to commence participation at this 
stage. The content of the written challenge must also describe the 
party's interest in the proceeding, the proposed rule the party finds 
objectionable, and the reasons for the challenge. If no comments are 
received, the regulations shall become final upon publication of a 
final rule.

List of Subjects in 37 CFR Part 260

    Copyright, Digital Audio Transmissions, Performance Right, 

Proposed Regulation

    In consideration of the foregoing, the Copyright Office proposes 
amending part 260 of 37 CFR as follows:


    1. The authority citation for part 260 continues to read as 

    Authority: 17 U.S.C. 114, 801(b)(1).

Sec. 260.2  [Amended]

    2. In Sec. 260.2, remove paragraph (d).
    3. Section 260.3 is amended as follows:
    a. By revising paragraphs (c), (d), and (e); and
    b. By adding new paragraph (f).
    The revisions to Sec. 260.3 read as follows:

Sec. 260.3  Terms for making payments of royalty fees.

* * * * *
    (c) The collective designated to receive the royalty payments and 
the statements of account shall have the responsibility of making 
further distribution of these payments to copyright owners of the 
exclusive right under 17 U.S.C. 106(6) whose sound recordings were 
performed by the services making the payments. Such copyright owners 
shall allocate their receipts according to the provisions set forth at 
17 U.S.C. 114(g)(2).
    (d) Before making the distributions specified in paragraph (c) of 
this section, the designated collective may deduct reasonable costs 
incurred in the administration of the collection and distribution of 
the royalty payments, so long as the reasonable costs do not exceed the 
actual costs incurred by the collective.
    (e) In determining the share of each service's royalty payments to 
be distributed to copyright owners who are nonmembers of the designated 
collective, the collective shall attach the same weight to each 
performance of a sound recording made by that service; provided, 
however, that the collective may adopt a distribution methodology that 
weights each such performance according to its relative value. In 
determining relative value, the collective may consider factors such as 
the actual or estimated number of persons who listened to each 
performance by the service. The collective shall inform the Register of 
Copyrights of:

    (1) The methodology for distributing royalty payments to 
nonmembers, and any amendment thereto, within 60 days after its 
    (2) Any written complaint that the collective receives from a 
nonmember concerning the distribution of royalty payments, within 60 
days of receiving such written complaint; and
    (3) The final disposition by the collective of any complaint 
specified by paragraph (e)(2) of this section, within 60 days of such 

Nothing in these rules shall deprive any person from pursuing any 
remedies they may have under law against the collective.
    (f) Commencing June 1, 1998, and until such time as a new 
designation is made, the collective established by the Recording 
Industry Association of America, Inc., known as ``Sound Exchange,'' 
shall receive the royalty payments and statements of account under this 
part 260. Membership in the collective shall be open on a 
nondiscriminatory basis to all copyright owners of the rights subject 
to statutory licensing under 17 U.S.C. 114. In determining whether to 
make a new designation, the Register of Copyrights may consider any 
written complaints concerning the collective; provided, however, that 
the collective shall receive timely notice of, and an opportunity to 
respond to, any such complaints.
    4. Section 260.6 is revised to read as follows:

Sec. 260.6  Verification of royalty payments.

    (a) General. This section prescribes procedures by which interested 
parties, as defined in paragraph (g) of this section, may verify the 
royalty payments made by the designated collective pursuant to 
Sec. 260.3(c).
    (b) Frequency of verification. Interested parties may conduct a 
single audit of the collective making the royalty payment during any 
given calendar year.
    (c) Notice of intent to audit. Interested parties must file with 
the Copyright Office a notice of intent to audit the collective making 
the royalty payments. Such notice of intent shall be served at the same 
time on the collective to be audited. Within 30 days of the filing of 
the notice of intent, the Copyright Office shall publish in the Federal 
Register a notice announcing such filing.
    (d) Retention of records. The interested party requesting the

[[Page 38229]]

verification procedure shall retain the report of the verification for 
a period of three years.
    (e) Acceptable verification procedure. An audit, including 
underlying paperwork, which was performed in the ordinary course of 
business according to generally accepted auditing standards by an 
independent auditor, shall serve as an acceptable verification 
procedure for all interested parties.
    (f) Costs of the verification procedure. The interested parties 
requesting the verification procedure shall pay for the cost of the 
verification procedure, unless an independent auditor concludes that 
there was an underpayment of five (5) percent or more, in which case, 
the collective which made the underpayment shall bear the costs of the 
verification procedure.
    (g) Interested parties. For purposes of this section, interested 
parties are:
    (1) Those copyright owners who are nonmembers of the collective 
entitled to receive royalty payments pursuant to Sec. 260.3(c); and
    (2) Those persons who are entitled to receive a share of the 
copyright owners' receipts pursuant to 17 U.S.C. 114(g)(2), or their 
designated agents.
    5. Section 260.7 is amended by removing the phrase ``collecting 
agent'' each place it appears and adding the word ``entity'' in its 
place; and in the last sentence, by removing the word ``fees'' and 
adding the word ``payments'' in its place.

    Dated: July 18, 2001.
Marilyn J. Kretsinger,
Assistant General Counsel.
[FR Doc. 01-18339 Filed 7-20-01; 8:45 am]