CommLawBlog : Broadcast & Communications Lawyers & Attorneys : Fletcher Heald & Hildreth Law Firm : Telecommunications, FCC Regulation, Communications Act

First, the decision may be a reliable indicator of the future. It’s clear that the CRB is likely to rely on the current state of affairs in setting rates and terms for webcasters during the years 2011-2015. So when the CRB gets around to establishing  2011-2015 rates, we won’t be surprised if noncommercial (and commercial) webcasters will get tagged again with this same $500 per channel annual minimum.

Second, the CRB’s decision provides a glimpse at some interesting data. According to the decision, SoundExchange claimed that it cost about $803 per channel per year to administer the webcasting statutory license.  If that’s really the case, then SoundExchange is losing money – to the tune of $303 a pop – on the majority of noncommercial stations.  

Interestingly, the CRB’s decision indicates that approximately 730 webcasters paid royalties to SoundExchange in 2009.  Of those, about half (i.e.., 363) were noncommercial.  Yet payments by noncommercial webcasters constituted only about one percent of all royalty payments.  Why?  Because 305 of the 363 reporting noncommercial webcasters – almost 85 percent – paid only the annual minimum of $500 per channel because they never exceed the monthly aggregate tuning hour maximum of 159,140 ATH.  

This fact demonstrates the important practical reality of this particular proceeding. For the vast majority of noncommercial webcasters currently reporting to SoundExchange, the minimum $500 annual per channel fee is the only royalty which they will have to pay to SoundExchange. 

From that perspective, the $500 fee is not merely an interesting but minor component of the royalty obligation. Rather, it appears that for most noncommercial webcasters, it is their royalty obligation. 

Of course, it’s not entirely clear how reliably representative the CRB’s figures are. After all, those figures reflect a total of only 363 noncommercial webcasters, which is not a lot, given the number of licensed noncommercial radio stations in the country – almost ten times that number (3,223) as of June, 2010, according to the FCC. We don’t know why the other stations aren’t accounted for. They may have chosen not to webcast because even the $500 fee was too much; or maybe they ar webcasting, but just not complying with reporting requirements; or maybe they just don’t feel like webcasting, whatever the royalties might be. Still, it’s interesting to contemplate the possibility that noncommercial webcasters’ obligations to SoundExchange may turn out, in practical effect, to be limited to $500 per year per channel.

As a threshold matter, Judge Walton rejected efforts to have the complaint tossed on jurisdictional grounds. No problem there, said the Judge, the District Court does indeed have jurisdiction – that is, the necessary authority – to hear such constitutional challenges.

Having brushed that question to the side, the Judge charged on to the merits.

As we reported last September, Live365’s argument consisted of a two-prong attack based on Article II of the Constitution. That section refers to two separate types of “officers” of the U.S.:   “principal” officers and “inferior” officers. Under the Constitution, “principal” officers must be appointed by the President and confirmed by the Senate; “inferior” officers, on the other hand, are not subject to the President/Senate limitation, but they may be appointed only by either the President, the courts, or “heads of departments”. Live365 (and Judge Kavanaugh before it) doubted that CRB judges satisfied either set of criteria.

Live365 first argued that CRB judges are “principal” officers because:

• they function without any real supervision from the Librarian of Congress;
• they’re not subject to limitations to which “inferior” officers are (such as limited duties, limited jurisdiction, temporary tenure, ability to be removed from office);
• they’re not subject to performance appraisals from their superiors;
• they have the same powers and responsibilities as their predecessor body, the Copyright Royalty Tribunal, whose members were directly appointed by the President as “principal” officers.

The trouble is that, while all those factors might indeed support Live365’s wished-for conclusion, the Supreme Court has not yet adopted any “bright line” test in this area. Rather, the Supreme Court has thus far chosen a case-by-case approach, looking at the peculiar matrix of factors presented in each individual case. Taking his cue from the Supremes, Judge Walton did the same here.

And to Live365’s disappointment, he decided that the defendants had the better argument. In his view, CRB judges should be deemed “inferior” (but only in the best sense, of course), largely because:

• CRB judges receive direction and supervision from the Librarian of Congress and the Register of Copyrights, who can promulgate and enforce binding ethical rules;
• the Librarian of Congress and Register of Copyrights provide all the judges’ administrative resources  and assign other duties.
• the Register of Copyrights can review the CRB judges' decisions for “legal error”.

But even Judge Walton acknowledged that there is room for disagreement here. Noting Judge Kavanaugh’s “understandable” observations, Walton conceded that “[t]he current state of the law has essentially created a gray area”, thanks to “the limited guidance the Framers of the Constitution provide as to where ‘[t]he line between ‘inferior’ and ‘principal’ officers . . . should be drawn,’ and the Supreme Court’s refusal to ‘decide exactly where the line falls between the two types of officers.’”

Having satisfied himself that the CRB judges are “inferior officers”, the Judge next analyzed Live365’s claim that, as such, they miss the Constitutional boat because they aren’t appointed by either the President, a “Head of Department”, or a court, like the Constitution requires.   

CRB judges are appointed by the Librarian of Congress. In Live 365’s view, the Librarian of Congress isn’t a “Head of Department" because he’s really part of the Legislative, not Executive, Branch. Not a crazy argument, since the Librarian reports to Congress, portrays itself as part of Congress, and has, in other contexts, been deemed by the D.C. Circuit to be part of the Legislative Branch. Hey, he’s the Librarian of Congress, for crying out loud.

Judge Walton was not persuaded. Sure, the Library of Congress is treated as a component of the Legislative Branch in the U.S. Code, but the Librarian (according to Walton) functions as an Executive Branch head: the Librarian is appointed (and can be removed) by the President and is in no way limited by Congress or Members of Congress. Moreover, the Copyright Act, in creating the Librarian of Congress, vests the Librarian with the power to appoint several employees in the manner afforded to other Executive Branch heads.

In light of those factors, Judge Walton concluded that Live365 had “not met its burden of showing that there is a substantial likelihood that it will succeed on the merits of its alternative Appointments Clause challenge”. The emphasis on “substantial” was the Judge’s, not ours – from which a reader could reasonably conclude that the Judge might think that there was at least some possibility (although obviously not a “substantial likelihood”) that Live365’s argument might prevail. So perhaps hope should spring eternal. After all, the Judge was merely ruling on the “preliminary injunction” aspect of Live365’s request, i.e., the part in which Live365 asked the Judge to order the CRB to stop its proceedings pending resolution of Live365’s request for a permanent injunction.

In seeking a preliminary injunction, a party is expected to demonstrate not only that it is likely to succeed on the merits of its ultimate claim, but also that it will sustain “irreparable harm” if a preliminary injunction is not granted. On this point, Live365 argued that, if it were forced to participate in a CRB rate-making proceeding while Judge Walton pondered Live365’s request for a permanent injunction, Live365 would incur more than $1 million in costs. Unfortunately for Live365, mere monetary harm generally doesn’t rise to the level of “irreparable” in the world of preliminary injunctions. And what’s worse, Judge Walton found that the other side would be harmed if the preliminary injunction were to be granted. The “already-tight schedule” of the CRB proceeding would have to be further “compressed”, and recording artists would not get paid during this period, which could adversely (and possibly profoundly) affect their finances. The Judge also decided that the public interest would not be harmed if the webcasting case goes forward.  Bottom line: request for preliminary injunction denied.

So the CRB lives on to set rates, at least for the time being. Live365 may continue to press for a permanent injunction, although the short-term outlook there isn’t great in view of Judge Walton’s detailed, and unfavorable, analysis of Live365’s constitutional arguments. Still, that analysis did include the acknowledgement that the question is far from settled, and Live365 has the added comfort of knowing that, once it moves past Judge Walton, it will find itself in the D.C. Circuit, i.e., Judge Kavanaugh’s house. Since Live365 has a pretty good idea that that judge, at least, is likely to be sympathetic to its arguments, don’t be surprised if Live365 picks itself up off the canvas and keeps slugging to get to the next round.

We’ve written plenty about the challenge to the March 2, 2007 decision of the Copyright Royalty Board which instituted rates and terms to be paid to owners of sound recordings for the years 2006-2010, including the appeal of that decision by several sectors of the webcasting community to the United States Court of Appeals for the District of Columbia Circuit. 

Our most recent post on the topic summarized the opinion of the Court of Appeals that upheld most aspects of the CRB decision. The only aspect of that decision that the Court tossed back to the CRB: the annual minimum fee to be paid by both commercial and noncommercial webcasters. The Court of Appeals determined that the CRB had provided absolutely no justification supporting this amount. Why $500? Why not $100? Why not $250? The CRB’s inability to justify the $500 requirement violated the Administrative Procedure Act’s requirement that, at a minimum, a new rule have some factual or legal underpinning – i.e., it was not reached in an arbitrary or capricious manner. 

The Court sent the CRB back to the drawing board. On December 23, 2009, the CRB began sketching. It published a Notice of Proposed Rulemaking in which it proposes to require every commercial and noncommercial webcaster to pay an annual minimum fee of – you guessed it –$500 per channel. These webcasters will only pay more at such time as their cumulative webcasting royalties for the year exceed $500.  

Our conversations with clients lead us to believe that the $500 per channel annual minimum payment was one of the least controversial aspects of the March 2007 CRB decision. Most commercial webcasters are going to exceed $500 pretty quickly anyway, so this is merely a down payment applied to later royalty payments. The noncommercial webcasters view the $500 payment as minimally burdensome even if they never exceed the monthly allowed maximum of 159,140 aggregate tuning hours which triggers additional payments. 

As a result, we envision minimal objection or contrary suggestions and expect the $500 annual minimum payments to be reinstated as a matter of law in the near future. But if you do have strong feelings one way or the other, you can submit comments to the CRB by January 22, 2010.

Live365’s argument, which draws from the reasoning advanced in both of the earlier cases, goes something like this.

The Constitution (Article II, to be precise) permits the President to appoint “officers of the United States”, as long as such appointments are subject to the advice and consent of the Senate. The same provision also permits Congress to designate certain “inferior officers” who can be appointed without the one-two punch of presidential appointment and Senate confirmation – BUT the Constitutional power to appoint those “inferior officers” is limited to the President, the courts, and “heads of departments”.

So there appear to be two types of U.S. “officers” identified in the Constitution: those which we can call “principal officers”, requiring Presidential appointment and Senate confirmation; and those which the Constitution refers to as “inferior officers”. But the appointment process to which CRJs are subject does not satisfy the Constitutional criteria for either type. CRJs are appointed by the Librarian of Congress. They thus cannot be “principal officers”. And since the Librarian of Congress is not a “head of department”, so the argument goes, CRJs cannot be “inferior officers”, either.   Accordingly, CRJs cannot be deemed to be validly-appointed U.S. “officers”, and their actions – including, for example, orders establishing royalty schedules – must be deemed to have no lawful effect.

Based on this line of argument, the Live365 case will hinge on:

• Whether the Court agrees that the CRJs rise to the level of “officers” of either type; and
• The proper characterization of the Library of Congress is a “department” whose “head” (i.e., the Librarian of Congress) may be given the power to appoint “inferior officers” under Article II of the Constitution.

Live365's complaint also argues that, because there is a high likelihood that the Court will find the CRJs to be unconstitutional and without authority, the Court should immediately order the CRB to terminate the upcoming proceeding to set the rates for 2011-2015. According to Live365, that proceeding is “a costly, intensive, year-long proceeding that may later be deemed null and void by a judicial determination that the CRB was constituted and sat in contravention of the Appointments Clause [of Article II].” 

We think that Live365 makes a very good initial argument. But that’s easy to do in a complaint. So we’re really interested in seeing what the government argues in response – and whether the Court does, in fact, rule on the preliminary injunction before the parties in the webcasting proceeding must make their next filings (direct statements) on September 29, which kicks off the trial-related frenzy that is the next phase of the CRB proceeding.

March 2, 2007:  Copyright Royalty Judges (CRJs) reach a decision regarding the rates and terms applicable to digital performances of sound recordings and making ephemeral recordings for the years 2006-2010. (Rehearing was denied on April 16, 2007.)

April 26, 2007: The Internet Radio Equality, the first of several attempts to overturn the ruling by legislation, is introduced in the House of Representatives (neither this nor any ensuing bill is enacted into law). 

May 30, 2007:  Several webcasters appeal the CRJs' decision to the United States Court of Appeals for the District of Columbia Circuit; these are eventually consolidated into one case.

July 12, 2007: The Court of Appeals denies the webcasters' request to stay the implementation of the new rates and terms, as a result of which the new rates and terms go into effect on July 15, 2007. 

. . . LOTS of time passes . . .

January 15, 2009: The Corporation for Public Broadcasting and SoundExchange, Inc., reach a deal for payment of royalties by eligible public radio stations for the years 2006-2010. This moots any concern about the CRJs’ decision as far as parties to this deal are concerned.

February 16, 2009:  The National Association of Broadcasters and SoundExchange reach a similar deal covering over-the-air broadcasters for the years 2006-2015. This moots any concern about the CRJs’ decision as far as parties to this deal are concerned.

July 7, 2009:  So-called "pureplay" webcasters and Sound Exchange reach a deal for payment of royalties for the years 2006-2010 by these web-only radio stations. This moots any concern about the CRJs’ decision as far as parties to this deal are concerned.

. . . VERY LITTLE time passes . . .

July 10, 2009: The United States Court of Appeals issues its ruling in the appeal of the March 2, 2007 CRJs’ decision.

In other words, more than two years after the CRJs’ decision was issued, the Court finally got around to resolving the appeals – and only after virtually every one of the major parties affected by that decision had already taken matters into their own hands and reached private deals obviating the royalty payment structure established by the CRJs.

The Court of Appeals by and large ruled against the webcasting community, finding the majority of the CRJs’ decision to be valid under the Administrative Procedure Act.  The Court remanded one portion of the case to the Copyright Royalty Judges: the $500 annual minimum fee paid by both commercial and noncommercial webcasters. 

In a move that will be analyzed by close readers of this blog and constitutional scholars alike – and that's not to imply that these groups are mutually exclusive – the Court declined, for the second time in as many weeks, to rule on the constitutionality of the Copyright Royalty Judges themselves.

Let's start with what is easily the most interesting part of the case:  the claim by Royalty Logic, Inc. that the Copyright Royalty Judges themselves have been unconstitutionally appointed to their positions.  (FYI – Royalty Logic is a SoundExchange wannabe seeking to be designated as a "receiving agent" allowed to collect webcaster royalties and distribute them to the copyright owners.) 

Does that claim of unconstitutionality ring a bell?  Yeah, we discussed a similar claim last week, when Judge Kavanaugh raised the issue in his concurring opinion in an appeal of a separate CRJ royalty decision (involving satellite radio).  Judge Kavanaugh concluded that the CRJs “appear to be” "principal officers" of the government, whose appointment constitutionally requires Senate confirmation. Since CRJ appointments don’t include any Senate OK, then the current appointment mechanism is unconstitutional, he suggested.

Royalty Logic used a different tack, something along the following lines. The Constitution authorizes Congress to delegate the power to appoint “inferior officers”, but that power can be given only to the President, the courts, or “Heads of Departments”. Everyone agrees that: (a) CRJs – who are appointed by the Librarian of Congress – are “inferior officers”; and (b) the Librarian of Congress is neither the President nor a court. Royalty Logic argued that the Librarian was also not a “head of department” and, therefore, the CRJ appointments were unconstitutional. 

While that latter point was disputed by SoundExchange and the Department of Justice, the Court chose not to resolve the issue. Instead, the Court observed that Royalty Logic hadn’t bothered to raise the issue of constitutionality in its initial brief, and had thrown in the argument only as a supplement several months later. The Courts don’t look kindly on such piecemeal presentation, especially when the issue raised supplementally has potentially “far-reaching consequences” which should not be resolved on the basis of “hasty, inadequate, and untimely briefing”. So the Court politely declined to consider that question further.

Under either Judge Kavanaugh's or Royalty Logic's formulation of the constitutionality argument, the result is the same: the entire underpinning of the CRJs’ operation (including every rate they have set) is called into question.  But despite the seemingly crucial importance of this point, the Court chose not to resolve it in either the satellite case or the webcaster case.  

Having sidestepped the constitutionality conundrum, the Court methodically plowed through the substantive challenges to the CRJs' decision. The Court found in each instance that the CRJs had not exceeded their authority.  A reviewing court, in determining whether an agency has acted in an "arbitrary and capricious manner", generally accords a rather large degree of deference to the forum whose decision is being reviewed.  The Court applied that generous standard of review to the "willing buyer/willing seller" standard applicable to this statutory license in one magnificent summary: 

The statute does not require that the market assumed by the [CRJs] achieve metaphyiscal perfection in competitiveness.  

Given this wide and forgiving scope of statutory authority, the CRJs got it right, for the most part.  The lone exception was the annual minimum payment of $500 required to be paid per channel (or station) by commercial and noncommercial webcasters alike.  This figure – which actually serves as more of a "deposit" with regard to most commercial webcasters, who can count this against amounts paid throughout the year – was supposedly chosen as a reasonable reflection of the administrative costs incurred by SoundExchange in receiving and distributing the royalties incurred by each webcaster. 

However, after combing through the 13, 288 pages of testimony and 192 exhibits introduced through 39 witnesses over 48 days of trial, the Court found absolutely no evidence supporting this $500 annual minimum payment.  With regard to commercial stations, the imposition of this annual minimum payment without a cap on the overall stations to which it applies constituted an unexplained departure from two voluntary agreements that had been in place.  That, my friends, is the epitome of arbitrary and capricious. 

The Court remanded this issue to the CRB for further consideration.  We wonder whether proceedings will actually continue.  Not only are most of these matters already settled, but this is one area where most webcasters really haven't raised much of a complaint. It's been our experience that commercial webcasters invariably exceed that $500 figure anyway and – though this isn't to say they're happy with the amount or wouldn't mind paying less – most noncommercial webcasters pay their $ 500 per year and don't complain if it ends there.

If that's the case – and it's indeed the end to this case – was this decision ultimately nothing more than "too little, too late"?  Perhaps with respect to the narrow issue of webcast royalties, but obviously not with respect to the much more fundamental issue of the constitutionality of the CRJs. Having shone a bright light on that issue twice in two weeks, but having left it undecided, the Court has effectively invited future parties to litigate it properly. That’s when the fireworks may begin.

• Every pureplay webcaster must make a $25,000 annual minimum payment. This will serve as a deposit against the overall royalty payments for the year if the overall number exceeds $25,000.
   
• Webcasters are divided into three groups for purposes of calculating overall royalty payments: 

• Large Webcasters
  • These are defined as entities with at least $1.25 million in annual revenues
     
  • “Large” webcasters must pay the greater of: 

• 25% of total revenues; or
   
• a “per performance” rate that is about half of that established by the March, 2007 CRB decision.  (For instance, under the settlement the 2009 rate is $0.0093 per song per listener, while the rate set in the March, 2007 CRB decision is $0.0018 per song per listener.)
   
• “Large” webcasters must submit “census” filings of playlist reports. These monthly filings consist of information about every song played as opposed to quarterly reports of songs played during two seven-day periods during the quarter.  These reports must be retained for at least four years
   
• Small Webcasters
  • These are defined as entities with: 

• Less than $1.25 million in annual revenues; and
   
• Less than the maximum allowable "aggregate tuning hours" in the year (which ranges from 8 million to 10 million ATH, depending on the year)
   
• “Small” webcasters must pay the greater of: 

• A percentage of revenues, calculated as follows:
   
  • 2006-2008: 10% of the first $250,000 in revenues and  12 percent for $ 250,000-$ 1, 249,999
     
  • 2009-2015: 12% of the first $250,000 in revenues and 14 percent for $250,000-$1,249,999;

OR

• 7% of expenses
   
• “Small” webcasters must submit “census” filings of playlist reports. These monthly filings consist of information about every song played as opposed to quarterly reports of songs played during two seven-day periods during the quarter.  These must be retained for at least four years.  But small webcasters can pay a proxy fee in exchange for relaxed reporting requirements.

• Pureplay Webcasters who also Offer Subscription Services
  • These are webcasters that offer some form of syndicated or subscription service in addition to a straight music stream.
     
  • They must pay the same rate as paid by broadcasters participating in the SoundExchange/NAB deal.

SoundExchange is pitching this “discounted” rate structure as an experiment. According to SoundExchange, “Time will tell if revenue sharing is the right move for both the recording community and webcasters, but we’re willing to take the risk in the hope that artists, rights holders and webcasters can all benefit.” But then again, SoundExchange maintains that the original rates were fair.

Reviews from the webcaster side are mixed. Pandora founder Tim Westergren calls the new rates “quite high”, but envisions that heavy users of his site will bear the brunt of the cost.  He surmises that free users of Pandora might find themselves limited to 40 free hours per month, with an “opt-in” fee of 99 cents if the user exceeds that limit.  (He notes that that would give the listener unlimited music for an entire month for the same amount he/she would pay for a single song download.)

The settlement will become effective 30 days after it is published in the Federal Register.

On the issue of royalties for the ephemeral recording which is a component of satellite delivery, though, the Court remanded the case back to the CRJ for further consideration.  All parties – including, curiously enough, the Librarian of Congress – agreed that the CRJ had messed up on that point.  In addressing the rate for ephemeral royalties, the CRJ had essentially punted, concluding that such ephemeral recordings are of little value and, therefore, do not warrant a separate rate.  The CRJ announced that, rather than set a separate rate for ephemeral recordings, it would simply treat that rate as “embodied” in the performance rate.  Since the ephemeral recording rate is specifically mandated by one section of the Copyright Act while performance rates are mandated by another, it was pretty clear that the CRJ’s short-cut would not withstand scrutiny – and it didn’t.  (Even the Librarian of Congress agreed on this point.)

The parties did disagree on what the Court should do about ephemeral rates.  The Librarian of Congress argued that that issue should be sent back down to the CRJ so that it could take another crack.  On the other hand, the adverse private parties – i.e., SoundExchange and Sirius/XM – both asked the Court not to remand; they were all for having the Court set the ephemeral rate itself. The Court declined to take that particular bait, however – it remanded the ephemeral recording rate question back to the CRJ for further consideration.

The majority decision is not particularly groundbreaking, but the concurring opinion of Judge Kavanaugh is a real eye-opener.  He raises the startling point that the CRB is unconstitutional because (among other factors) of the novel selection process for its members -- the CRJ --  which does not include either appointment by the Prez or Senate confirmation.  And even more startling, despite his apparent conclusion that it’s unconstitutional, he concludes that, since no party raised that issue, the Court does not need to address it.  While there is a conventional judicial doctrine of avoiding constitutional questions where possible, it’s a little surprising that Judge Kavanaugh was content to take that path here.  After all, the Court ends up remanding the matter to the body that is, or may be, unconstitutional.  You might think that, before it ships the issues and the parties back to a particular forum, the Court would want to satisfy itself that that forum is constitutionally valid.  Apparently not.

If nothing else, Judge Kavanaugh’s opinion casts a dark cloud over any decision coming out of the CRJ unless and until the question of the constitutionality of the CRB/CRJ arrangement is resolved.  So while this latest Court decision does not itself directly affect broadcasters, it may provide ammunition for broadcasters finding themselves on the wrong side of a CRJ ruling.