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

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.

The reporting rules are part of the system established by the CRB for assuring collection and payment of appropriate royalties to copyright holders. Using webcaster-supplied playlists reflecting the frequency with which songs are played on the web, SoundExchange can fairly distribute the royalties it collects. When the CRB first finalized the playlist reporting requirements in 2006, all webcasters were required to file quarterly reports with SoundExchange listing every song played by the webcaster during two seven day periods in that quarter. In December 2008, the CRB proposed to change those quarterly filings to “census” filings – i.e., monthly filings containing information about every song played during the month. The recently-published rules formally adopt that census filing approach.

Under the “new” rules,  census reporting – that is, reporting within 45 days of the end of each month the required information about all songs played during that month – is required for all webcasters except

• broadcasters simulcasting an over-the-air broadcast on the Internet which have such a small listenership that they do not exceed the $500 annual minimum payment per year (in other words, any very small commercial webcasters and noncommercial webcasters that do not exceed 159,140 aggregate tuning hours in any month); and
• preexisting satellite digital audio radio services, new subscription services or business establishment services who cannot accurately measure listenership for technological reasons. (These folks must still report their playlists, but can do so on a modified “aggregate tuning hour” basis.)

Of course webcasters who elected to participate in one of the several settlement agreements reached in the past couple of years are bound by the playlist reporting requirements in the applicable agreement. These webcasters should review their particular settlement agreement, and let us know if you have any questions about your reporting requirements.

The song-related information which must be filed has not markedly changed, though there is one key exception applicable to broadcasters. The reportable information still consists of:

• The name of the webcasting service
• The category transmission code, although this has changed slightly, with broadcasters now using one of the following category codes:
  • Eligible nonsubscription transmissions of broadcast simulcast programming not reasonably classified as news, talk, sports or business programming (essentially, simulcast of a broadcast station’s music programming);
  • Eligible nonsubscription transmissions of non-music programming reasonably classified as news, talk, sports or business programming (essentially, a broadcast station’s news, talk, sports or business programming); and
  • Transmissions of broadcast simulcast programming not reasonably classified as news, talk, sports or business programming made by an eligible new subscription service (this category involves subscription-only simulcast of music programming by a broadcast station)
• The featured artists
• The sound recording title
• The International Standard Recording Code, or a combination of (a) album title and (b) marketing label
• Actual total performances of the song, or a combination of (a) aggregate tuning hours and (b) channel or program name and (c) number of times the song was played during the relevant period

For the last category (actual total performances of the song or the listed combination), the “combination” alternative is applicable only to a preexisting satellite digital audio radio service, a new subscription service, a business establishment service and broadcasters who do not exceed the annual minimum payment required for a given channel (currently $500). 

The new rules have been purged of unnecessary references to prior license terms, obsolete categories (e.g., “small webcaster”) and the like. And illustrating the March of Technology, the CRB has deleted the option of filing the reports on floppy diskettes.

Notably, the Copyright Royalty Board did not adopt the following proposed changes: 

• Any form of “proxy fee” or other exemption from filing altogether, even for the smallest webcasters;
• Imposition of a late fee for tardy or non-filed playlist reports; or
• An exemption from playlist reporting of songs played during syndicated radio programming

While we have focused here on the applicability of these rules to broadcasters who are also webcasting, a section of the newly final rules applies slightly different standards to “preexisting subscription services”. Please contact us if you believe you qualify as a “preexisting subscription service” and require guidance as to how the new rules apply to you. 

Again, the CRB’s changes go into effect on November 12, 2009.

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.

Recall that, for webcasting royalty purposes, the term “noncommercial” is defined by tax code (Section 501) considerations, not by the conventional FCC definition of the term. That is, a noncommercial webcaster is an entity which either (a) is already tax-exempt under Section 501 or (b) has applied for tax-exempt status or (c) is a government entity acting within its public purpose. As a general default matter, noncommercial webcasters must comply with the royalty rates set out in the March 2, 2007 decision of the Copyright Royalty Board (CRB) and other applicable regulations, which require:

a $500 annual minimum fee per channel (though a recent Court of Appeals decision has raised questions about the continued validity of this fee);

commercial per performance rates, for listenership above 159,140 aggregate tuning hours in any given month (about 220 simultaneous listeners at every moment in the month);

reporting of information about all songs played for two seven-day periods per quarter

compliance with the "performance complement" elements of the statutory license limiting, among other things, the number of songs played from the same album or artists in a given time period.

Noncommercial entities can avoid these default requirements in a variety of ways. For example, some entities are covered by the agreement (which was recently extended) between SoundExchange and the Corporation for Public Broadcasting. 

The two new agreements now provide still more ways of opting out of the default CRB regs. Here is how those new agreements work.

The General Agreement

The General Agreement is available to any noncommercial webcaster, not covered by the CPB/SoundExchange agreement, which simulcasts an over-the-air signal (though it can also have other streams). The terms of the General Agreement apply to the years 2006-2015.

To take advantage of the General Agreement, the eligible noncommercial webcaster must file a notice of election by September 15, 2009 or within 30 days of commencing webcasting, whichever is later. (The notice forms are available on the SoundExchange website.)This will cover the webcaster for every subsequent year unless the webcaster revokes its participation by January 31 in any future year. The noncommercial webcaster must also make good on all unpaid royalties owed for the period 2006-2009 before September 15, 2009. 

The General Agreement calls for participating noncommercial webcasters to pay only a $500 annual minimum fee per channel by January 31 of each year as long as the webcaster does not exceed 159,140 aggregate tuning hours (ATH) in a given month. This is essentially the same requirement imposed by the CRB default regs, except that under the new General Agreement the webcaster must file a Statement of Account each month, whether or not it exceeds the ATH max.

However, if the webcaster exceeds 159,140 ATH, it must pay royalties at the following rates and time periods:

2006-10:    $0.0002176 per performance or $0.00251 per ATH for a music channel or $0.0002 per ATH for news/talk/business/sports channels)

2011:         $0.00057 per performance

2012:         $0.00067 per performance

2013:         $0.00073 per performance

2014:         $0.00077 per performance

2015:         $0.00083 per performance

(For comparison purposes, the CRB-imposed per performance rates range from $0.0008 to $0.00019 over the period 2006-2010. No CRB rates have been set for 2011-2015.)

Royalties for the excess transmissions can be calculated on the ATH basis by multiplying twelve songs per hour (a permitted approximation) by the number of listeners in each hour. 

The General Agreement imposes reporting requirements on participating webcasters. Specifically, they must file quarterly reports (due within 45 days of the end of each quarter) listing all songs played during two seven-day periods during the quarter. While a similar reporting obligation was previously in place, the new deal permits webcasters to report simply the number of times each song was played and the number of listeners per hour, rather than the specific number of listeners for each song.

During the period 2011-2015, if the webcaster exceeds a monthly average 159, 140 aggregate tuning hours in any given year, it must engage in “census reporting” for the entire following year. That means that it will have to report every song played during the year – although the ATH reporting method (i.e., number of times each song is played, along with the total number of listeners per hour) can be used instead of the more specific (and onerous) reporting of the number of listeners to each particular song.

Additionally, if a webcaster certifies that it had fewer than 44,000 ATH in the previous year (about five-six simultaneous listeners at every moment in the year) and that it reasonably expects to stay below that number in the coming year, it can avoid the reporting requirement altogether by filing a $100 “proxy fee”.  This certification must be made by September 15, 2009 or within 30 days of commencing webcasting, whichever is later, and again by January 31 of every year in which the webcaster is eligible for, and chooses, this “microcaster” status. The noncommercial webcaster can exceed the 44,000 ATH level one year in this time period and still retain this "microcaster" status as long as it implements technological measures to ensure it does not exceed the limit again. 

Noncommercial Educational Webcasters

Any noncommercial educational webcaster not covered by the CPB/SoundExchange agreement can choose to be covered by the terms of this second new agreement for the years 2011-2015 (or, for reporting purposes only, 2009-2010 as well). To be eligible, the noncommercial webcaster must: (a) be directly operated by, or affiliated with and officially sanctioned by, a domestically-accredited primary or secondary school, college, university or other post-secondary degree granting institution; (b) staff its webcasting operations substantially by students; and (c) not have exceeded 159,140 ATH in any month during the preceding year.

To take advantage of the educational webcaster agreement, a noncommercial educational webcaster must elect this status by January 31 of EACH YEAR or 45 days after the end of the month in which it begins webcasting operations, whichever is later. In other words, this does not automatically renew, unlike the General Agreement). 

Any noncommercial educational webcaster choosing to participate in this agreement must pay a $500 annual minimum fee per channel by January 31 of each year.  

If an educational webcaster exceeds 159,140 aggregate tuning hours in a given month, then the overage will be subject to the following royalty rates, depending on the year in which the overage occurs:

2006-10:    The current CRB-mandated commercial rates

2011:         $ 0.0017 per performance

2012:         $0.0020 per performance

2013:         $0.0022 per performance

2014:         $0.0023 per performance

2015:         $0.0025 per performance

In the event that the 159,140 ATH level is exceeded, royalties can be calculated on the ATH basis by multiplying twelve songs per hour (a permitted approximation) by the number of listeners in each hour.

The educational webcasting agreement imposes reporting requirements on participating webcasters. Specifically, they must file quarterly reports (due within 45 days of the end of each quarter) listing all songs played during two seven-day periods during the quarter. While a similar reporting obligation was previously in place, the new deal permits webcasters to report simply the number of times each song was played and the number of listeners per hour, rather than the specific number of listeners for each song.

If a webcaster certifies that it had fewer than 55,000 ATH for all but one month in the previous year (that would amount to about 75 simultaneous listeners at every moment in the month) and that it reasonably expects to stay below that number in the coming year, it can avoid the reporting requirement by filing a $100 “proxy fee”.  (The educational webcaster may exceed the limit for one month, once, without losing its eligibility as an “educational webcaster” as long as it implements certain technical measures to ensure compliance going forward.) This alternative to the reporting requirement is available not only for 2011-2015, but also for 2009-2010. A webcaster choosing the option for 2009-2010 should file the required certification along with the $500 annual minimum fee due January 31, 2010.

If an educational webcaster exceeds 159,140 average monthly ATH in a given year, then for the entire following year it must engage in “census reporting”, i.e., every song played during the year (but it can simply report the number of times the song was performed, rather than the full listenership for each performance).

Finally, every noncommercial educational webcaster must keep, for a period of at least three calendar years, "server logs sufficient to substantiate all information relevant to eligibility, rate calculation and reporting". So hastily deleting files to save server space may cost you more in the end.

That’s right.  SoundExchange, representing the holders of performance copyrights (held by artists, record labels and others), has announced that it has agreed to terms governing the payment of royalties by four more groups of webcasters.   Despite the plethora of earlier settlement agreements, there remained one category of folks not covered by any royalty agreement: noncommercial entities with FCC licenses that are not part of the public radio system. 

The good news is that, with the completion of the settlement agreements recently announced by SoundExchange, most of these should now be covered in one of the agreements summarized below. 

We won’t have the final details until the full terms of each settlement are published in the Federal Register.   (Note: The agreements won’t become effective until 30 days following Federal Register publication.)  Still, from the information that SoundExchange has released, we know the following.

Religious and Non-Commercial Webcasters

A large subset of “noncommercial entities with FCC licenses that are not part of the public radio system” consists of religious broadcasters. To those of you in that group we say: your prayers have been answered. 

According to the press release issued by SoundExchange, an agreement was reached with the National Religious Broadcasters Music Committee governing royalty rates for the years 2006-2015. 

Webcasters choosing to participate will pay a per performance rate that begins slightly lower than those set by the CRB but will increase through the term.  Fees will be calculated by multiplying the applicable annual royalty rate times the number of songs played times the number of listeners.  “Small stations” – not defined in the press release – may be able to pay a “proxy fee” (as do small commercial broadcasters) to avoid filing records containing information of all songs played. 

This agreement establishes rates through 2015.  In other words, it supplants not only the rates which the CRB set in March, 2007, but also those that the CRB still has under consideration for upcoming years.

College Radio

Many, though not all, college broadcasters also fall into the population of “noncommercial entities with FCC licenses that are not part of the public radio system”.  To those of you in that group we say: it’s time to graduate to a new royalty scheme.

These folks will pay an annual set fee of $500.00 as long as they do not exceed 159,140 “aggregate tuning hours” in a given month.  (If they exceed that ATH level, they will be subject to the royalty scheme set up for commercial per-performance rates in the agreement between SoundExchange and the National Association of Broadcasters earlier this year.)  

Sound Exchange’s press release on this agreement indicates that “college stations and other noncommercial educational webcasters” will pay only a minimum annual fee and will have relaxed recordkeeping requirements. 

XM-Sirius

Thought this one was already resolved, did you? Well, we discussed the rates paid by XM-Sirius a few weeks ago, but that was for the performance of the sound recordings via their satellite feed. This one is for performance via their website.

Again, all we have to work from is a barebones press release, but the terms appear to involve payment on a per performance basis through 2015, though the specific rate has not yet been publicly disclosed.

The Mysterious Fourth Agreement???

While SoundExchange reported that a total of four new agreements had been reached, it didn’t release any details about the final agreement.   Why the mystery?  Who knows?  It could be that this last agreement is the coolest of them all.  We’ll just have to wait and see.

You can be sure that we’ll pass on the full details of each agreement – including who is eligible for which agreements and what steps those eligible parties must take to participate – when publication in the Federal Register occurs.  Once that happens, we’ll also be in a position to update the step-by-step guide to webcasting royalties (which we posted several months ago) to include a breakdown of the latest agreements. Check back here at www.CommLawBlog.com for more information as it comes available.

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.

The CRB received 43 comments in response to its initial proposal to increase the two-seven-day-per-quarter filing requirement to full "census" reporting.  These comments could be divided into four basic categories: 

• Copyright Owners  (including SoundExchange) who support the move to census reporting as a means of accurately distributing copyright royalty payments. 
   
• Educational and Commercial Radio broadcasters who oppose the proposed change as unduly burdensome, if not impossible.  
  
  
  • Some comments stated outright that increased reporting requirements would result in the commenter ceasing its webcasting altogether, due to a lack of "finances, staff' and technology" to engage in monthly reporting. 
     
  • Other comments noted the particular hurdle facing educational broadcasters, many of whom still allow disc jockeys to freely choose their songs rather than relying on an automated playlist.  These commenters urged the CRB to exempt from any increased reporting requirement those educational broadcasters who pay only the $ 500 annual minimum royalty fee per channel and never exceed the 159,140 aggregate tuning hour maxiumum in a given month.
     
• A Service that Simulcasts the Over-the-Air Broadcasts of Mainly Noncommercial Stations on the Internet
  
• Commercial Providers of Software that Allows Radio Stations and Webcasters to Automate Their Playlist Reporting, two of whom opposthe increased census reporting because of concerns over cost and technology burdens.

The Notice of Inquiry hones in on this particular issue of cost and administrative burden.  Noting that the Copyright Act requires the CRB to establish a method of notifying copyright owners that their sound recordings are being publicly performed under the statutory license, the Notice of Inquiry provides only two alternatives:  the current quarterly reporting requirement and the proposed monthly requirement.  In addition to seeking suggestions as to a possible third alternative that can be both informative and cost-effective, it also asks the following questions (among others): 

• How many small webcasting entities will be adversely impacted by the proposed monthly census reporting? 
   
• What percentage of broadcasters use automated playlists?  What is the cost of preparing a report using the automated playlist and how would that cost increase if census reporting is instituted? For those not using automated playlists, how are reports generated and filed?
   
• Specific to SoundExchange: 
  
  
  • What is the current methodology used to allocate and distribute royalties to copyright owners? 
  • How would that methodology change with census reporting and, in particular,  how would it increase accurate and efficient royalty distribution?
  • What cost savings or additional burdens can copyright owners expect through census reporting?
     
• Who, if anyone, should be exempted from the proposed census reporting?   Possibilities include:
   
  • A revenue-based cut-off (with comment sought on the proper amount for the cut-off)
  • Strictly along the lines of the royalties paid (such as those who do not exceed the $ 500 annual minimum payment)
  • Commercial  vs. Noncommercial
  • Based on the webcaster's physical size or number of employees

We're assuming that the NAB will again file comments on behalf of broadcasters, but you should feel free to provide your tales of horror and woe (or any other information) to the CRB in written comments due May 26, 2009, with reply comments due on June 8, 2009.