But Sirius XM, which succeeded before the CRB, may not be happy that its victory was upheld.

When it comes to setting copyright royalty rates, the Copyright Royalty Board (CRB) enjoys considerable leeway. Just ask the U.S. Court of Appeals for the District of Columbia Circuit.

In an across-the-board victory for the CRB, the Court has upheld the CRB’s final 2013 ruling determining royalty rates for the Satellite Digital Audio Radio Service (SDARS, a service with only one operator, Sirius XM) and Pre-existing Subscription Services (PSS) (e.g., the appellant in this case, Music Choice). While the particular rates at issue in the appeal are probably not of much direct interest to most of our readers, a couple of aspects of the Court’s opinion could come into play when the CRB eventually resolves “Webcasting IV”. That’s the proceeding that will establish rates and terms for webcasting by radio stations and other non-interactive services for the years 2016-2020.

First, there’s the question of how the CRB reaches a particular royalty rate. If the affected parties (i.e., service providers and copyright owners) can’t come to mutually agreeable terms, the question goes to the CRB, which conducts a trial-type proceeding. The interested parties propose rates, or rate ranges, and then offer evidence to support their respective proposals. Each side gets to challenge the other’s evidence. In the end, the CRB reviews all the evidence and comes up with rates to apply over the coming five-year term.

For the period ending 2012, Sirius XM was paying 8% of its gross revenues under the then-operative CRB rates; the corresponding rate for PSS operators was 7.5% of gross revenues. SoundExchange, representing copyright holders, wanted both numbers to go up … a lot. It proposed that SDARS rates jump to 12% in 2013 and then continue to climb to 20% by 2017. SoundExchange had even more extravagant ideas for PSS rates: in its view the current rate should be doubled to 15% for 2013 and then proceed upward to a whopping 45% of gross revenues in 2017. Not surprisingly, Sirius XM and Music Choice disagreed. Both wanted their respective rates to be reduced below 2012 levels: Sirius XM was thinking of SDARS rates down in the 5%-7% range, and Music Choice was thinking even smaller, proposing 2.6% on the PSS side.

Faced with the wide gulf between the various proposals, the CRB reviewed the evidence and concluded that the SDARS rate should start at 9% in 2013 and then proceed upward in annual 0.5%  steps until it reaches 11% in 2017. On the PSS side, the CRB concluded that the 2013 rate should be 8%, rising to 8.5% for 2014-2017. In taking this route, the CRB rejected both sets of proposed rates and instead opted to use the current 2012 rates as “guideposts” for future rates. In the SDARS context, it also looked at its own deliberations in the previous rate setting proceeding (covering 2005-2012), in which the CRB had concluded that 13% was an upper limit for SDARS rates. 

Needless to say, SoundExchange wasn’t pleased on either the SDARS or the PSS front, and Music Choice was none too pleased, either. (Sirius XM appears to have been OK with the CRB’s SDARS rates.) Both SoundExchange and Music Choice challenged the CRB both on its reliance supposedly outdated “guideposts” and on its refusal to accept the parties’ proposals. The Court, however, had no problem with the CRB’s approach. As the Court saw it, the CRB is entitled to a boatload of deference when it comes to rate-setting, and the CRB’s approach in this proceeding was well within the bounds of the discretion accorded it by Congress.

This is important to keep in mind when it comes to Webcasting IV. While we can expect SoundExchange to propose significant increases in rates there, it should be comforting to know that: (a) the CRB does have a history of preferring more gradual step-ups tied at least in part to existing rates; and (b) the Court is fine with that approach. In other words, if the CRB in Webcasting IV finds itself in the same situation as in the SDARS/PSS proceeding, with wildly varying proposed rates, the CRB may very well take a more measured, split-the-baby course. And if it does so, there’s a reasonably good chance that it will be upheld.

The second interesting point involved the definition of “gross revenues”. Obviously, that term – the second half of the rate calculation – is as important as the percentages to be applied. And since the dispute about that definition involved (among other things) questions relating to pre-1972 sound recordings – a hot issue of late, as CommLawBlog readers know – the Court’s decision deserves attention.

The CRB had agreed to let Sirius XM deduct from its “gross revenues” revenue attributable to the performance of pre-1972 sound recordings because, as we all know by now, there is no federal public performance copyright protection for such recordings. In response, SoundExchange claimed that that deduction amounted to “double deducting”. Since, unlike the feds, some states do provide performance copyright protection for pre-1972 recordings, SoundExchange offered two alternative analyses. In states which do not offer such protection, according to SoundExchange, the CRB’s established benchmark rates already reflect the “diminished value” of these recordings, which means that a CRB-approved deduction would be a double-dip. And in the other states, there is no need for any such deduction, at least as SoundExchange sees it.

The Court wasn’t buying any of it. It agreed with the CRB that there was plenty of evidence indicating that the benchmark rates do not already reflect the value of pre-1972 recordings. And the Court also concluded that there’s nothing in the Copyright Act concerning the effect of state-imposed copyright protection, so that factor need not be considered by the CRB in its rate-setting.

In the course of this discussion, the D.C. Circuit noted (in agreement with the CRB) that there is no federal copyright protection for pre-1972 sound recordings. While that may be reassuring on some level, it is no cause for celebration: as I have reported, three courts in California and New York have indicated that state laws creating certain copyright protection for these pre-1972 sound recordings extend to the public performance right. (In all three of those suits Sirius XM was the loser.) It’s at least possible that the D.C. Circuit’s ruling prominent reminder of the non-existence of federal protection might hasten similar lawsuits at the state level – with similar results. It might even spawn a movement to legislatively expand state law protection for pre-1972 sound recordings. Or it might give rise to efforts to work a legislative fix at the federal level – and who knows what Congress might also choose to include (hint, hint: other Performance Rights?).

And if any (or all) of those circumstances do unfold, that could be bad news for Sirius XM, which has thus far enjoyed a largely royalty-free ride when it comes to pre-1972 recordings. So, even though it was the only party that didn’t disagree with the CRB’s ruling, Sirius XM’s victory on the issue of how to calculate gross revenues could turn out to be pyrrhic for Sirius XM and unfortunate for others.