Posted on February 9, 2012 by David Oxenford

Constitutionality of Copyright Royalty Board Argued Before the US Court of Appeals - How Will It Affect Future Music Royalty Rate-Setting?

The Copyright Royalty Board makes many important decisions, yet for the last several years, there has been a cloud over its operations, as there have been questions as to whether its members were constitutionally appointed (see our articles here, here and here). Well, the question is before the Courts again – this time squarely in front of the US Court of Appeals for the District of Columbia – a Court one step below the Supreme Court. The Copyright Royalty Board sets the royalty rates to be paid by Internet radio stations for the public performance of sound recordings, and in doing so, they have made some controversial decisions over the last few years. They also set royalties for other digital non-interactive music services, including Sirius XM, music services that come with cable and satellite television services, and background music services. The Board also oversees the distribution of funds that are collected for the retransmission of distant television signals by cable systems. It also sets the rates under Section 115 of the Copyright Act for the reproductions of musical compositions made by record companies when producing musical recordings or downloads, by digital music companies in connection with on-demand music services, and by wireless carriers in selling ringtones. 

The case before the Court involves a seemingly small matter – the appeal of Intercollegiate Broadcasting Services from the CRB decision setting default rates for Internet radio services that are not covered by one of the many Webcaster Settlement Act agreements (about which we wrote here and here). IBS essentially is objecting to the fact that the Board would not lower the annual minimum royalty fee paid by some of IBS’ smaller members below $500. But, in connection with its appeal, IBS raised the issue of the constitutionality of the appointment of the Judges, and the Court this week heard an oral argument on the issue – mentioning the rate questions only in passing while concentrating on the constitutionality of the appointment of the Judges.

The constitutional issue is a complex one, involving the Appointments Clause of the Constitution, i.e. who can appoint government officials. “Principal Officers” of the United States have to be appointed by the President, while inferior officers can be appointed by the head of an executive department. Without going into the depths of the constitutional issues under consideration, there was much debate about whether the Copyright Royalty Judges (“CRJs”), who are appointed by the Librarian of Congress, are principal or inferior officers. And there was even some discussion of whether the Librarian is a head of an executive department, as the Library of Congress is theoretically part of the Congress – the legislative not the executive branch of government.

The argument also spent a significant amount of time discussing what would happen if the Court decided that the CRJ’s were in fact unconstitutionally appointed. As the Chief Judge asked, if the Court was to decide that the Judge’s appointment was unconstitutional, what would be the “least bad” remedy that they could order. In other words, they were looking to see what remedy they could order that was least disruptive to Copyright law. The discussion offered all sorts of alternatives – from ones where the Court could just decide that a very limited section of the law was unconstitutional and strike just those sections (e.g., the sections forbidding the Librarian from removing the Judges except for cause, or the section limiting the Copyright Office’s review of any final CRJ decision to an advisory one for future cases, not a binding review of the present case – attempts to make the Judges into inferior officers who could properly be appointed by someone other than the President), to the possibility that the CRJs appointment could simply be voided, leaving to Congress the question of what to do next. There did not seem to be any debate as to whether prior decisions of the CRJs, that were no longer under appeal, would remain binding on the parties to which they apply (e.g. rates already set would remain in place and binding).

One interesting aspect of the argument on potential remedies what the argument of counsel for SoundExchange who contended that any decision that the Court makes should be as limited as possible, as a decision overturning the CRB system would create “chaos”  as the statutory royalty is crucial to the effective functioning of the webcasting marketplace. This is interesting as SoundExchange, in CRB proceedings, always contends that the royalty is something that is forced on them and their members, and not something that they believe is necessary.

Look for a decision on this case in the next few months, which may help to once and for all resolve the question of the constitutionality of the CRB. Given that the CRJs are currently considering new royalties for satellite radio and new rates under Section 115, this is an important decision that could have important ramifications for many segments of the digital music industry and for Copyright law more generally. 
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Posted on June 25, 2008 by David Oxenford

Yes We Do Exist - Claims Copyright Royalty Board

We recently wrote about the challenge to appointment of the Copyright Royalty Board's judges filed by Royalty Logic as part of the appeal of the Board's decision on Internet Radio royalties.  Royalty Logic argued that the appointment of the Copyright Royalty Judges was improper, as the Librarian of Congress was not the "head of a department" who can appoint lesser government officials under the Appointments Clause of the Constitution.  Thus, Royalty Logic contends that the decision reached by the Board as to Internet radio royalties was a nullity, as the Board effectively does not legally exist.  Earlier this week, the Board and SoundExchange filed their replies to the Royalty Logic motion, arguing that, in fact, the Librarian is the head of a department, as he is appointed by the President and approved by Congress and runs a government "department," i.e. the Library of Congress, of which the Copyright Office is a part.  In demonstrating that the Library is a department, the briefs reach back to the creation of the Library by Thomas Jefferson, and look at the legislative history of legislation modifying the powers of the Library and the process for the appointment of the Librarian - legislation passed in 1870 and 1897.  Essentially, the very technical argument about why the Board was not properly constituted was met with an equally technical one that says it was properly formed.  Clearly, arguments only lawyers could love.

While Royalty Logic will have the opportunity to respond, the litigation process continues on the main portion of the appeal, as SoundExchange filed its intervenor's brief the week before last, defending the decision of the Copyright Royalty Board.  In one notable departure, SoundExchange, while contending that the Board was correct in determining the minimum fees that would be required of webcasters, it said that, because of the agreement that it reached with certain webcasters that would cap minimum fees at $50,000  no matter how many channels a service might have (see our discussion of the agreement here), it asked that the Court remand that one limited matter back to the Board for adoption of the limitation on minimum fees so that it would apply to all webcasters and not just those who signed the agreement.  In all other respects, SoundExchange opposed the briefs of the webcasters.

Thus, almost one full year after the royalties were made effective, those royalties continue in place.  This week, we saw the second major webcaster pull the plug on its Internet Radio operations.  AOL months ago agree to allow CBS to run its Internet Radio operations, and now Microsoft's MSN service has now announced that it is terminating its Internet radio service which had been powered by Pandora.  Spokesman for Pandora itself have stated that the royalties don't allow for its business model to succeed (despite reported revenues of $25 million).   The Small Commercial Webcasters that I have represented in the case still have reached no settlement in the case, and other small webcasters only exist because of a special rate unilaterally offered by SoundExchange, even though it has a number of limitations and problems (see our post here).  While SoundExchange has claimed that the rate arrived at last year is fair and that the industry is growing even with the rate, who is paying it other than a few broadcasters who can run the service has an adjunct to their broadcast service as more or less a loss leader?  And what will happen when the rates rise by another 20% next year?  These practical questions remain as the appeal process moves slowly forward.
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Posted on June 1, 2008 by David Oxenford

Does the Copyright Royalty Board Exist - Internet Radio Appeal Proceeds and New Issues Arise

The appeals of last year's Copyright Royalty Board decision on the royalties paid for the use of sound recordings by Internet radio stations continue on, and one recent filing raises interesting questions of whether or not the CRB was properly appointed.  Last week, the Department of Justice, which represents the CRB in defending its decision in the Court of Appeals, filed its brief in opposition to the briefs of the webcasters, which we summarized here.  The DOJ brief essentially argued that the webcasters' briefs were insufficient to satisfy the requirement for a successful appeal - that the CRB decision was arbitrary and capricious or otherwise contrary to law.  Essentially, a Court need not revisit the decision and substitute its judgment as to whether the it believes that the decision was correct, but instead, to overturn a decision, the Court must find that the CRB (the expert agency) either violated the law or could not, on the fact, have logically come up with the decision that it did.  Thus, the DOJ brief made arguments that there was enough factual evidence for the CRB to decide in the way that it did, and made arguments that the webcasters had not offered contrary arguments or evidence on certain points during the CRB proceeding and were therefore barred from raising those arguments now.  Just before the DOJ brief was filed, another pleading raised the fundamental question of whether the Copyright Royalty Board was properly appointed and, if not, whether it has the constitutional authority to decide the cases that it has been considering.

This new argument about the CRB’s authority comes in a request filed with the Court of Appeals by Royalty Logic, a party to the CRB proceeding.  Royalty Logic is not a webcaster, but instead is seeking to be an alternative collection agency to SoundExchange.  Its pleading seeks supplemental briefing on the question of whether the Copyright Royalty Judges are “inferior officers” of the Federal government who, under the Constitution, can only be appointed by the President, by the Courts or by the head of a Department of the government. In a recent Supreme Court case, the Court found that certain tax court judges, who were appointed by a chief judge and not by a cabinet-level officer (the head of a “department”) violated this Appointments Clause of the Constitution. There has been much press coverage in the past few weeks as to whether this decision also applies to patent judges, and whether it could invalidate hundreds of patents approved by these judges (see the NY Times article on this issue, and listen to an NPR piece about the controversy). Royalty Logic contends that the same logic should apply to the appointment of the Copyright Royalty Judges who make up the CRB.  The Copyright Royalty Judges are appointed by the Librarian of Congress.  One question would be whether the Librarian is the equivalent to the head of a department though, technically, the Library of Congress is not even in the Executive Branch of government, but instead part of Congress.  In any event, Royalty Logic notes that the Copyright Royalty Tribunal, a predecessor agency done away with during the Clinton administration as part of their "Reinventing Government" program (one of the few agencies that was "reinvented"), had members appointed by the President.

In an order released last week, the Court permitted Royalty Logic to brief the issue, and gave the DOJ the right to respond.  However, the Court specifically did not make any determination as to whether it will consider the issue, as both the DOJ and SoundExchange have opposed the Royalty Logic motion as having been filed too late to be considered in this proceeding.

Obviously, if the Court does decide to hear the issue, and does decide that the CRB was not properly appointed, the results may fundamentally change the argument  - potentially requiring the re-hearing of the recently decided CRB cases or a legislative solution to provide a new process or even to set the rates.  And if Congress gets involved, who knows what else could happen?

In fact, recently, in connection with an unrelated bill in Congress on a matter having nothing to do with music royalties, The Internet Radio Equality Act, about which we wrote here, resurfaced as a potential rider. Eventually, as it threatened to derail the bill, the rider was withdrawn.  The new CRB royalties have now been effective for almost eleven months (see our reminder, here). While the recent action on IREA was predictably been greeted with skepticism by SoundExchange, it should not come as a shock that the bill is being revived as there have been no announced mutually-negotiated settlements of the royalty dispute over the past year, even though there have been discussions, and even though most Internet radio companies have claimed that there businesses are in jeopardy should these royalties continue to be in effect, and as they continue to substantially increase over the next two years. 

Unless there is legislative intervention, the appeal will go on.  Not only will the briefs be filed on the question of the CRB's status, but SoundExchange will also be filing a brief in support of the CRB decision later this month.  The webcasters will respond in July, and oral arguments will be held at a date to be set later in the year.  A decision is probably on tap for 2009 - just in time for the commencement of the next proceeding for royalties for 2011-2015.
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