The US Court of Appeals for the District of Columbia Circuit today issued a decision basically upholding the royalty rates set by the Copyright Royalty Board due under Section 114 of the Copyright Act by satellite radio operators for the public performance of sound recordings. The CRB decision, setting royalties for the years of 2007 to 2012, established rates that grew from 6% to 8% over the six year term. As we explained in our post, here, the Board looked at the the public interest factors set out by Section 801(b) of the Copyright Act, factors not applicable to Internet Radio royalties, in reaching the determination these royalties. Particularly important was the factor which took into account the potential impact of the royalties on the stability of the businesses that would be subject to the royalty, resulting in a reduction of the perceived fair market value of the royalty from what the board determined to be about 13% of gross revenues to the 6-8% final royalty set by the Board. The Court upheld the Board’s reasoning, rejecting SoundExchange’s challenge to the decision, though the Court did remand the case to the Board to decide the proper allocation of the royalty to the ephemeral rights covered by Section 112 of the Copyright Act.
What was perhaps most interesting about the Court’s decision was the concurring opinion of one of the three Judges, who stated that the fact that the Board’s judges were appointed by the Librarian of Congress, and not by the President, "raises a serious constitutional issue." This was the same issue raised by Royalty Logic in challenging the constitutionality of the CRB in the webcasting proceeding (see our posts here and here). The Judge concurred in the majority decision as none of the parties to the satellite radio case raised the constitutional issue, but this very question was squarely raised in the webcasting proceeding, and thus may well be resolved in the decision on that appeal.
The Court decision rejected SoundExchange’s challenges to the decision of the Board to apply the 801(b) factor which instructed it to take into account the impact of the royalty on the stability of the industry. The application of this factor resulted in a royalty that grows from 6 to 8%, reducing what might have been a royalty in the range of 13% had the Board relied solely on its assessment of fair market value. Among other issues, the Court rejected SoundExchange’s claim that the XM-Sirius merger should have been taken into account to mitigate against any need for this factor to be taken into account. The Court also rejected the Board’s decision to exclude from revenues subject to the royalty those revenues that came from non-music services, like revenue from advertising on non-music channels or from equipment purchases.
The only issue that the Court did not resolve was the value of the Section 112 ephemeral royalty – the royalty that is to compensate copyright holders for the temporary transitory copies made in the streaming process, such as those made on servers. The Board found that no one had shown any value for those transitory copies, and thus the royalty had no real market value, so any residual value was subsumed entirely within the Section 114 royalty. After the Board issued its decision, the Copyright Office issued an opinion that the Board needed to set a separate royalty for the ephemeral right. While the satellite radio companies suggested the value was zero, and SoundExchange argued that it should be 8.8% of the total royalty, the Court could find no evidence supporting either position. So the Court remanded this issue to the Board to determine what percentage of the royalty, if any, should be allocated to the ephemeral rights.
This decision, coming as it does on the date that webcasters announce a settlement with royalties that range from 12% of gross revenues to 25% or more of such revenues, demonstrates again the difference that a standard can make. The 801(b) standard, taking into account the public interest factors, produces a rate that the music users can actually support (as the satellite companies did here, not appealing the decision of the CRB, but instead arguing in support of it), while the "wiling buyer, willing seller" standard produces royalties which, even after a settlement substantially reducing the royalty, brings only grudging relief. This issue should be assessed by Congress when it reviews the Copyright Royalty Board’s status if, as suggested by this Court, the webcasting court finds the CRB to be unconstitutional.