United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 19, 1999 Decided May 21, 1999
No. 98-1263
Recording Industry Association of America,
Petitioner
v.
Librarian of Congress,
Respondent
Digital Cable Radio Associates, et al.,
Intervenors
On Petition for Review of an Order from the
Librarian of Congress
Robert A. Garrett argued the cause for petitioner. With
him on the briefs was Cary H. Sherman. Eric A. Rubel
entered an appearance.
Mark W. Pennak, Attorney, U.S. Department of Justice,
argued the cause for respondent. With him on the brief were
Frank W. Hunger, Assistant Attorney General, and William
Kanter, Deputy Director.
Bruce D. Sokler, Fernando R. Laguarda, Joni Lupovitz
and Jon L. Praed were on the brief for intervenors.
Before: Edwards, Chief Judge, Sentelle and Tatel,
Circuit Judges.
Opinion for the Court filed by Chief Judge Edwards.
Edwards, Chief Judge: Under s 114(f) of the Copyright
Act ("Act"), 17 U.S.C. ss 101-1332, the Librarian of Congress
is charged with establishing the rates and terms for compul-
sory licenses of certain subscription transmissions of digital
audio music. In this first-ever proceeding under s 114, the
Librarian determined that three music services subject to the
terms of the license must pay the Recording Industry Associ-
ation of America ("RIAA") 6.5 percent of their gross domestic
residential revenues in exchange for the right to transmit
digital audio music. The Librarian also imposed certain
terms and conditions of operation on both RIAA and the
music services. RIAA now challenges the 6.5 percent rate
set by the Librarian, claiming that it is too low. RIAA also
challenges the additional conditions imposed by the Librarian,
i.e., conditions imposed on RIAA in its capacity as the collec-
tion agent for copyright owners.
The rate set by the Librarian survives challenge, because
the Librarian's interpretation and application of the statute
are permissible and consistent with established law. We
reject the additional conditions imposed by the Librarian,
however, for want of support in the record. The petition for
review is denied in part and granted in part, and the case is
hereby remanded.
I. Background
In 1990, digital audio services began transmitting sound
recordings in the United States. At that time, United States
copyright law did not recognize a performance right for sound
recordings. As a result, digital audio services were not
required to pay recording companies and recording artists for
their performances; only the copyright owners of the notes
and lyrics underlying sound recordings received a royalty for
the transmission of any performance.
In 1995, Congress changed the copyright landscape by
enacting the Digital Performance Right in Sound Recordings
Act of 1995, Pub. L. No. 104-39, 109 Stat. 336, amending the
Copyright Act. The new law afforded copyright owners a
separate right to the performance of sound recordings via
digital audio transmissions. See 17 U.S.C. s 106(6). This
meant that certain digital music services would be required to
pay recording companies and recording artists when they
transmitted sound recordings. Although copyright owners
now have protected interests under the 1995 law, they are
nontheless required to give licenses to those who seek to
transmit sound recordings. The terms of licenses are either
negotiated by the parties or set pursuant to arbitration. See
id. s 114(f)(1).
Section 114 was amended on October 28, 1998 by the
Digital Millennium Copyright Act, Pub. L. No. 105-304, 112
Stat. 2860, to distinguish between transmissions by preexist-
ing subscription services, such as those operated by the
services in this case, and eligible nonsubscription transmis-
sions and new subscription services. However, the only
changes brought by the 1998 law that are relevant to this
proceeding are that s 114(f)(1) and (2) were renumbered to
s 114(f)(1)(A) and (B), and the license period was extended
from December 31, 2000 to December 31, 2001. See 17
U.S.C. s 114(f)(1)(A), (B).
On December 1, 1995, the Librarian published a notice
signaling the commencement of a six-month period during
which the parties could negotiate license agreements for the
performance of sound recordings by digital audio transmis-
sion. See Digital Performance Right in Sound Recordings,
60 Fed. Reg. 61,655 (Dec. 1, 1995). If an understanding was
reached, the Librarian could then issue a license reflecting
the terms of the parties' agreement. See 17 U.S.C.
s 114(f)(1)(A). In the absence of an agreement, those parties
with a significant interest in the establishment of reasonable
terms and rates for a s 114 license were to file a petition with
the Copyright Office no later than August 1, 1996, requesting
an arbitration before a copyright arbitration royalty panel
pursuant to Chapter 8 of the Copyright Act. See Digital
Performance Right in Sound Recordings, 60 Fed. Reg. at
61,656. Under the statute, an arbitration panel is authorized
to set a "reasonable copyright royalty rate," which is "calcu-
lated to achieve" four statutory objectives. 17 U.S.C.
s 801(b)(1). The four statutory objectives are:
(A) To maximize the availability of creative works to the
public;
(B) To afford the copyright owner a fair return for his
creative work and the copyright user a fair income under
existing economic conditions;
(C) To reflect the relative roles of the copyright owner
and the copyright user in the product made available to
the public with respect to relative creative contribution,
technological contribution, capital investment, cost, risk,
and contribution to the opening of new markets for
creative expression and media for their communication;
(D) To minimize any disruptive impact on the structure
of the industries involved and on generally prevailing
industry practices.
Id.
When the parties in this case failed to reach an agreement
during the six-month negotiation period, RIAA filed a petition
with the Copyright Office seeking arbitration. After deter-
mining that RIAA had a significant interest in the proposed
proceeding, the Librarian convened a copyright arbitration
royalty panel. Before the panel, RIAA sought a rate of 41.5
percent of the digital services revenue. The three music
services appearing in the case, Digital Music Express, Digital
Cable Radio Associates, and Muzak, L.P., urged a rate of 2.0
percent or less. After considering the evidence presented in
light of the aforecited statutory objectives, the arbitration
panel recommended a royalty rate of 5.0 percent of the
services' gross domestic residential revenues and certain
terms for payment and accounting for payments. See Deter-
mination of Reasonable Rates and Terms for the Digital
Performance of Sound Recordings, 63 Fed. Reg. 25,394,
25,396 (May 8, 1998).
The Register of Copyrights then reviewed the panel's
determination. See 17 U.S.C. s 802(f) (requiring Register to
review panel's decision and make recommendations to Librar-
ian). The Register rejected the rate set by the panel, be-
cause she found that the use of a certain negotiated license
fee as a starting point was arbitrary. See 63 Fed. Reg. at
25,399. The Register therefore reevaluated the record evi-
dence and recommended a rate of 6.5 percent. See id. at
25,410. When setting this rate, the Register, like the panel,
"considered the relevant marketplace points of reference
offered into evidence." Id. at 25,409. She rejected RIAA's
contention, however, that she must adopt "marketplace
rates." See id. at 25,399-400. Moreover, unlike the panel,
the Register "gave more consideration to the rates paid for
the performance right in the musical compositions, because
these rates represent an actual marketplace value for a public
performance right in the digital arena, albeit not the digital
performance right in sound recordings." Id. at 25,409.
In addition to finding the 6.5 percent rate appropriate, the
Register accepted the panel's recommendation to designate a
single entity, RIAA, to collect and distribute all royalty fees.
See id. at 25,412. She also determined that there must be
safeguards in place to monitor the functions of RIAA, since 10
percent of the affected copyright owners were not RIAA
members. See id. She therefore recommended that the
Librarian adopt terms that: (1) required each performance to
be valued equally when royalties are paid to copyright own-
ers, (2) permitted the copyright owners to audit RIAA's
practices in handling the royalty fees, (3) specified the nature
of the costs that RIAA may deduct from royalties before
distribution, and (4) specified how "unknown copyright own-
ers" should be treated in the distribution of royalties. See id.
at 25,412-13.
On May 8, 1998, the Librarian accepted the Register's
recommendations and, in accordance with those recommenda-
tions, adopted new regulations. See id. at 25,413-15 (adopt-
ing 37 C.F.R. ss 260.1 to 260.7). Particularly important here
are the regulations that impose conditions on RIAA in its
capacity as the sole collection and disbursement agent. Sec-
tion 260.2(d) requires RIAA to value each performance equal-
ly when distributing royalties, s 260.3(d) dictates what costs
RIAA may deduct from the royalties, s 260.6(b) allows "inter-
ested parties" to audit RIAA, and s 260.7 prescribes the way
in which RIAA must deal with unknown copyright owners.
II. Analysis
A.Standard of Review
We review the Librarian's interpretation of the relevant
statutory provisions under the familiar two-step analysis of
Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837, 842-43 (1984).
Chevron is principally concerned with whether an agency
has authority to act under a statute. See Chevron, 467
U.S. at 842-45. Thus, a reviewing court's inquiry under
Chevron is rooted in statutory analysis and is focused on
discerning the boundaries of Congress' delegation of
authority to the agency; and as long as the agency stays
within that delegation, it is free to make policy choices in
interpreting the statute, and such interpretations are
entitled to deference. Id. at 843-45, 865-66.... [T]he
question for the reviewing court is whether the agency's
construction of the statute is faithful to its plain meaning,
or, if the statute has no plain meaning, whether the
agency's interpretation "is based on a permissible con-
struction of the statute." Chevron, 467 U.S. at 843.
Arent v. Shalala, 70 F.3d 610, 615 (D.C. Cir. 1995).
As for rates and conditions established by the Librarian
pursuant to s 114, the standard and scope of judicial review
are as defined in 17 U.S.C. s 802(g):
[t]he court shall have jurisdiction to modify or vacate a
decision of the Librarian only if it finds, on the basis of
the record before the Librarian, that the Librarian acted
in an arbitrary manner.
The standard under s 802(g) is "exceptionally deferential,"
requiring the court to "uphold a royalty award if the Librari-
an has offered a facially plausible explanation for it in terms
of the record evidence." National Ass'n of Broadcasters v.
Librarian of Congress, 146 F.3d 907, 918 (D.C. Cir. 1998)
("NAB v. Librarian").
B.The 6.5 Percent Rate
The determination of appropriate rates for s 114 licenses is
governed by 17 U.S.C. s 801(b):
Subject to the provisions of this chapter, the purposes of
the copyright arbitration royalty panels shall be as fol-
lows:
(1) To make determinations concerning the adjust-
ment of reasonable copyright royalty rates as provided
in section[ ] 114 ... and to make determinations as to
reasonable terms and rates of royalty payments as
provided in section 118. The rates applicable under
section[ ] 114 ... shall be calculated to achieve the
following objectives:
(A) To maximize the availability of creative works to
the public;
(B) To afford the copyright owner a fair return for
his creative work and the copyright user a fair
income under existing economic conditions;
(C) To reflect the relative roles of the copyright
owner and the copyright user in the product made
available to the public with respect to relative crea-
tive contribution, technological contribution, capital
investment, cost, risk, and contribution to the open-
ing of new markets for creative expression and
media for their communication;
(D) To minimize any disruptive impact on the struc-
ture of the industries involved and on generally
prevailing industry practices.
The Librarian argues that the term "reasonable copyright
royalty rates" under s 801(b)(1) takes its meaning from the
four statutory objectives under s 801(b)(1)(A)-(D). In other
words, "reasonable rates" are simply those that are calculated
to achieve the four objectives. Accordingly, the 6.5 percent
rate in this proceeding was set only after it was determined
that the rate would achieve the cited statutory objectives.
RIAA counters that the disputed statutory language unam-
biguously "imposes two separate requirements: the Section
114 rate must be (1) a 'reasonable copyright royalty rate' and
(2) 'calculated to achieve' the Section 801(b)(1)(A)-(D) objec-
tives." Reply Brief for Petitioner at 5. It claims that
"reasonable copyright royalty rates" means a rate that af-
fords fair market compensation. Recognizing that there is no
such thing as a precise fair market compensation rate, RIAA
argues that the Librarian must first determine the range of
market rates that are appropriate and then select a rate from
within the range of fair market rates that meets the objec-
tives of s 801(b)(1)(A)-(D). Only this interpretation, argues
RIAA, gives meaning to both requirements.
In order for RIAA to succeed on this claim, it must show
that, under step one of Chevron, Congress has clearly re-
quired the use of market rates in s 801(b)(1), or that, under
step two of Chevron, the Librarian's interpretation is imper-
missible. RIAA fails both parts of the Chevron test.
RIAA's claim that the statute clearly requires the use of
"market rates" is simply wrong. Section 801(b)(1) requires
only that arbitration panels set "reasonable copyright royalty
rates." The statute does not use the term "market rates,"
nor does it require that the term "reasonable rates" be
defined as market rates. Moreover, there is no reason to
think that the two terms are coterminous, for it is obvious
that a "market rate" may not be "reasonable," and vice versa.
Furthermore, when Congress sought to require market
rates in the Act, it used the term "market rate" or its
equivalent. See, e.g., 17 U.S.C. s 119(c)(3)(B) ("In determin-
ing royalty fees under this paragraph, the copyright arbitra-
tion royalty panel ... shall establish fees for the retransmis-
sion of network stations and superstations that most clearly
represent the fair market value of secondary transmissions.")
(emphasis added). Most strikingly, in the recent amend-
ments to s 114(f), the Librarian is directed to "establish rates
and terms that most clearly represent the rates and terms
that would have been negotiated in the marketplace between
a willing buyer and a willing seller" for the new categories of
services. Pub. L. No. 105-304, 112 Stat. at 2896 (codified as
17 U.S.C. s 114(f)(2)(B)). Notably, the statutory criteria for
establishing rates for preexisting services, such as those at
issue here, remain unchanged, even though both subsections
(f)(1) and (f)(2) were revised by the 1998 legislation and are
virtually identical in all other aspects.
In sum, s 801(b)(1) does not clearly dictate the use of
market rates when determining a "reasonable" royalty rate
under s 114. Thus, under Chevron step two, the court must
afford the Librarian deference if his interpretation is permis-
sible. Here, the Librarian determined that "reasonable
rates" are those that are calculated with reference to the four
statutory criteria. This interpretation is not only permissible
but, given that s 114 rates are to "be calculated to achieve"
the four objectives of s 801(b)(1), it is the most natural
reading of the statute. The Librarian's interpretation is
therefore entitled to deference.
RIAA next argues that the Librarian also erred in setting
the rate at 6.5 percent, because he failed to follow Copyright
Royalty Tribunal precedent as required by 17 U.S.C.
s 802(c). Prior to 1993, the Copyright Royalty Tribunal had
jurisdiction to set rates and, in some cases, terms for each of
the compulsory licenses and to distribute compulsory licens-
ing royalties. In 1993, Congress abolished the Copyright
Royalty Tribunal and most of its tasks are now performed by
copyright arbitration royalty panels. See NAB v. Librarian,
146 F.3d at 912-13. Section 802(c) provides that copyright
arbitration royalty panels "shall act on the basis of," among
other things, past Tribunal precedent. 17 U.S.C. s 802(c)
(emphasis added). This court has held that it will "defer to
the Librarian's reasonable and permissible interpretation of
the requirements of subsection 802(c) under the second step
of the Chevron analysis." NAB v. Librarian, 146 F.3d at 927.
In this case, the Librarian found that only two Tribunal
decisions are relevant, because they are the only ones in
which the s 801(b)(1) objectives applied while the Tribunal
was still in operation. See 17 U.S.C. s 801(b) (1988 & Supp.
IV 1992) ("Subject to the provisions of this chapter, the
purposes of the Tribunal shall be ... to make determinations
concerning the adjustment of reasonable copyright royalty
rates as provided in sections 115 and 116, and to make
determinations as to reasonable terms and rates of royalty
payments as provided in section 118. The rates applicable
under sections 115 and 116 shall be calculated to achieve the
following objectives."). Although RIAA argues that other
decisions are also relevant, this argument is based on its
belief that s 801(b)(1) requires two steps. Because it was
reasonable for the Librarian to find that the term "reasonable
copyright royalty rates" is defined by the four statutory
objectives, there is no need to look to Tribunal precedent
interpreting the term "reasonable rates" in other contexts.
Thus, the only relevant precedent, as the Librarian correct-
ly points out, are those cases that interpreted the statutory
language that is at issue here. Those two decisions are the
Tribunal's s 115 decision, Adjustment of Royalty Payable
Under Compulsory License for Making and Distributing
Phonorecords; Rates and Adjustment of Rates, 46 Fed. Reg.
10,466 (Feb. 3, 1981), and its s 116 decision, 1980 Adjustment
of the Royalty Rate for Coin-Operated Phonorecord Players,
46 Fed. Reg. 884 (Jan. 5, 1981). With respect to the s 115
decision, RIAA argues that, because the Tribunal stated that
a rate set above what the market could bear could not be
reasonable, "[s]urely, if an above-market rate is not reason-
able under Section 801(b)(1), a below market rate likewise is
not reasonable; neither affords a fair return." Brief for
Petitioner at 24. However, the s 115 decision was affirmed
by this court specifically because the Tribunal had followed
the statutory objectives. See Recording Indus. Ass'n of
America v. Copyright Royalty Tribunal, 662 F.2d 1, 8-10 &
n.24 (D.C. Cir. 1981) (noting that failure to consider the
criteria would have been grounds for reversal). In this case,
the Librarian relied on the statutory objectives in making his
decision, and thus his action is consistent with the s 115
precedent. See Determination of Reasonable Rates and
Terms for the Digital Performance of Sound Recordings, 63
Fed. Reg. at 25,400. Moreover, the specific language upon
which RIAA relies simply went to whether a rate that was
fixed above the market rate could be reasonable in the
context of its rejection of the "bargaining room theory." See
Adjustment of Royalty Payable Under Compulsory License
for Making and Distributing Phonorecords; Rates and Ad-
justment of Rates, 46 Fed. Reg. at 10,478; Recording Indus.
Ass'n of America v. Copyright Royalty Tribunal, 662 F.2d at
11-13 (finding that the Librarian's rejection of the "bargain-
ing room theory" was reasonable, because "Congress had
chosen to express its will through the statutory criteria"
rather than adopting that theory as the basis for the rate).
But there is no suggestion here that the rate has been set
above the market value, nor is any question regarding the
"bargaining room theory" presented. Accordingly, the specif-
ic language that RIAA relies upon is inapposite.
RIAA also argues that the Librarian failed to follow the
holding of the Tribunal's s 116 decision. However, there is
nothing in the s 116 decision that requires the use of market
rates. To the contrary, the Tribunal specifically acknowl-
edged that although "our rate cannot be directly linked to
marketplace parallels, we find that they serve as an appropri-
ate benchmark to be weighed together with the entire record
and the statutory criteria." 1980 Adjustment of the Royalty
Rate for Coin-Operated Phonorecord Players, 46 Fed. Reg.
at 888. In addition, the Seventh Circuit recognized, in affirm-
ing the s 116 decision, that the Tribunal, in arriving at its
rate, "carefully weighed the evidence derived from the mar-
ketplace analogies and other evidence specifically in light of
the four statutory criteria of section 801(b)." Amusement
and Music Operators Ass'n v. Copyright Royalty Tribunal,
676 F.2d 1144, 1157 (7th Cir. 1982). The Librarian interpret-
ed this precedent to mean that marketplace analogies, along
with other evidence, must be considered and a rate should
then be chosen specifically based on the four statutory crite-
ria. See Determination of Reasonable Rates and Terms for
the Digital Performance of Sound Recordings, 63 Fed. Reg.
at 25,400. Because this is a reasonable interpretation of the
precedent, the Librarian has not violated s 802(c).
RIAA does not contest the evidence in support of the
establishment of a 6.5 percent rate; it only argues that the
Librarian erred in his interpretation of the statute and in his
application of past precedent. Because we have found that
the Librarian's interpretation of s 801(b)(1) is permissible
and that he did not err in his application of past precedent,
we deny RIAA's petition for review with respect to the
establishment of a 6.5 percent rate.
C.Conditions Imposed on RIAA
RIAA next argues that, after fixing a rate, the Librarian
has no authority to impose terms on the RIAA collective.
We disagree. Under the Act, the Librarian may impose
terms "which ... shall be binding on all copyright owners of
sound recordings and entities performing sound recordings."
17 U.S.C. s 114(f)(1)(B). Although RIAA is not a copyright
owner, it is the agent of the copyright owners, and, as such,
acts on behalf of all copyright owners. Accordingly, RIAA
may be bound by the Librarian's terms, just as copyright
owners may be. Moreover, it is hard to imagine the imposi-
tion of a royalty rate without some indication as to how the
money collected is to be allocated. In particular, because
RIAA does not represent all copyright owners but will nev-
ertheless collect and distribute royalties on behalf of all
copyright owners, the Librarian obviously has the power to
prescribe the allocations due to those who are not RIAA
members.
We do agree, however, with RIAA's next argument that,
even if the Librarian has the authority, the imposition of
terms here was improper. The problem in this case is that
there is no evidence in the record to support the terms
imposed on RIAA.
This court has jurisdiction to vacate or modify an order of
the Librarian "if it finds, on the basis of the record before the
Librarian, that the Librarian acted in an arbitrary manner."
17 U.S.C. s 802(g). Thus, the court is required to uphold an
award only when "the Librarian's final award to a class
claimant bears a rational relationship to the record evidence,
is plausibly explained and is otherwise developed in a manner
that does not plainly contravene applicable statutory provi-
sions." NAB v. Librarian, 146 F.3d at 924 (emphasis added).
It is not enough for the Librarian simply to offer a plausible
explanation for his actions; there must be record evidence to
support the terms imposed. Without record evidence to
support his decision, we are constrained to find that the
Librarian acted arbitrarily.
In this appeal, the Librarian concedes that there is no
evidence in the record to support his decision with respect to
the disputed terms; he argues, however, that his decision
should be upheld because the terms, at least with respect to
auditing, parallel the terms imposed on the music services for
which there is evidentiary support in the record. See Brief
for Respondent at 53-57. This argument does not hold
water: the Librarian cannot assume, without any evidence to
support his decision, that RIAA and the music services should
be treated similarly. Moreover, the other terms imposed on
RIAA are, in fact, quite different from those imposed on the
music services, because of RIAA's very different role as the
collection and distribution agent. Thus, the Librarian's deci-
sion cannot be upheld on this basis.
Next, the Librarian argues that he "may adopt ... an
unsupported Panel award if that decision is accompanied by
an adequate 'explanation.' " Brief for Respondent at 56. In
support, he cites the following passage from NAB v. Librari-
an: "For example, we think the Librarian would plainly act
in an arbitrary manner if, without explanation or adjustment,
he adopted an award proposed by the Panel that was not
supported by any evidence or that was based on evidence
which could not reasonably be interpreted to support the
award." 146 F.3d at 923. However, nowhere in the NAB
opinion does the court state that it would allow the Librarian
to act without regard to the record. To the contrary, the
court's holding contradicts the Librarian's argument, because
it specifically required the Librarian's award to bear "a
rational relationship to the record evidence." Id. at 924.
There may be some circumstances in which the Librarian's
decision must, for want of concrete data, be based principally
on sound judgment. But even in these instances, a matter in
dispute must be properly raised before the arbitration panel
so that the parties have a fair opportunity to address it, and
so that the Librarian has the benefit of the parties' views
before reaching a judgment. There is no such record here.
Indeed, at oral argument, counsel for the Librarian conceded
that the copyright arbitration royalty panel prematurely end-
ed its inquiry by failing to require the imposition of terms on
RIAA and should have considered this issue. In the face of
such a concession, we think it is clear that this portion of the
proceeding must be remanded.
III. Conclusion
For the foregoing reasons, we grant RIAA's petition for
review with respect to the terms imposed under 37 C.F.R.
ss 260.2(d), 260.3(d), 260.6(b), and 260.7, and remand for
further consideration of these matters. We deny RIAA's
petition for review in all other respects.
So ordered.