SPEAKERS CONTENTS INSERTS
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80–194 PDF
2002
COPYRIGHT ARBITRATION ROYALTY PANEL (CARP) STRUCTURE AND PROCESS
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
JUNE 13, 2002
Serial No. 78
Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman
HENRY J. HYDE, Illinois
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
LINDSEY O. GRAHAM, South Carolina
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL E. ISSA, California
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
Subcommittee on Courts, the Internet, and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
HENRY J. HYDE, Illinois
ELTON GALLEGLY, California
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BOB GOODLATTE, Virginia, Vice Chair
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
LINDSEY O. GRAHAM, South Carolina
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
RIC KELLER, Florida
DARRELL E. ISSA, California
MELISSA A. HART, Pennsylvania
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
BLAINE MERRITT, Chief Counsel
DEBRA ROSE, Counsel
CHRIS J. KATOPIS, Counsel
MELISSA L. MCDONALD, Full Committee Counsel
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ALEC FRENCH, Minority Counsel
C O N T E N T S
JUNE 13, 2002
OPENING STATEMENT
The Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Rick Boucher, a Representative in Congress From the State of Virginia
The Honorable Chris Cannon, a Representative in Congress From the State of Utah
WITNESSES
Mr. Michael J. Remington, Attorney-at-Law and Partner, Drinker Biddle & Reath, LLP
Oral Testimony
Prepared Statement
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Mr. Robert A. Garrett, Attorney-at-Law and Partner, Arnold & Porter
Oral Testimony
Prepared Statement
Mr. R. Bruce Rich, Attorney-at-Law, Weil, Gotshal & Manges, LLP
Oral Testimony
Prepared Statement
The Honorable Marybeth Peters, Register of Copyrights and Associate Librarian for Copyright Services, Copyright Office of the United States, The Library of Congress
Oral Testimony
Prepared Statement
APPENDIX
Statements Submitted for the Hearing Record
The Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
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The Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan and Ranking Member, Committee on the Judiciary
The Honorable Rick Boucher, a Representative in Congress From the State of Virginia
The Honorable Chris Cannon, a Representative in Congress From the State of Utah
The Honorable Darrell Issa, a Representative in Congress From the State of California
Statement by the Intercollegiate Broadcasting System
Statement by Mr. David Mandelbrot, Vice President, Media and Entertainment, Yahoo! Inc.
Material Submitted for the Hearing Record
Letter from Mr. James C. May, Executive Vice President, Government Relations, National Association of Broadcasters
Letter from James J. Popham, Vice President, Statutory License Counsel of the Motion Picture Association of America, Inc. (MPAA)
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Ms. Hilary Rosen, Chairman & Chief Executive Officer of the Recording Industry Association (RIAA)
Letter from Mr. I Fred Koenigsberg, White & Case LLP and Mr. Marvin L. Berenson, Senior Vice President & General Counsel at Broadcast Music Inc.
Letter from Mr. Patrick Collins, Senior Vice President - Licensing, SESAC, Inc.and Mr. John C Beiter, General Counsel for SESAC, Inc. Loeb & Loeb LLP
Letter from Mr. Kevin Klose, President and Chief Executive Officer, on behalf of National Public Radio, Inc. (NPR) and its member station licensees
Letter from Mr. William S. Koenig, National Basketball Association, Mr. Thomas J. Ostertag, Office of the Commissioner of Baseball, Mr. John Tortora, National Hockey League, Mr. L. Jeffrey Pash, National Football League, and Mr. Ritchie T. Thomas, counsel for National Collegiate Athletic Association
COPYRIGHT ARBITRATION ROYALTY PANEL (CARP) STRUCTURE AND PROCESS
THURSDAY, JUNE 13, 2002
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
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Washington, DC.
The Subcommittee met, pursuant to call, at 2:30 p.m., in Room 2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.
Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee will come to order.
The Founding Fathers understood the importance of copyright to our Nation. In keeping with this tradition, our Subcommittee has always worked to support artists by ensuring that they receive fair compensation for their creative endeavors. Our hearing today will focus on an arcane but yet important component of the present system that reimburses copyright holders for their work.
By way of background, and as part of the 1976 Copyright Act amendments, Congress acknowledged the need for Government to oversee the royalty ratemaking and distribution process by creating the Copyright Royalty Tribunal, or CRT as it became known. The need for this entity was especially critical since the 76 amendments also created 3 new compulsory licenses.
By 1993, Congress, the Copyright Office and ratemaking participants believed that greater efficiencies could be realized under a different system, which led to the development of our present construct, the Copyright Arbitration Royalty Panel, known to many of you all as CARP.
Unfortunately, it now appears that history is repeating itself as the current structure and operation of the CARP system has generated great frustration among those parties required to participate within its statutory confines. Although some critics have criticized our efforts to develop a fair and efficient ratemaking and distribution process as disappointing, I am optimistic that we will ultimately prevail in our attempt to build a better copyright mousetrap.
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We have an excellent panel of witnesses today who will doubtlessly add to our individual and collective understanding or misunderstanding, hopefully understanding, of the CARP system, warts and all. I welcome all of you here today and thank them in advance for sharing their thoughts.
Now, as a bit of background, as you all may well know, the arbiters handed down the CARP decision last February, February 21st, I think. The Copyright Act, as you furthermore know, provides a 90-day period whereby the Copyright Office, which is a part of the Library of Congress, can advise and counsel with the Librarian as to his final decision of rejecting or accepting the CARP decision. The Librarian, handed down his opinion, his rejection, last month, the 21st or—21st of May, Marybeth tells me.
The Copyright Act furthermore provides an additional 30 days during which time the Librarian is afforded the right to examine his thoughts along with the Copyright Office and then submit his final decision. So we expect to see that on or before 20 June.
[The prepared statement of Mr. Coble follows in the Appendix]
Mr. COBLE. Having said all that, and before I recognize the distinguished gentleman from California, you saw me hand him a piece of birthday cake. The Chairman of the full Judiciary Committee is having his birthday today, so Mr. Sensenbrenner shared a couple pieces with Howard and me, and I am sorry the rest of you can't have any. If you go back in the back room, there may be some left.
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But I am now pleased to recognize the distinguished gentleman from California Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman. He wins the lottery, and I get a piece of birthday cake.
Anyhow, thank you very much for holding this hearing on the Copyright Arbitration Royalty Panel. I am a strong supporter of marketplace solutions to copyright royalty disputes. I think copyright owners have every economic incentive to capture additional revenue by licensing their work, their works, and every right to seek the highest royalties that the market will bear. If they are too short-sighted to capitalize on opportunities for new revenue, or they fail to act rationally, as economists would say, the marketplace will punish them. Furthermore, when copyright owners have engaged in a competitive conduct, the antitrust laws have time after time proven adequate to remedy this conduct.
Compulsory licenses in CARPs, on the other hand, have proven to be imperfect, unwieldy, and costly licensing mechanisms at best. I suspect that many CARP participants would have found a more—far more satisfactory outcome—I am talking about licensees and copyright owners—had they chosen to spend their money and effort negotiating a reasonable settlement in the marketplace rather than in a CARP.
Compulsory licenses tend to outlive their purpose, and they may create marketplace dislocations rather than address them. For example, the cable compulsory license was created to help a struggling and entrepreneurial cable industry keep up with the broadcast industry. Today the cable license continues to exist in an era where the cable industry is able to exercise market power at least comparable to that of the relevant copyright owners.
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While I do not have a fondness for compulsory licenses, I recognize that we must do our best to make the ones we do have work. The CARP process was catapulted into national awareness this year because of the controversy of Webcasting CARP. The outcome of the Webcasting CARP has garnered much attention from the press and public. And I know it is, as the Chairman says, under consideration at the Copyright Office and with the Librarian of Congress. What captured our attention about the Webcasting CARP was not only the royalty rate it set, however, but the process through which it occurred.
While many of the rating distributions determinations are the subject of marked disagreement among the participants, the one thing that even the strongest opponents agree upon is that the CARP process has serious flaws and warrants improvement. The expense is the biggest issue. Participants in a CARP bear not only their own substantial legal fees, but also the cost of the CARP proceeding itself. This is often millions of dollars, sometimes much more expensive than the royalty claim that the CARP is addressing. I believe Mr. Remington is going to speak particularly to the situations in which a participant had to pay tens of thousands of dollars for a CARP to determine the distribution of around $10 in royalties.
In addition to the problems of cost, I know there are great concerns over the autonomy and independence of the arbitration body, the burden that it places upon the Copyright Office, and the overall fairness and consistency of the outcomes. Our witnesses are experienced participants in CARP proceedings and can speak to the problems they have encountered during CARP arbitration.
The issue of CARP performance reform is not new in our Subcommittee. In 1998, Chairman Coble introduced legislation to reform the methods through which the royalty rate is determined. Ultimately there was not enough support to enact his reform proposals. Given today's climate, however, I believe there is sufficient impetus and sufficient interest to seriously consider changes to the arbitration process, and I anticipate an active discussion today to determine a model that most efficiently accomplishes the goals of the CARP process without unduly burdening the participants.
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Thank you, Mr. Chairman.
Mr. COBLE. Thank you, Mr. Berman.
Mr. COBLE. Normally I prefer opening statements to be restricted to the Ranking Member and to me, but we have two gentlemen on each side of the aisle who are very interested in this issue. And incidentally, folks, the small or the diminished attendance here today on the part of the Subcommittee I don't believe reflects their lack of interest. It is the fact that the final bell rang, and there are no more votes today, so they are probably going back to their respective districts.
But let me now recognize the distinguished gentleman from Virginia, Mr. Boucher for his opening statement.
Mr. BOUCHER. Mr. Chairman, thank you very much. I appreciate your indulgence as Mr. Cannon and I contribute to the conversation here in making open statements. I also want to thank you, Mr. Chairman, for a hearing on a very timely subject.
The CARP process, in my opinion, is badly broken. It should be replaced with a more efficient, more affordable and fairer system. In my view, the functions of the CARP should be transferred to a United States district court.
The problems which beset the CARP are many. While the CARP process was designed to produce a streamlined procedure, the lack of appropriate discovery mechanisms has prolonged the proceedings, achieving the opposite of what was designed.
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The process is also too expensive. It is beyond the ability of many interested parties to afford. Having private parties pay the fees of the arbitrator is manifestly unjust to the financially less fortunate and to the nonprofit entities that have a very large interest in the proceedings of the CARP.
No body of expertise is developed by the arbitrators that then could be applied to subsequent proceedings. Starting with a new arbitrator panel each time will lead to inconsistent judgments and a constant process of reinventing the wheel, and the standards which are applied are demonstrably inadequate. In the recent Webcasting decision, the concept of fairness of the payment was totally absent from the deliberation. Fairness is the standard in other proceedings. Standard, for example, is fundamental to—fairness is fundamental to the standard under section 801 for royalty payments for digital music services other than Webcasting. Fairness is also at the heart of the standard under section 119 for royalties that are paid by cable and satellite companies to terrestrial broadcasters for the rebroadcast of terrestrial broadcast signals. But fairness is not an element of the standard under section 114 applicable to Webcasters.
However, we address the procedural problems, and as I have said earlier, I think vetting these rate-setting functions in a U.S. district court is the best approach. We also need to insert fairness of the payment as the governing standard under section 114. We must avoid a repeat of the rules like the most recent one through which a one-size-fits-all approach was adopted, where small Webcasters that measure their royalties in the tens of thousands of dollars annually were saddled with royalty fees in the range of hundreds of thousands of dollars annually. A fairness standard would have prevented that ruling that threatens to put the young and the small companies out of business.
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Changes must be made, and I welcome this first hearing of our Subcommittee as we explore the problem, as we hear from a panel of distinguished witnesses who I want to join with the Chairman and Ranking Member in welcoming here today and as we consider this.
Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentleman.
Mr. COBLE. I am pleased now to recognize the distinguished gentleman from Utah, Mr. Cannon for 5 minutes.
Mr. CANNON. I thank the Chairman. I have been sitting here wondering if the average IQ has gone up or down because some people left when they could after the last vote earlier today.
I thank you for calling this important hearing on the structural process of CARP, our royalty-setting panels. I will acknowledge that I was one of the many Members of the Congress who had concerns about the result created by the latest CARP panel for Webcasters.
I would like to remark for a moment on the governing standard by which the CARP determines the royalty rate. In addition to considering CARP structure and procedures, this Committee must also consider why there are separate rate-setting standards for the sound recording CARPs, for the Webcasters and the satellite TV CARPs, and all other CARPs including the sound recording CARPs for industries other than Webcasting.
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In particular the satellite TV and all other CARPs have standards that require rates based on fairness, fair market value and balancing the interest of the participants. The Webcasting CARP has only the willing buyer/willing seller language, which suggests that there is a functioning market that results in a fair price. However, if the Congress and this Committee thought the market was functioning fairly in the context of any compulsory licenses, there would not be any compulsory licenses as they are needed only when a market is dysfunctional or inherently one-sided, which this one clearly is.
Particularly with the nascent industry negotiating against powerful collectives representing content owners such as RIAA, ASCAP and BMI, there is no leverage on the side of the Webcasters, and in that case the willing buyer/willing seller standard seems to require the CARP to ratify the results of a single-seller marketplace that is powered by an industry collective.
I mentioned my concern earlier over the recent CARP rate announced for Webcasters which has been set aside for additional review by Mr. Billington, the Librarian of Congress. It is clear to me the purpose of Congress in putting in place the compulsory license for Webcasters in the DMCA was to promote a nascent online industry up to the point it could flourish and add real diversity to the way the consumers get content delivered. But if the mechanism we have established sets rates that would be detrimental to that goal, do we have a responsibility to reexamine the results? I think the answer is yes when Congress's expressed intent is violated. Such actions are not unprecedented. In fact, we did as much fairly recently when we deemed that the CARP for satellite broadcasting set a rate that was too high for satellite television distributors and took actions to overturn the rate.
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I know this will be unpopular with some in this room: There ought to be an acknowledgment today that whatever structure or process which we have for CARPs now or in the future, if the results produced are expressly against the intent of Congress and this Committee in establishing a compulsory license in the first place, then this Committee and Congress have a right and a duty to consider actions that might overturn such results.
I thank the Chairman and look forward to hearing the witnesses discuss how we might improve the CARP process and structure so as to get results that are more consistent with Congress's goals and stated intent. Thank you.
Mr. COBLE. I failed to mention this earlier, folks, but I want to make this clear. It is not my intent for the purpose of this hearing to influence the Copyright Office or the Librarian in their deliberations regarding the Webcasting CARP or for that matter to reverse decisions on previous CARPs. Rather, it is my hope that the Subcommittee is simply trying to determine if the current structure and performance of CARPs are fair and sound, and if not, what changes or amendments should be forthcoming.
You all bear with me each time I do this. I apologize for the lengthy introductions, but for the benefit of the uninformed in who don't know the backgrounds of our witnesses, I think you need to.
Our first witness is Michael J. Remington, who is a partner in the law firm of Drinker, Biddle & Reath, where he specializes in intellectual property law, tort reform, government relations and lobbying. Prior to entering private practice, Mr. Remington held high-level positions in the three branches of the Federal Government. Most impressively, for a total of 13 years he was chief counsel to our Subcommittee, most impressively to us. We guard this very jealously, Mike, as you know.
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In the judicial branch Mr. Remington served as a law clerk to the U.S. District Judge John W. Reynolds and Deputy Legislative Affairs Officer to the Judicial Conference of the United States under Chief Justice Warren Burger. In the executive branch he was a prosecutor in the Criminal Division of the U.S. Department of Justice, where he specialized in criminal appeals.
A former Fulbright scholar in Paris, and a Peace Corps volunteer in Africa, Mr. Remington is a graduate of the University of Wisconsin, where he received his law degree in 1973 and was admitted to practice in the State of Wisconsin and the District of Columbia.
Our next witness is Mr. Robert Garrett, who is a partner in the law firm of Arnold & Porter. Mr. Garrett has focused on intellectual property and telecommunications matters since joining Arnold & Porter in 1977. He has practiced extensively before the Federal Communications Commission, the Copyright Office, the Copyright Royalty Tribunal, the Copyright Arbitration Royalty Panels and the Federal courts. He has represented sports leagues, the recording industry, municipal and foreign governments, programming producers and networks, and others in litigation, arbitration and administrative proceedings.
Prior to joining Arnold & Porter, Mr. Garrett served as a law clerk to Justice John Paul Stevens, who was then a judge of the U.S. Court of Appeals for the Seventh Circuit, and as an assistant to the General Counsel Office of the Secretary of the Army.
Mr. Garrett earned his J.D. degree from Northwestern University and his B.A. From Northwestern. Mr. Garrett is admitted to practice in the States of Illinois and the District of Columbia.
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Our next witness is Mr. R. Bruce Rich, who is with the law form of Weil, Gotschal & Manges. He is a nationally recognized expert in intellectual property law, concentrating on issues pertaining to communications, publishing, and cable and commercial broadcasting.
Mr. Rich earned his J.D. From the University of Pennsylvania and is BA magna cum laude from Dartmouth College. Mr. Rich is adjunct professor at New York law school's Media Law Institute.
Our final witness today is the Honorable Marybeth Peters, who is the Register of Copyrights for the United States. Marybeth has served as Acting General Counsel of Copyright Office and as chief of both the Examining and Information and Reference Divisions. She has served as a consultant on copyright law to the World Intellectual Property Organization and authored the General Guide to the Copyright Act of 1976.
Ms. Peters received her undergraduate degree from Rhode Island College and her law degree with honors from the George Washington University Center. She is a member of the bar of the District of Columbia.
Good to have all of you with us, lady and gentlemen. We have written statements from each of you, and I ask at this time unanimous consent to submit them into the record in their entirety.
Now, Marybeth has appeared before us several times, and, Mike, you are familiar with the rule. Folks, as we have previously requested, if you could confine your oral statement to 5 minutes, we don't want to muzzle anyone, but in the interest of time, because we may have a second round of questioning, when you see the red light illuminate brightly into your face, you will know that your 5 minutes have expired. You will not be keel-hauled at that point, but you should wrap up shortly.
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Mike, why don't we start with you.
STATEMENT OF MICHAEL J. REMINGTON, ATTORNEY-AT-LAW AND PARTNER, DRINKER BIDDLE & REATH, LLP
Mr. REMINGTON. Thank you, Mr. Chairman.
Mr. Chairman, Mr. Ranking Minority Member, Members of the Subcommittee, I am grateful for the opportunity to testify before you about the subject of CARP structure and process.
Mr. Chairman, there is no greater privilege and prestige than having worked for this Subcommittee. Last night in preparing for this hearing, I was reviewing some past Subcommittee hearings. I read the printed record for a May 1, 1985, hearing on the CRT and the Copyright Office. Mr. Chairman, you and Mr. Berman and Mr. Boucher were Members of the Subcommittee at that time. Mr. Kastenmeier set the tone for the hearing, ''I have little doubt that the tribunal is in dire need of reform. The Subcommittee has had a classic case of a broken agency on its hands. I do not know whether the agency is broken beyond repair. I certainly hope not.'' History does indeed repeat itself, as you stated, Mr. Chairman, and as was stated by Mr. Boucher.
I appear on my own behalf as a member of the law firm of Drinker Biddle & Reath. I am authorized to state that my views comport with my principal client, BMI, for which I serve as counsel. This Committee is aware that BMI is a performing right organization representing hundreds of thousands of songwriters, composers and music publishers in the licensing of the public performing right in their musical works.
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I am experienced in and familiar with the CARP process and structure. I am also familiar with the CARP's predecessor, the CRT. It is my position and that of BMI that conditions and circumstances relating to the CARP structure and process indicate a clear need for congressional action. Any legislative reform should minimally incorporate first a structure to promote the stability and predictability of results; two, procedures for encouraging settlement and a mechanism for streamlining the resolution of small claims; and three, cost-reduction measures.
First, how to create a structure to promote stability and predictability of results is a difficult problem. Tough choices must be made, and constitutional questions about the location, what branch of Government, for example, of any new structure must be considered. Any reform should eliminate the ad hoc nature of the current process. I prefer the option of a permanent panel of salaried administrative law judges supported by a professional staff, but would certainly not object to a return of the CRT model. There would be no appeal to the Librarian of Congress. A direct appeal to the D.C. Circuit would be permitted.
Second, Congress should enact a mechanism for streamlining the resolution of small claims. BMI and other music claimants have experienced three such proceedings, two of which I will mention, and Mr. Berman alluded to these in his opening remarks. In the 1992 through 1994 DART distribution proceedings, two pro se individuals were awarded $11.03 with arbitrator costs of $12,000. In the 1995 through 1998 distribution proceeding, which resulted in a total award of $6.06 to the same two individuals, arbitrator costs were in excess of $21,000; that is almost 3,000 times the amount in controversy. When transaction costs repetitively so greatly exceed the amount of controversy, the CARP system is not an effective dispute resolution mechanism.
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As regard to small claims, the Committee should consider three amendments. Specifically you should consider a uniform filing fee analogous to the fee for Federal civil action for all claimants amounts; two, an offer of judgment mechanism analogous to rule 68 of the Federal Rules of Civil Procedure; and three, the elimination of oral hearings.
Third, irrespective of whether Congress legislates these reforms, further cost-reduction measures should be adopted. Congress should require the Copyright Office or any new entity to report cost-deduction information on an annual basis. Moreover, the Office should be forced to cap by regulation the billing rates of the arbitrators if you opt for that system, because hourly rates combined with the number of hours worked could still be too costly. The office should also be empowered to cap on a case-by-case basis the cost of the entire proceeding.
In my written statement I suggested several administrative improvements that would result in further cost reductions.
In conclusion, despite initial optimism about the elimination of the CRT in 1993 and its replacement by the ad hoc CARPs, the new process needs legislative reform. Two former Members of this Subcommittee, both of whom became judges, the Honorable Charles Wiggins and the Honorable George Danielson, often sounded the refrain, and I am sure many of you sound the same refrain, ''if it ain't broke, don't fix it.'' I am sure that both Judge Wiggins and Judge Danielson, and I hope the Members on the dais, would agree that the copyright royalty system is broken.
Mr. Chairman, Members of the Subcommittee, I and my client, BMI, and indeed a larger group of copyright owners look forward to working with you on the reform process. Thank you.
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Mr. COBLE. Thank you.
[The prepared statement of Mr. Remington follows:]
PREPARED STATEMENT OF MICHAEL J. REMINGTON
Mr. Chairman, Mr. Ranking Minority Member, and Members of the Subcommittee, I appreciate the opportunity to testify before you on the important subject of ''the Copyright Arbitration Royalty Panel ('CARP') structure and process.'' The functioning of all institutions of government, including the Copyright Office (the ''Office'') and the Library of Congress, is critically important. The fact that a governmental operation is funded through user-fees or delegates functions to non-governmental individuals, such as private arbitrators, does not signify a decreased need for legislative oversight. Vigorous program oversight is every bit as important as institutional, agency oversight.
On April 12, 2002, Mr. Chairman, you wrote a letter to interested parties (including myself) requesting thoughts and opinions about the CARP structure process. As a base-line starting point for examination, you further requested a review of a Report of the Register of Copyrights on options to improve the process. See Options to Improve Copyright Royalty Rate Setting and Distribution Decision-Making, A Report of the Register of Copyrights (February 23, 1998) (''Register's Report''). You, however, specified that a Register's Report is only a template and that comments need not be restricted to the Report. My statement follows the approach you described in your letter.
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I appear on my own behalf but I am also authorized to state that my views comport with those of Broadcast Music, Inc. (''BMI''), for which I serve as Washington, D.C. counsel. In my capacity as an attorney representing BMI, which commenced in 1994, I am experienced in and familiar with the CARP structure and process. I am also familiar with the CARP's predecessor, the Copyright Royalty Tribunal (''CRT'').
From 1978 to the present, the U.S. performing right organizations (BMI, the American Society of Composers, Authors and Publishers (''ASCAP'') and SESAC, Inc. (''SESAC'') [hereinafter ''PROs'']) have been active participants in rate and distribution proceedings, first before the CRT and then the ad hoc CARP system that is utilized today. Annually, in the past, the PROs have participated as claimants to cable, satellite and DART royalty funds and, whenever necessary, participate in distribution proceedings. In the past, they have participated in rate-setting proceedings for cable, satellite, non-commercial educational broadcasting, and jukebox royalties. While the PROs have a successful history of settling compulsory license matters prior to litigation, they have occasionally been obliged to litigate distribution and rate controversies. The PROs have experienced three recent CARP royalty-distribution controversies, two in DART and one in cable (within the music category) regarding individual claimants, one section 118 rate-adjustment proceeding between BMI and ASCAP, acting individually, and the public broadcasting industry (the first after twenty years of successful settlements), and another rate-adjustment proceeding between copyright owners and satellite carriers.
For the record, I was a counsel to this Subcommittee for nearly thirteen years. I served as Counsel from 1977 to 1981, Chief Counsel from 1983 until 1991 and Special Counsel from 1991 to 1992. I also previously served as a prosecutor (in the Attorney General's Honors Program) in the U.S. Department of Justice and as Deputy Legislative Affairs Officer in the Administrative Office of the U.S. Courts. I left the committee staff in early 1992 to become Director of the National Commission on Judicial Discipline and Removal (''National Commission'') where I served for 18 months; I recently testified before the Subcommittee on ''the operations of federal judicial misconduct and recusal statutes.'' Currently, I am a partner in the law firm of Drinker Biddle & Reath LLP where I am the founding chair of the firm's intellectual property group. I am also an adjunct faculty member at two local-area law schools: Catholic University's Columbus School of Law (where I teach legislation) and George Mason University School of Law (where I teach copyright). Except for BMI's interests, my firm has no other client interests in the matters before the Subcommittee this morning.
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As an alumnus of this Subcommittee, I follow its activities very closely. Mr. Chairman, and Mr. Ranking Minority Member, your captaincy of the Subcommittee has been sterling, as has been the leadership of and commitment to vigorous oversight by Chairman Sensenbrenner and the full Committee's Ranking Minority Member, Mr. Conyers. I would be remiss if I did not commend your able staffs.
I. BACKGROUND
Throughout its history, my client, BMI, has participated willingly in facilitating congressional oversight, recognizing that Congress needs to monitor not only how particular copyright laws are being implemented but how government programs are being administered as well. Effective oversight is very useful for government officials responsible for administering programs (such as the Register of Copyrights) because it gives them an opportunity to explain and justify their decisions and priorities; it also gives them the chance to hear the views, including criticisms, of the public and congressional committees, which control budgets and can rewrite legislation.
I am honored to sit at the witness table with the Register of Copyrights, Marybeth Peters. I know she agrees with the importance of oversight. As we shall see, she and her competent and committed lawyers and staff in the General Counsel's office have a difficult task administering a flawed statute. Furthermore, the role of the Office and that of the CARPs, and the Librarian have in recent years become increasingly more difficult. Congress has created new compulsory licenses in complicated and complex areas, delegating issues of first impression to the Office and the CARPs. As manifested in the recent webcasting proceeding, the responsibility of an initial rate-setting can be much more onerous than a rate adjustment of a previously-established rate.
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It is my position that conditions and circumstances relating to the CARP structure and process indicate the need for legislative action. A mere oversight hearing will identify problems, but not resolve them.
Some history is in order. In 1993, Congress replaced the CRT, an independent agency with Presidential-appointed commissioners situated within the legislative branch that was created in the Copyright Revision Act of 1976, with ad hoc CARPs within the Library of Congress. See the Copyright Royalty Tribunal Reform Act of 1993, Pub. L. No. 103–198, 107 Stat. 2304 (1993). Today, whenever there is a controversy on the distribution of compulsory copyright royalties or the adjustment of copyright royalty rates, the Librarian is authorized to convene a three-person CARP. Administrative responsibilities prior to the declaration of a controversy are assigned to the Copyright Office. I believe that this is the first oversight hearing conducted by the Committee specifically on the operations of the CARP structure and process.
In the legislative history that accompanies the Act, this Committee evidenced the view that ''ad hoc arbitration panels are better suited to handle the functions of the Tribunal. . . . Testimony of witnesses before both Houses on the proposal supports this conclusion.'' H.R. Rep. No. 103–286, at 11 (1993). In light of clear statutory text and consistent legislative history, one court found that the CARP system was created by Congress and implemented by the Office to facilitate ''expeditious and informal settlement of claims at the administrative level and to discourage resort to formal, protracted and costly judicial processes of resolving disputes.'' National Ass'n of Broadcasters v. Librarian of Congress, 146 F. 3d 907, 920 (D.C. Cir. 1998).
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Unfortunately, the CARP system has not fulfilled the policy promises of informal, expeditious and inexpensive dispute resolution of royalty controversies. The Copyright Office itself, which sits at the vortex of the CARP system, recognizes that the system has suffered from ''major problems.'' See Register's Report at 11. In retrospect, it was probably an error for the Congress to have abolished the CRT rather than modifying or altering it.
Few dispute that the CARP system has proved to be just the opposite: that is, time-consuming, formal and very expensive. It has not promoted stability and predictability of results. The CARP system does not discourage resort to the costly, formal and protracted process. Settlements are often hard to achieve.
The system should be reformed by Congress, sooner rather than later. Key members of the legislative branch seem to agree. Mr. Chairman, in 1998, shortly after issuance of the Register's Report, you introduced legislation to replace the ad hoc CARP system with a permanent Copyright Royalty Adjudication Board composed of full-time chief administrative copyright judges, and such part-time administrative copyright judges as the Librarian upon the recommendation of the Register, finds necessary. See H.R. 3210, 105th Cong., 2d Sess. (1998). Companion legislation was introduced in the Senate by Senators Hatch, Leahy, and Kohl. See S. 1720, 105th Cong., 2d Sess. (1998). Mr. Chairman, on April 12, 2002, you took the further step (described above) of writing a letter to interested parties soliciting views about the CARP structure and process.
In my view, any legislative reforms should minimally incorporate: (1) a structure to promote the stability and predictability of results; (2) procedures for encouraging settlement of small claims and a mechanism for streamlining the resolution of small claims; and (3) cost-reduction measures.
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II. CONGRESS SHOULD CREATE A STRUCTURE TO PROMOTE THE STABILITY AND PREDICTABILITY OF RESULTS.
The nature of ad hoc arbitration panels inevitably leads to a lack of stability in decision-making and a decrease in the predictability of results, thereby eroding confidence in the process. What to do to reform the process is a difficult problem. Tough choices must be made and constitutional questions about the location (what branch of government) of any new structure must be considered. Any reform should eliminate the ad hoc nature of the process either through a standing cadre of administrative copyright judges on salary equipped with a professional staff, a return to the CRT model (with Presidential appointments and advice and consent of the Senate), or appointment of a permanent, salaried administrative copyright judge (with part-time, salaried colleagues) supported by a professional staff. Continuity among decision-makers and a certain degree of institutional memory are essential. As a general proposition, decision-makers should have expertise (or the ability to acquire knowledge through staff) in applicable law, regulations, precedents and subject matter, and in conducting adjudicatory proceedings.
I prefer a replacement of the CARP system. But if the current system is maintained, the pool of potential CARP members should be expanded. And if the pool is expanded—particularly to include qualified non-lawyers—each party should be permitted a specified number of peremptory challenges (to be determined on a case-by-case basis prior to selection) to proposed panel members as is standard practice in other arbitral fora. Such a rule would reduce the potential for prejudice and continue to ensure that panels consist of qualified, impartial members.
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The Register's Report sets forth five options for reform. Notwithstanding whatever option is selected by the Congress, the Register recommends that the CARP system should include eleven features. See Register's Report at 11–12. I agree with some of these features, to wit:
the statutory requirement that CARP panelists have arbitration experience should be deleted;
the word ''adjudicator'' can be substituted for ''arbitrator'' wherever mentioned in the law;
individuals not associated with an arbitration association, but who meet the qualifications, should be permitted to put their own names into nomination;
the Office should be statutorily authorized to cap, by regulation, the billing rate of arbitrators; and
authorize the assessment of CARP costs on any party that fails to negotiate a settlement in good faith (akin to Rule 68, Federal Rules of Civil Procedure).
All of these items address the salutary goals of promoting stability, expeditious decision-making, and decreased costs. They, however, may not go far enough. For example, cost-caps on the billing rates of arbitrators would not, standing alone, cap the overall costs of a proceeding. The Office's authority to cap costs should be broadened to cover the entire proceeding.
Three of the Register's other recommended features are not objectionable:
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Extend the current time limit from 180 days to 270 days per proceeding;
Extend the current time limit to review CARP decisions from 60 days to 90 days; and
Provide by law a procedure to petition the CARP for reconsideration of its decision.
Nevertheless, careful heed should be taken to avoid the unintended consequences of delaying expeditious decision-making and escalating costs.
Stated differently, a minimalist approach to CARP reform, even if the Register's features were implemented, would, in my opinion, still be doomed to failure. More radical surgery is required. That radical surgery should remedy two structural problems in the current statute.
First, the Copyright Office is placed in the schizophrenic situation of being the intake agency (a clerk of court, of sorts) and the appellate court (as advisor to the Librarian) for CARP decisions. Such dual responsibility is extremely rare in the United States and the Office clearly has struggled with balancing its two roles. For example, in fear of tainting future appellate decisions, the Office often bucks threshold questions to a CARP, refusing to decide them at the stage of the process when they should be decided. Congress should either eliminate the Office's intake role or remove its appellate responsibilities.
Second, in the U.S. justice system, minimal standards of due process dictate one appeal of right, with a second discretionary appeal (as a safety check on the initial appeal). This was the practice under the CRT's statute, and it basically is the practice adopted by the caselaw of the D.C. Circuit (which is the appropriate circuit for judicial review of copyright arbitration royalty appeals). After determining the appellate role of the Librarian of Congress (and the advisory role of the Copyright Office), this Committee should follow the justice-system standards that have been used over the years for the U.S. magistrate, bankruptcy court, and Article I court systems.
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III. CONGRESS SHOULD ENACT PROCEDURES FOR ENCOURAGING SETTLEMENT OF SMALL CLAIMS, AND A MECHANISM FOR STREAMLINING THE RESOLUTION OF SMALL CLAIMS.
The statutory mandate prescribing allocation of CARP costs in a ''distribution proceeding in proportion to the royalty funds awarded to each party'' has had the unfortunate effect of allowing those with small claims to inflate their claims and force litigation at the expense of other parties. Abuses of the process have occurred and the Office has consistently found that it lacks authority either to prevent these abuses or to expedite decision-making. Arbitrator costs alone far exceed the amount-in-controversy. For example;
the costs of the arbitrators in the 1992–94 Digital Audio Recording Technology ('DART'') distribution proceeding, which resulted in an award of $11.03 to two individual claimants were more than $12,000 (more than one thousand times the amount-in-controversy);
the costs of the arbitrators in the 1995–98 DART distribution proceeding, which resulted in a total award of $6.06 to the same two individual claimants ($5.04 to one and $1.02 to the second) were in excess of $21,000 (almost three thousand times the amount-in-controversy); and
in the 1991 Cable Distribution Proceeding (Phase II), the arbitrators awarded $63.74 to an individual claimant, yet the costs of the arbitrators were more than five hundred times that amount.
To make it worse from a cost-perspective, all of these matters, after final disposition by the Librarian of Congress, were appealed to the U.S. Court of Appeals for the District of Columbia. The appeal in the second matter was withdrawn; the appeals in the first and third matters necessitated the preparation of a record on appeal and the submission of briefs by the U.S. Department of Justice and the parties. Both appeals were summarily denied. One went even farther because it was subjected to a petition for certiorari in the U.S. Supreme Court and a petition for rehearing before the Court. And, all three proceedings were ''paper'' proceedings before the respective CARPs designed to reduce arbitrator costs. The PROs were not the only institutional parties forced to bear these costs. Additionally, it should be noted that said costs do not include outside attorneys' fees, in-house attorneys' fees and staff time, Copyright Office cost deductions from the funds and costs to the U.S. Department of Justice. In the two DART proceedings, the PROs were part of a ''settling party'' team that also included the National Music Publishers' Association, the Songwriters Guild of America, the Gospel Music Coalition, and Copyright Management, Inc., with costs borne by their respective individual members and affiliates. In the cable proceeding, the PROs acted together.
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When transaction costs so greatly exceed the amount-in-controversy, the CARP system is not an efficient and effective dispute-resolution device. In all three proceedings, the individuals rejected repeated attempts to settle for reasonable amounts. Neither the Office nor the arbitrators paid more than lipservice to settlement—neither took an active role (similar to that performed by U.S. district court judges or U.S. magistrate judges) to encourage settlements. Claimants with small claims have been able to use existing CARP rules to prolong CARP proceedings and derail settlements at virtually no cost to themselves, but at substantial cost to all other interested parties. In these circumstances, it is abundantly clear that the CARP system has not met the expectations of its congressional sponsors or the parties who are compelled to litigate their royalty distribution disputes within the confines of this system.
Several of the reforms (particularly those related to small claims) discussed in the Register's Report would foster the goal of settling claims at the administrative level, minimizing costs and encouraging expeditious and efficient resolution of disputes. To achieve these goals, statutory changes are necessary. Otherwise, the Register would already have implemented the proposed changes as regulations.
The Committee should consider three amendments to the Copyright Act to cure statutory defects and misuses of the rules, while at the same time giving due recognition to the rights of those with small, albeit valid, claims to participate in CARP proceedings. The intent of these proposals is to create an incentive for all parties to engage in meaningful settlement discussions prior to commencement of CARP proceedings. The amendments are not designed to injure or threat unfairly small claimants. Specifically, I propose that there be: (1) a uniform filing fee (analogous to the filing fee for a federal civil action) for all claimants; (2) an offer of judgment mechanism analogous to Rule 68 of the Federal Rules of Civil Procedure applicable to small claims; and (3) the elimination of oral hearings in small claims proceedings.
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A. Establishment of a Filing Fee. I propose that all parties in a copyright arbitration royalty distribution or rate proceeding pay a filing fee at the time of filing a notice of intent to participate. The filing fee would be identical to that required for all litigants filing civil actions in federal district courts (currently $150.00). See 28 U.S.C. §1914. Because the filing fee would be pegged to a notice of intent to participate, a single fee would be paid for each notice filed. The Office now requires a single notice of intent for both Phase I and II proceedings with respect to cable and satellite distributions; therefore, only one filing fee would be paid for each proceeding.
Establishment of a filing fee would ensure that all parties share a base-level burden of the costs of the proceeding. The filing fee would be paid before the commencement of a proceeding because such filing fee could very well exceed the ultimate amount of any award, as it would have in the case of the DART and cable proceedings discussed above.
Moreover, payment of a filing fee—which would be added to the relevant fund or subfund—could help defray the administrative costs incurred by the Office in connection with these proceedings. As stated above, the administrative costs of some proceedings are disproportionately high compared with the funds in controversy. A filing fee would result in a more reasonable relationship between administrative costs and the amount of the funds in controversy.
Finally, payment of a reasonable filing fee by all parties who file a notice of intent to participate in a royalty distribution or rate adjustment proceeding would discourage the filing of frivolous claims and create an incentive for all parties, regardless of the size of their claims, to engage, early on, in meaningful settlement discussions. This is particularly true with regard to those asserting small claims, who have little or no incentive to engage in significant settlement discussions under the current statute and CARP regulations. I would be happy to assist in the drafting process.
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B. Offers of Judgment to Small Claimants. An offer of judgment procedure—similar to that found in Rule 68 of the Federal Rules of Civil Procedure—to encourage settlements and to avoid protracted arbitration proceedings should be enacted. Such a procedure would apply only in small claims matters where the amount-in-controversy is $15,000 or less (per annual fund) and where the costs of the arbitration may well significantly exceed the amount-in-controversy.
Rule 68 has the force of statutory law, having been proposed by the U.S. Supreme Court and permitted to go into effect by the Congress. Application of its concepts to small claims in copyright arbitration distribution proceedings would encourage the settlement of small claims, and would promote the imposition of sanctions in instances of abuse. I would be pleased to assist in the drafting process.
C. Elimination of Oral Hearings in Small Claims Proceedings. Cost savings were achieved in the three small claims proceedings mentioned above because they were all adjudicated on the basis of paper (not oral) proceedings. But unnecessary costs were incurred due to the current unwillingness of the Copyright Office (or lack of authority therein) to grant motions to proceed on paper documents, deferring this decision to an as yet unconstituted CARP where the motion is later subjected to oral arguments. Cases involving small claims (defined statutorily) should automatically be subjected to a paper proceeding. In matters where no genuine issues of material fact exist, the Office should be statutorily authorized to make a summary judgment decision based on facts not in dispute, applicable law and precedents, before the CARP is empanelled.
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IV. CONGRESS SHOULD ENACT OTHER COST-REDUCTION MEASURES.
Creation of a permanent structure with salaried government employees, along with a small claims process, would inevitably save substantial costs in comparison to the current CARP system with no decrease in the quality of decision-making. Irrespective of whether Congress legislates these reforms, further cost-reduction measures can and should be adopted.
Under current law, the Library of Congress and the Office may deduct reasonable costs from royalty fees deposited or collected. Such deductions are generally made before royalties are distributed to any copyright claimants. See 17 U.S.C. §802(h). These deductions, which are significant, are not readily ascertainable by the public or to the responsible appropriation and authorization committees in the legislative branch. All that is known is that costs are paid by copyright owners. The fact that no costs are at taxpayer expense does not signify the absence of a need for fiscal accountability. As in the business world, the system would benefit from transparent, sound and consistent accounting practices. Questions could be answered: Are inquiries posed to the Copyright Office by the general public deducted from royalty funds? Are congressional inquiries? Are user costs increasing or decreasing? Does the Office have a mechanism to prevent abuses on its time and resources? Let me make it clear that there is no evidence of waste or abuse in the Office's accounting practices. However, if Congress required that the Office (or any new entity) report cost-deduction information on an annual basis to the House and Senate Judiciary Committees, good government (including cost savings) would be served. Through your oversight power, the House and Senate Judiciary Committees could then monitor the costs being shouldered by authors and copyright owners. Without cost data, your ability to assess the functioning of the CARP process is hobbled. Copyright owners should know how costly is a system for which they pay. The administrative head of the CARP process should know how important are fiscal responsibilities.
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Moreover, as discussed above, to further reduce costs, the Office should be authorized to cap, by regulation, the billing rates of arbitrators. Currently, there is a wide disparity in these rates. The Office has not allowed arbitrators to be stricken on the basis of high-hourly rates. Authorization of a cap on rates, if responsibly implemented by the Office, could solve this problem. Because hourly rates (combined with the number of hours worked) could still be too costly, the Office should also be empowered to cap on a case-by-case basis the costs of an entire proceeding.
V. ADMINISTRATIVE IMPROVEMENTS COULD BE IMPLEMENTED.
Several improvements could ordinarily be made to the CARP process though amendments to Office rules and regulations. As a group for the past five years, copyright owners have made numerous proposals to the Office that have not been implemented. The Committee should either consider enactment of these proposals as legislative changes or strongly encourage the Office to take immediate regulatory action (within a designated time-period with a report back to the Congress):
A. Public Records. Contemporaneous notice of CARP decisions through publication in the Federal Register is necessary. The Office has made laudable improvements to its website; these improvements should be expanded to the CARP process.
B. Settlement Period. A formal settlement time-period (with adequate time and notice to the parties of the names and addresses or other participants) before the filing of written direct cases should be required.
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C. Precedential Rulings. Rulings of the Librarian and the CARPs are to be accorded precedential effect in subsequent proceedings. The Office should establish a repository readily available to the public electronically and at the Library of Congress, which collects all rulings of the Librarian and the CARPs.
D. Summary Judgment Authority. If there are no genuine issues of material fact in dispute, the Office should be entitled to make a decision disposing of the matter prior to an adjudication by a CARP.
A final word about judicial education. The Office should avail itself of judicial education programs that are provided to administrators and judges in the judicial branch of government, and ALJs in the executive branch. Admittedly, it is rare for legislative branch official to cross-fertilize with their counterparts in the other two branches. But, I am confident that a letter from you, Mr. Chairman, to the Director of the Federal Judicial Center, for example, would suffice to admit Copyright Office officials to appropriate educational sessions at the Center.
CONCLUSION
Mr. Chairman and Mr. Ranking Member, I again commend you for your leadership on intellectual property issues, and copyright law in general, including the process in which certain copyright royalties are distributed and royalty rates established. Despite initial optimism after the elimination of the CRT in 1993 and its replacement by the ad hoc CARPs, the new process has proven to be flawed and in dire need of legislative improvements. Two former Members of this Subcommittee, both of whom became judges (the Honorable Charles Wiggins and the Honorable George Danielson) often sounded the refrain: ''If it ain't broke, don't fix it.'' I am sure that both would conclude, after these hearings, that the CARP system is broken. In sum, Congress should:
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replace the ad hoc nature of the CARP process with a permanent panel of salaried administrative law judges supported by a professional staff;
create a small claims process;
further reduce costs and add fiscal accountability to the process;
promote various administrative improvements; and
continue to exercise vigorous oversight.
I look forward to working with you on effectuating these improvements.
Mr. COBLE. Mr. Garrett.
STATEMENT OF ROBERT A. GARRETT, ATTORNEY-AT-LAW AND PARTNER, ARNOLD & PORTER
Mr. GARRETT. Mr. Chairman, Members of the Subcommittee, let me thank you for inviting me to testify this afternoon. It is an honor to appear before you and the Subcommittee as well as to be on a panel with the Register of Copyrights and my colleagues.
Let me summarize my statement with three points. First I believe that all parties here share common objectives, and they want a system that produces consistent results, they want a system that produces credible results, but I believe most importantly they also want a system that produces results at an affordable cost. This is a concern that everyone shares regardless of whether it is a copyright owner or a copyright user, a small party or a large party.
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The existing system, I believe, is too costly. It is a system that is not affordable for all parties. As you consider the different options and different alternatives before you, I ask that you put foremost in your consideration issues of cost, trying to make this process one that is more affordable, one that is less costly to all of the participants.
Secondly, Mr. Chairman, you have wisely entitled these hearings as CARP structure and process. I believe the terms ''structure'' and ''process'' encompass the principal issues that are before you. But in my view, the most important issues here are those that relate to structure and not to process, and the changes that should be made here are changes that go to process and not to structure.
When these issues have arisen in the past, the primary focus has been on structure and trying to determine which decisionmaking body is the best and most suited for resolving copyright royalty allocations or copyright royalty ratemaking. The thought is that if you simply get the right body, the right decisionmaking body, that the problems are going to go away, and I don't believe that that is the case, Mr. Chairman. I believe that the problems here, particularly the problems of cost, are ones that relate more to process. I believe that your specific focus here should be on trying to improve that process.
Thirdly, there are several different process issues that I believe should be addressed. My written statement highlights two of them, two that I consider to be the most important at least. These are the issues that concern the system of evidentiary hearings as well as discovery before the existing CARPs. I think without a doubt the two principal cost concerns, the two principal costs of the current system, are the evidentiary hearings and discovery. I believe that one should either eliminate or severely restrict the scope of the evidentiary hearings. They are not necessary, they are very costly, and I don't think that they produce markedly different results from a paper proceeding. It is frequently done by administrative agencies in the United States using a paper record, and I would recommend that example as well here.
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With respect to discovery, I believe that that, too, should be eliminated. We have a very different form of discovery in the CARP proceedings, the hybrid form, and it is not the Federal Rules of Civil Procedure type of discovery. It is a limited form of discovery, which is nevertheless one that is very costly, one that breeds uncertainty, and I think that the results of the cases, the results of the different proceedings before the CARPs, would not be materially different if one did eliminate discovery.
Let me just say in conclusion, Mr. Chairman, that there are a number of difficult issues here. I believe that you have done exactly the right thing by asking those who are affected by this process to give their views. I know that my colleagues have views that some—that they probably share generally, and some have different views. And I look forward to working with you and the Subcommittee in resolving these different issues.
Mr. COBLE. Thank you, Mr. Garrett.
[The prepared statement of Mr. Garrett follows:]
PREPARED STATEMENT OF ROBERT ALAN GARRETT
Mr. Chairman and members of the Subcommittee, my name is Bob Garrett and I am a partner in the law firm of Arnold & Porter in Washington, D.C. Thank you for inviting me to testify as part of your oversight hearing on ''The CARP (Copyright Arbitration Royalty Panel) Structure and Process.'' During the past twenty-five years, I have represented professional and collegiate sports interests and the recording industry in several proceedings before CARPs and their predecessor, the Copyright Royalty Tribunal (''CRT''). However, I am not testifying today on behalf of these clients. The views I express are my own and do not necessarily reflect the views of any other party. I am here to offer my perspective, based upon my experience, concerning the CARP structure and process. Before I do so, I believe it is useful to discuss briefly (1) the nature and history of the CARP system; and (2) the policy objectives that you may wish to consider in assessing that system.
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1. NATURE AND HISTORY OF THE CARP SYSTEM
Twenty years ago, in November of 1982, the CRT issued a decision in which it set the royalty rate that cable systems must pay when they retransmit certain copyrighted television programming. Ted Turner of Turner Broadcasting, a vocal critic of the CRT and its rate decision, testified before Congress that ''this CRT decision puts us out of business'' because the rate is too high; ''they have knocked us out, and I didn't even go talk to them because I didn't figure that they would put us out.'' Cable Copyright and Signal Carriage Act of 1982: Joint Hearing on H.R. 5949 Before the Comm. on Commerce, Science, and Transp. and the Comm. on the Judiciary, 97th Cong. 114 (1982). Senator Long of Louisiana interjected, ''Please excuse me, but who is this CRT?'' Mr. Turner responded:
That is a good question. . . . I had never met anybody on it. It is a group. I knew they existed, but I didn't know they did anything. . . . [Then they released their decision] on my 44th birthday, 2 weeks ago, and I was in shock.
Id. at 114–15.
More recently, the question being asked is, ''Who is this CARP?'' The simple answer is that nine years ago, in the Copyright Royalty Tribunal Reform Act of 1993, Congress chose to replace the CRT with a system that relies upon multiple ad hoc panels of arbitrators called ''CARPs''—the acronym for ''Copyright Arbitration Royalty Panels.'' The purpose of CARPs is twofold: (1) to determine royalty rates and terms for the use of copyrighted works pursuant to compulsory licenses in Sections 111, 112, 114, 115, 116, 118 and 119 of the Copyright Act; and (2) to allocate among copyright owners compulsory licensing royalties collected pursuant to Sections 111, 116, 119 and 1003 of the Copyright Act. As you know, Mr. Chairman, these compulsory or ''statutory'' licensing provisions generally compel copyright owners to license certain uses of their works to different parties who pay the prescribed royalty and comply with other statutory and regulatory conditions.
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Each CARP consists of three private attorneys who are nominated by professional arbitration associations and appointed by the Librarian of Congress after consultation with the Register of Copyrights and input from the affected parties. A CARP normally conducts a trial-like evidentiary hearing in which interested parties present evidence and argument and cross-examine witnesses. These hearings can be quite extensive; for example, the most recent CARP, that involving the royalty to be paid by webcasters when they transmit sound recordings over the Internet, consumed 40 days of evidentiary hearings and generated almost 15,000 pages of transcript as well as thousands of additional pages of written testimony and exhibits. Following the evidentiary hearings, the CARP issues a written report in which it recommends, based upon the record before it and relevant precedent, a royalty rate or royalty allocation. The Register of Copyrights reviews the CARP's report and makes a recommendation as to whether the Librarian of Congress should adopt or should modify that report. If the Librarian rejects the CARP report in whole or in part, he must reach his own decision with the advice of the Register. Parties may seek judicial review of the Librarian's decision in the U.S. Court of Appeals for the District of Columbia Circuit. See generally 17 U.S.C. §801 & 802.
As long as compulsory licenses exist, it will be necessary for either Congress or some other body, like a CARP, to determine the amount of compulsory licensing royalties that copyright owners are entitled to receive. There is, of course, nothing novel about this concept. The 1710 Statute of Anne—from which copyright law in the United States is a direct descendant—authorized several different government officials, including the Archbishop of Canterbury and the Lord Keeper of the Great Seal, to resolve disputes over whether the cost of a particular book was ''too high and unreasonable'' and to set prices that ''according to the best of their judgments . . . shall seem just and reasonable.'' 8 Anne C. 19, §4 (1710), reprinted in 8 Nimmer on Copyright, App. 7–7 to 7–9 (2002). Likewise, the Great State of North Carolina, following the Articles of Confederation, empowered local courts to determine the price of copyrighted books, maps and charts—in cases where the author or publisher ''set an unreasonable price on the same, regard being had to the probable labour, expence, and risk of such author and publisher.'' Laws of the State of North Carolina, ch. 26, sec. II (1785), reprinted in 8 Nimmer on Copyright, App. 7–33 (2002). See generally Korman & Koenigsberg, The First Proceeding Before the Copyright Royalty Tribunal: ASCAP and the Public Broadcasters, 1 Comm. & the Law 15, 17–18 (1979). The CARP system may thus be viewed as merely the most current mechanism by which government-set prices replace market-set prices for the right to use intellectual property in the United States.
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2. POLICY OBJECTIVES
Over the years there has been considerable debate concerning the appropriate structure and process for setting copyright royalty rates and allocating copyright royalties. As discussed below, that debate has produced a number of different ideas as to the most appropriate structure and process. It also has identified the principal policy objectives that the affected parties believe should be achieved in determining that structure and process. Briefly-stated, there are three such objectives—those that relate to Cost, to Consistency and to Credibility:
Cost—copyright owners and copyright users alike are understandably concerned about the costs of rate-setting and royalty allocation proceedings. These costs can be quite substantial. They take the form of, among other things, attorney fees, expert witness fees, consultant fees, arbitrator fees, Copyright Office costs, out-of-pocket expenses and time lost from running businesses and producing copyrighted works. These costs have the effect of both decreasing the compulsory licensing royalties that copyright owners receive and increasing the amounts that copyright users must pay for the compulsory license—a result that is inherently antithetical to a principal purpose of compulsory licensing, i.e., the reduction of transaction costs. The parties affected by compulsory licensing seek a system of ratemaking and royalty allocation that minimizes their costs as much as possible.
Consistency—the parties also seek a system that fosters predictability and continuity. It is generally accepted that voluntary settlements among affected parties to royalty disputes are preferable to having those disputes resolved through litigation and government intervention. Procedural and substantive consistency are necessary to provide the parties with the greatest possible degree of certainty in assessing litigation risks and considering prospects for settlement. Such consistency promotes settlement and reduces cost.
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Credibility—the parties also seek a system with a decision-making process that they believe is legitimate; they want to feel that the decision-makers understand the issues involved in the cases being decided and that those cases are decided in a timely and professional manner. The objective here is to ensure that the system is not only fair and reasonable, but that the affected parties also perceive it as fair and reasonable.
While there may be general agreement as to the principal policy objectives, the parties do not always agree on whether or to what extent particular structures or procedures achieve those objectives. Moreover, it is not possible to achieve all these objectives equally in determining the most appropriate structure and process of copyright rate-setting and royalty allocation. When choosing among particular structural and procedural alternatives, it may be necessary to make trade-offs. A particular procedure, such as requiring full-blown federal court discovery, may enhance at least perceptions as to the credibility of the decision-making process. But that procedure may also come at a financial cost and a time-delay that is unacceptable to all or some of the parties. Each party, and ultimately the Copyright Office and Congress, must prioritize the above objectives in assessing each of the relevant structural and process options.
3. STRUCTURAL OPTIONS
When Parliament enacted the Statute of Anne in 1710, it apparently had a difficult time deciding who should be responsible for resolving disputes over the price of copyrighted books. Accordingly, it gave that responsibility to several different persons. Individuals who thought the market price was too high could choose to seek relief (1) in a judicial forum (from the Chancellor and the Lord Chief Justices); (2) in an administrative or quasi-administrative forum (from the Lord Chief Baron of the Exchequer, the Archbishop of Canterbury and the Lord Keeper of the Great Seal of Britain); or (3) from private bodies with official sanction (Vice-Chancellors of the Universities). See 8 Anne C. 19, §4 (1710); Korman & Koenigsberg, supra at 18. There also has been no shortage of ideas here in the United States as to the most appropriate structure for setting compulsory licensing royalty rates and allocating compulsory licensing royalties.
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a. Proposals Leading to CRT Creation
The CRT had its origins in a 1969 Senate bill that comprehensively revised the Copyright Act of 1909 and provided for various compulsory licenses. That bill entrusted royalty ratemaking and distribution responsibilities to a body it named the ''Copyright Royalty Tribunal.'' The Tribunal, as envisioned by the Senate bill, was very different than the CRT that eventually emerged in the Copyright Act of 1976. Under the Senate version, the Tribunal consisted of ad hoc arbitration panels created by the Register of Copyrights from lists of arbitrators supplied by the American Arbitration Association or similar organizations—in short, a structure similar to the current CARP system. The Senate ultimately approved this structure, along with provisions that subjected Tribunal rate decisions to Congressional veto and limited judicial review of Tribunal decisions to cases of corruption, fraud, partiality or other prejudicial misconduct. See CRT Reform and Compulsory Licenses, 1985: Hearings on H.R. 2752 and H.R. 2784 Before the Subcomm. on Courts, Civil Liberties, and the Admin. of Justice of the House Comm. on the Judiciary, 99th Cong. 84–85 (1985) (Statement of Donald Curran, Associate Librarian of Congress and Acting Register of Copyrights) (''Curran Statement'').
The House changed that structure, in part out of concerns over whether it was constitutional for an employee in the Legislative Branch, the Register, to appoint Tribunal members who perform executive branch functions. That concern was heightened by the then recent decision in Buckley v. Valeo, 424 U.S. 1 (1976). There the Supreme Court held that persons exercising executive branch functions must be appointed in accordance with Article II, Section 2, Clause 2 of the Constitution, which requires appointments by the President, the courts or ''heads of departments.''
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The copyright revision bill that the House passed in 1976 established a permanent ''Copyright Royalty Commission,'' consisting of three members appointed by the President for staggered terms of five years. The House bill also expanded judicial review, and it eliminated the legislative veto of the Commission's rate determinations. According to the House Report accompanying the copyright revision legislation, such determinations ''were not appropriate subjects for regular review by Congress.'' H. Rep. No. 94–1476 at 179 (1976).
The conferees generally acceded to the House version—except that they renamed the Commission the ''Copyright Royalty Tribunal;'' and they expanded the number of commissioners to five appointed by the President (and confirmed by the Senate) for staggered seven-year terms. (The number of CRT commissioners was reduced to three in 1990). The CRT became an independent agency in the legislative branch that received administrative support from the Library of Congress but had its decisions reviewed directly by the federal court of appeals. See Conf. Rep. No. 94–1733 at 81–82 (1976).
b. Proposals Leading to CRT Abolition
Although Congress considered significantly different structures for royalty rate setting and royalty allocation before creating the CRT in the 1976 Act, the affected parties apparently paid little attention to this issue. Tom Brennan, the first CRT Chairman (who also served as chief counsel to the Senate Subcommittee on Patents, Trademarks and Copyrights during its consideration of that legislation) observed:
Seldom has an entirely new agency of the federal government been created with so little study, and such limited input and analysis by the private interests most directly involved.
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Brennan, The Copyright Royalty Tribunal—An American Perspective, 34 J. Copyright Soc'y 148 (1986). In the years following its creation, however, the CRT received considerably more attention. Upset by a 1982 CRT rate decision, the cable industry called for the abolition of the CRT. Certain CRT commissioners, as they were leaving the Tribunal, also called for its abolition. Concerns were expressed over whether the workload required several full-time commissioners and whether political appointees, particularly those with no copyright or communications industry experience, were best qualified for making decisions as to copyright rate determinations and royalty distributions.
During the 1980's and early 1990's Congress considered a host of different and generally conflicting proposals as to the structure that should be established for royalty rate-setting and distribution. These proposals included the following—
Eliminate the compulsory licenses and allow market negotiations, thereby obviating the need for any ratesetting and royalty allocation mechanism;
Place the CRT in the Copyright Office;
Transfer the CRT's responsibilities to the Copyright Office;
Place the CRT in the Department of Commerce and vest authority to appoint Tribunal members in the Secretary of Commerce;
Place the CRT in a regulatory agency such as the FCC or FTC, which would assign fact-finding responsibilities to ALJs;
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Vest authority to appoint CRT members in a federal court;
Reconstitute the CRT as an independent agency in the executive, legislative or judicial branch;
Reconstitute the CRT as a part-time commission of experts in communications or copyright law who oversee ad hoc arbitration panels;
Transfer the CRT's responsibilities to a federal court or to a newly created copyright court, which could make use of special masters (similar to the ASCAP and BMI rate courts);
Adopt a system of private arbitration (similar to that in some European countries) where collective bargaining units would have the authority to bind all affected parties, with judicial or administrative review or compulsory arbitration only where the bargaining units are unable to agree;
Implement a 1981 GAO suggestion of making CRT membership part-time, with Presidentially-appointed members meeting at the call of the Register of Copyrights;
Retain the CRT with only one full-time commissioner and two part-time commissioners who would utilize ALJs to conduct fact-finding and to render initial decisions;
Set royalty rates in the law with an objective self-adjusting mechanism;
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Require private arbitration under the rules of the American Arbitration Association before arbitrators selected for a term of three years; and
Transfer the CRT's responsibilities to panels of ALJs, appointed for terms of several years, that would operate within the Copyright Office.
In 1993 Congress concluded that there was insufficient work to justify a full-time agency. See H.R. Rep. No. 103–286, at 9 (1993). It thus enacted the Copyright Royalty Tribunal Reform Act of 1993, which abolished the CRT and replaced it with the CARP system. As discussed above, the CARP system is comparable to the one that the Senate had originally approved during its consideration of the Copyright Act of 1976. One major difference was that the 1993 law contemplated review of CARP decisions by the Register and Librarian prior to judicial review, while the Senate version, as also noted above, provided for legislative veto and limited judicial review.
c. Proposals For CARP Reform
The debate over the proper structure for royalty rate-setting and distribution did not end with the Copyright Royalty Tribunal Reform Act of 1993. In 1996 Senator Hatch introduced a bill that would have replaced the CARPs with single ALJs in a newly-created U.S. Intellectual Property Organization (''USIPO''). The USIPO would have consisted of the Copyright Office and the Patent and Trademark Office. Under Senator Hatch's bill, an ALJ's decision could be appealed to the Commissioner of the USIPO and then to the U.S. Court of Appeals for the Federal Circuit.
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In mid-1997 a CARP recommended a royalty rate that the satellite carrier industry considered too high. Accordingly, the satellite carriers urged Congress to reform the CARP process. In early 1998 the Copyright Office presented Congress with five options for doing so. Those options, which were comparable to some of the options that had been discussed during the debates over CRT reform, were:
(1) Retain the CARPs but make certain improvements in the CARP system;
(2) Replace the CARPs with ALJs;
(3) Replace the CARPs with non-ALJ presiding judges; replace the CARPs with a Copyright Royalty Adjudication Board (''CRAB''); and replace the CARPs with a new, independent regulatory agency.
See U.S. Copyright Office, Options to Improve Copyright Royalty Rate Setting And Distribution Decision-Making (Feb. 23, 1998) (''1998 Register Report''); Hearing Before the Subcomm. On Courts and Intellectual Property of the House Comm. on the Judiciary, 105th Cong. 14 (1998) (Prepared Statement of Hon. Marybeth Peters, Register of Copyrights) (''1998 Register Statement'').
The Register concluded that the CARP system (a) is too expensive because of the high costs of the arbitrators; (b) lacks stability and predictability of results; and (c) places a burden on the Copyright Office and the Library of Congress. 1998 Register Report at ii. ''Our experience with this system over the past few years,'' said the Register, ''has persuaded us that it is burdensome, costly, and inefficient.'' 1998 Register Statement at 14. The Register thus recommended that Congress replace the CARPs with CRABs.
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The CRAB approach was embodied in your bill, Mr. Chairman, HR 3210, which you introduced on February 12, 1998; that bill was reported favorably by this Subcommittee on March 18, 1998. HR 3210 would have established a Copyright Royalty Adjudication Board (''CRAB'') within the Copyright Office. The CRAB would consist of one full-time chief administrative copyright judge (''ACJ'') and two to four part-time ACJs, all of whom would be appointed by the Librarian upon the recommendation of the Register. The chief ACJ, who would be appointed for a term of five years, would be an attorney with experience in handling administrative hearings or court trials and demonstrated knowledge of copyright law. The other ACJs, who would be appointed for different terms of up to five years, would need expertise in the business and economics of industries affected by the CRAB.
Under HR 3210, the CRABs would conduct proceedings in accordance with rules to be adopted by the Librarian upon the recommendation of the Register and in consultation with the CRAB. The final decisions of the CRAB would be subject to review by the U.S. Court of Appeals for the Federal Circuit, rather than (as is the case with the CARPs) review by the Register, Librarian and U.S. Court of Appeals for the District of Columbia Circuit. The Register, however, would have the right to submit her position to the CRAB on any matter before the CRAB, as well as to seek reconsideration of any initial decision rendered by the CRAB.
4. PROCESS PROPOSALS
As the above suggests, there have been a number of thoughtful and creative proposals over the years concerning the most appropriate structure for copyright royalty ratemaking and allocation. Each of the proposed structures has its advantages and disadvantages, as well as its supporters and detractors. While reasonable arguments can be made for choosing one structure over another, I do not believe that simply changing the structure, once again, will effectively deal with the problems that exist in the current CARP system; nor will such a change achieve the objectives that the affected parties wish to achieve in a system of copyright royalty ratemaking and allocation. The real focus, I believe, should be on process rather than structure. Simply moving from CARPs to CRABs or some other structure will not address the very serious cost issues that exist under either system; another move to an entirely new structure (nine years after abandoning the original structure) will also generate new problems of consistency and credibility.
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Several of the copyright owner counsel who regularly practice before CARPs have begun discussion on how best to improve the CARP process. What has emerged from these discussions to date is that there are a variety of process issues that must be addressed. The issues involve matters such as the implementation of settlements negotiated by parties to proceedings, the treatment of confidential material in CARP proceedings, the role of the Copyright Office in providing continuity among various CARP proceedings, time limits, qualifications of decision-makers, small claims, frivolous claims and offers of judgment. I would like to highlight two additional issues that I believe are among the most important issues to be addressed.
Evidentiary Hearings. The single largest cost to clients involved in a CARP proceeding is, typically, the evidentiary hearing. As noted above, the most recent CARP proceeding involved 40 days of adversarial evidentiary hearings and generated almost 15,000 pages of transcript; while the issues in that case were particularly complex, the likelihood is that future royalty ratemaking and distribution proceedings also will require the significant time commitments associated with evidentiary hearings. The amount of time that must be devoted to preparing for, participating in and analyzing (for purposes of briefing) such evidentiary hearings has been and likely will continue to be enormous. It is my personal view that serious consideration must now be given either to eliminating these hearings entirely or to permitting them only in the exceptional case where good cause is shown. I further believe that the results of the copyright royalty ratemaking and allocation proceedings would not be markedly different if they were resolved entirely or primarily on the basis of written submissions.
There are alternative measures that could achieve some cost savings without eliminating evidentiary hearings altogether. For instance, arbitrators could request limited evidentiary hearings solely on issues or witness testimony that they identify after review of the written cases, or argument from counsel on a limited set of issues. Evidentiary hearings could also be confined to direct cases alone; under the current system, evidentiary hearings are conducted on rebuttal cases as well. In addition, hearing time could be reduced by eliminating oral direct testimony and only allowing cross-examination of all witnesses. While each of these proposals, if adopted, would help reduce costs and should be considered, they would not be as cost effective as eliminating evidentiary hearings altogether.
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Discovery. Discovery is another major cost of participation in CARP proceedings. We currently have a hybrid system that may be the worst of all worlds. On the one hand, the rules do not provide for the type and breadth of discovery normally permitted in federal civil litigation. See H.R. Rep. No. 103–286, at 13 (1993) (noting Committee's contemplation that CARPs would not strictly adhere to the Federal Rules of Civil Procedure or Evidence). There are no depositions or interrogatories and the parties are entitled only to documents ''underlying'' particular statements made in written testimony rather than all relevant documentation. Moreover, given the existing timetables for dealing with discovery requests, there is very limited opportunity to make productive use out of the discovery that is available. These limitations are designed to hold down costs and to expedite the proceedings.
On the other hand, the Copyright Office has gradually expanded its view of underlying documents and thus the scope of discovery. Even where the Copyright Office denies a discovery request, a CARP (which may consist of arbitrators more accustomed to the rules prevailing in federal civil court litigation) can effectively reverse that ruling and order the production of documents. While the CARPs (like the Copyright Office) have no subpoena authority, they do have the power to strike and to weigh testimony; thus, it is rare that parties do not comply with CARP orders directing additional discovery—although the CARP may have a more difficult time obtaining information from third parties. The result is that the nature of discovery in CARP proceedings has become increasingly more uncertain and with that uncertainty has come increasing costs.
In my view, this hybrid system is becoming much too costly and uncertain, and serious consideration should be given to eliminating discovery altogether. As an alternative to the current system, I believe the parties should be permitted to choose how much underlying documentation should accompany (or be produced in connection with) their written testimony, and the amount of support provided for the statements in the testimony would go to the weight afforded that testimony. If a party chooses not to provide documentation plainly relevant to particular testimony, less weight or perhaps no weight would be given to the assertions made in that testimony; conversely, the more ''back-up'' that is provided for particular testimony, the greater the weight that would be accorded that testimony.
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To be sure, replacing the formal hybrid discovery process that currently exists with a voluntary process with incentives for full disclosure would be a significant step—and one that may be viewed as undermining to some degree the credibility of CARP proceedings. But the Government already renders major decisions, producing significant economic and personal consequences, without the benefit of the type of discovery available under the current Copyright Office/CARP rules. On balance, I do not believe that any added benefits of such discovery warrant the costs and uncertainties associated with it.
My colleagues who practice before the CARPs will surely have their own views concerning the need for evidentiary hearings and discovery. I urge you to consider those views as well as the views that we all have concerning the other process issues. My hope is that we can reach a consensus as to how these issues should best be resolved because it is in the best interests of all of us and all of our clients to do so.
CONCLUSION
Seventeen years ago, during the debates on CRT reform, the then-Associate Librarian of Congress and Acting Register of Copyrights, Donald Curran, aptly observed: ''Because the compulsory licenses represent a difficult compromise between copyright owners and copyright users, it is doubtful that any administrative body can make all parties happy.'' Curran Statement at 88 n. 11. I believe that observation holds true today as well. Regardless of which body you choose to decide compulsory licensing rate and allocation issues, it is doubtful that that body will make all parties happy; indeed, the nature of the system is such that all parties will generally be unhappy. I do not believe that the overriding objectives of cost, consistency and credibility will be well-served if the structure of the decision-making body is changed each time that parties express disappointment with a particular result. At the same time, I believe it is important to continually focus on ways to improve the process of royalty rate-setting and allocation—in particular, to find ways to reduce the substantial costs of this process.
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Mr. Chairman and members of the Subcommittee, thank you for your time and attention. I look forward to providing you with whatever assistance I can in addressing these difficult issues.
Mr. COBLE. Mr. Rich.
STATEMENT OF R. BRUCE RICH, ATTORNEY-AT-LAW, WEIL, GOTSHAL & MANGES, LLP
Mr. RICH. Thank you, Mr. Chairman, Mr. Ranking Member, Members of the Subcommittee. Thank you for the opportunity to testify before you today. I appear in my capacity as a partner in the law firm of Weil, Gotshal & Manges LLP, two of whose principal offices are located New York City and Washington, D.C. For more than two decades my firm and I have represented a diverse array of media clients, each of whom are significant users of copyrighted music and work through the thicket of music license issues that present themselves in securing necessary copyright rights from the music performing rights organizations, ASCAP, BMI, as well as from the recording industry. I have litigated so-called rate court cases under the ASCAP and BMI consent decrees and served as counsel for a variety of media entities in two CARP rate adjustment proceedings, including the most recent Webcast proceeding.
I should make clear that the views I express today, while shaped by my experience in representing clients in these various areas, are my own and do not necessarily reflect those of my clients.
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I share the concerns expressed by each of the other witnesses today that despite the efforts of the Members of this Subcommittee and of the Copyright Office to create a CARP process that facilitates informal, expeditious, inexpensive, but also fair dispute resolution, the current CARP structure suffers from serious shortcomings which have had quite the opposite effect. In particular I agree with the views expressed by Mr. Remington in his written testimony that the CARP structure is in need of radical surgery, and the goals expressed, although not the recommendations proposed, by Mr. Garrett, that any CARP reform must seek to reduce costs, foster consistency and increase credibility of the decisions.
My written testimony identifies seven procedural issues which I urge the Subcommittee and the Copyright Office to address. First, at least in rate adjustment cases, the overly formalistic rules pertaining to case development and presentation need reform. In particular, parties should be entitled to conduct meaningful discovery, subject to supervision, to prevent abuse prior to having to commit to their trial positions. Discovery and hearings should be conducted in accordance with the Federal Rules of Civil Procedure and the Federal Rules of Evidence.
As things stand now, cases are underdiscovered and overtried. Moreover, the current lack of meaningful discovery coupled with the absence of more rigorous rules of evidence currently allow parties to withhold key impeaching documents, blockade access to critical evidence, and load the record instead with unsupportable and ordinarily inadmissible hearsay.
Second, arbitrator fees and hearing costs have grown exorbitant. The $1.2 million in arbitrator fees charged in the recently concluded section 112, 114 Webcasting proceeding, coupled with the individual legal fees borne by each of the participants, made the process inordinately expensive and prevented many companies from participating in the proceedings. This had the not-incidental effect of forcing those companies which did participate to shoulder for entire industries standing to benefit—to shoulder the burden for entire industries standing to benefit from the statutory license.
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Third, the current system tends to generate decisions that neither build meaningfully on prior precedent, nor establish the kinds of first principles that typify decisions by Federal courts. This creates a lack of predictability that serves no one's interests.
Fourth, case adjudicators must be afforded subpoena power.
Fifth, the use of three adjudicators is unnecessary and inefficient. One highly skilled and trained jurist whose decision is appealable once to an appropriate reviewing court would be far superior.
Sixth, the 180-day time limit for conducting CARP proceedings no matter what their complexity is unworkable. Deadlines are good, but they need to be sensible and extendable as necessary for good cause shown.
Finally, the time between the section 112 and 114 CARP cycles should be extended from their current 2-year cycles where they overlap ludicrously to a period of 5 years.
As explained more fully in my written testimony, I believe, consistent with Mr. Boucher, that, subject to a constitutional analysis, the identified problems can best be remedied by transferring the authority to conduct CARP ratemaking procedures to a Federal district court. Experience with the ASCAP, BMI rate courts in the Southern District of New York, which essentially entail the same search for a hypothetical willing buyer/willing seller rate as is the object of many CARP rate-setting proceedings, has shown that particularized copyright-oriented expertise, even if it did repose in the CARP panels, which it doesn't, is not as important as other skill sets. Rate determinations aiming to replicate competitive market behavior more intensively require a facility with macroeconomics and the basic principles of antitrust, the ability to assimilate facts concerning multiple media marketplaces, the ability to evaluate complex statistical and economic data put forth by the parties' experts, and the ability to sift through and properly evaluate record evidence, including making judgments about issues such as witness credibility. Each of these functions, I would suggest to the panel, is well suited to Federal judicial determination.
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In conclusion, I would like to thank the Subcommittee for its continued oversight of these important matters and offer whatever assistance you and the Copyright Office might deem appropriate in addressing these important issues.
Mr. COBLE. Thank you, Mr. Rich.
[The prepared statement of Mr. Rich follows:]
PREPARED STATEMENT OF R. BRUCE RICH
Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to testify before you today. I appear today in my capacity as a partner in the law firm of Weil, Gotshal & Manges LLP. Over the past 24 years, my Firm and I have represented a diverse array of broadcast and cable television, radio broadcasting, background music, new media and webcasting entities in their music license relationships with the music performing rights organizations and, more recently, with the recording industry. That representation has embraced antitrust counseling and litigation; the rendering of copyright advice; participation in individual and industry-wide negotiations over license fees and terms; prosecution of so-called ''rate court'' cases under the auspices of the ASCAP and BMI government consent decrees; and serving as counsel for various clients in two CARP rate adjustment proceedings.
That background has afforded me, as both an intellectual property and antitrust practitioner, with a broad perspective on the workings of the music licensing marketplace. Particularly in respect of performance rights licensing (whether of music works or sound recordings), I have become intimately familiar with the structure and degree of competitiveness of these music markets; the challenge facing large users of copyrighted material in procuring the necessary performance rights on fair, reasonable, and competitive terms; the operations of the various compulsory license mechanisms that have been instituted as admittedly imperfect substitutes for markets that would not function competitively without them; and the efficacy of the compulsory license procedures that implement those mechanisms.
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Of particular relevance to today's hearing, in respect of music performance rights licensing, our law firm has represented the ABC and CBS Television Networks, Showtime/The Movie Channel and numerous additional cable television networks, the nation's commercial local television broadcasters, the commercial radio industry, as well as the background music entities Muzak and DMX/AEI, in rate court proceedings conducted in the Federal District Court for the Southern District of New York, as well as in appeals to the United States Court of Appeals for the Second Circuit from such proceedings. Those proceedings fundamentally have entailed the determination of ''reasonable,'' i.e., competitive-market-approximating, license fees for public performances of musical works licensed by one or another of ASCAP and BMI, as well as, in some instances, the determination of the forms such licenses should take.
In 1998, our Firm and I represented the Public Broadcasting Service (''PBS''), National Public Radio (''NPR''), and the stations on whose behalf they sought rates in the CARP rate adjustment proceedings for the noncommercial educational broadcasting compulsory license available pursuant to Section 118 of the Copyright Act. See Adjustment of the Rates for Noncommercial Educational Broadcasting Compulsory License, Docket No. 96–6, CARP NCBRA. More recently, our Firm represented various FCC-licensed broadcasters, as well as some twenty webcasters, in the CARP to set rates and terms for certain uses of sound recordings pursuant to Sections 112 and 114 of the Copyright Act—a proceeding which is still in its appellate phase. In this same proceeding, we also represented DMX Music, Inc., the background music service provider, with respect to its use of ephemeral recordings subject to the §112 license. See Digital Performance Right in Sound Recordings and Ephemeral Recordings, Docket No. 2000–9, CARP DTRA 1&2 (''§112/114 Proceeding'').
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Although my views on issues pertinent to today's hearings clearly have been shaped by my experience in representing clients in these various fora, I appear today solely on my own behalf, and the views which I offer through this testimony are solely personal ones.
My testimony today (1) outlines the major procedural shortcomings inherent in the CARP process as it is currently constituted; (2) suggests that, subject to a Constitutional analysis, serious consideration be given to transferring the rate-setting and distribution functions currently carried out by CARP Panels to a court of law; and (3) comments briefly upon the governing standards for rate-setting under §112, 114 and 118 of the Copyright Act.
PROCEDURAL SHORTCOMINGS IN THE CARP PROCESS
Despite the commendable efforts of the Panels convened to hear these proceedings and the Copyright Office attorneys and staff who oversee and facilitate the CARP process, the CARP structure suffers from serious shortcomings which render the proceedings inordinately expensive, inefficient, and burdensome, and which frequently lead to rulings that are substantively flawed. Although a principal motivation for establishing an arbitration process to conduct rate-setting and distribution functions was to streamline the litigation process in order to achieve efficiencies over what one would expect in a courtroom context, experience has demonstrated quite the opposite effect.
Case Development and Presentation
The CARP process, as currently structured, imposes formalistic rules regarding the manner and timing of presentation of cases and the discovery that may be had, accompanied by a virtual absence of rules of evidence. In combination, these features create a frenetic litigation environment in which cases are underdiscovered and overtried.
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Manner and Timing of Presentation of Cases. Parties are required, at the very outset of the proceedings, and prior to any discovery, simultaneously to submit and exchange in written form the direct testimony of each of their witnesses—lay and expert alike—together with every trial exhibit to be utilized. This places the proverbial cart before the horse—effectively locking in the parties' trial positions before anyone has knowledge of anyone else's factual, economic and legal arguments. The salutary effects of permitting discovery prior to requiring parties to commit to trial positions, in terms of narrowing and focusing what is to be tried, are thereby lost.
What is more, during the ensuing hearing phase, material deviation from the written direct cases is prohibited, so that neither side's witnesses—most notably, their experts—are permitted to respond on the stand to the other parties' written direct cases. For all of their prolixity, the parties' governing cases are like ships passing in the night. Issue is not truly joined until the rebuttal phase of the proceedings, which, instead of being devoted to those few issues that normally remain open following presentation of cases in chief, entails further voluminous filings in order to respond to the other side's direct testimony. This is followed by yet another round of hearings in which many of the same expert and fact witnesses are recalled to the stand to respond to that which they were prohibited from testifying about in their initial testimony. The inefficiency and undue expense of such a process is manifest.
Discovery and Evidence. CARP discovery, such as it is, is truncated and carried on under unrealistically short deadlines. Parties to the CARP are not subject to normal rules of discovery such as those found in the Federal Rules of Civil Procedure. The CARP process does not allow for depositions, requests for admission, interrogatories or any other means by which the parties can test the assertions made by their opponents prior to the presentation of hearing testimony. Instead, parties are required to produce solely those documents which ''underlie'' their written direct or rebuttal testimony or exhibits. 37 C.F.R. §251.45. While this is, no doubt, intended to achieve the laudable goal of reducing expense and alleviating undue burdens on the parties, these constraints measurably distort and disrupt the litigation process. The truncated discovery process deprives the parties of the opportunity, prior to trial cross-examination, to test the assertions made by their opponents. Whereas the presumption underlying the Federal Rules of Civil Procedure is to shed light on the parties' respective positions and thereby reduce surprise and promote the narrowing of issues for trial, the present CARP discovery rules have the opposite—and perverse—effect of blockading access to relevant evidence, enhancing the element of surprise, and broadening the scope of what is presented (and cross-examined upon) at trial. Once again, this is, in the end, costly and wasteful—especially taking account (as I do below) of the arbitration fees incurred with each hour of hearing time.
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I am of course aware of the potential for open-ended discovery to spawn abuse and itself become inordinately expensive. The solution, I would submit, is to have the supervising jurist (in my proposal below, a federal judge, or his designee) carefully control the discovery process and curtail abuse.
The CARP hearings themselves lack predictable structure and suffer from the absence of more rigorous rules of evidence. Although all witnesses proffer testimony in written form in advance of their appearances, whether a given witness will rehash his or her testimony on direct examination, merely summarize it in a few minutes, or proceed directly to cross-examination is generally a matter for ad hoc determination, witness by witness, by examining counsel.
More problematic is the absence of meaningful rules of evidence, such as the Federal Rules of Evidence, to control, and make predictable, exactly what evidence will be admissible. By way of example, in the 1998 PBS/NPR CARP, in which I served as counsel, hundreds of hearsay documents (website postings, newspaper articles, and the like) were admitted into the record ''for what they were worth.'' I would suggest they were worth very little. But they occupied inordinate time, motion practice, and photocopy expense to contend with.
With generally sophisticated counsel and well-funded parties, there is little reason inordinately to relax rules of admissibility designed to create a trustworthy record. This is especially true where, as here, there is so little opportunity to engage in meaningful discovery of matters pertaining to your adversary's case. As matters now stand, key impeaching documents residing in the parties' files will safely remain there, immune from disclosure, while the parties are free to lard the record with what should be inadmissible hearsay.
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Finally, the cramped discovery rules virtually require, in certain instances, seat-of-the-pants cross-examinations violating the most cardinal rule of cross-examination: don't ask any question to which you do not already know the answer. The consequence is not merely the risk of eliciting testimony your client would sooner not have; it is also a prolongation of the process in a fashion that cumulatively wears on counsel and the Panel alike. Especially in a trial of the magnitude of the just-concluded §112/114 Proceeding, the impact of such practice on the overall length of the hearings can be significant.
Costs
The arbitrator fees and hearing costs which must be borne by any party wishing to participate in a CARP proceeding can be astronomical. Although the Copyright Royalty Tribunal (''CRT'') was abolished, in part, in order to reduce the expenses associated with maintaining a full-time body of adjudicators who were called upon to hear cases only on a part-time basis, the hourly fees and out of pocket costs charged by the arbitrators empanelled by the CARP process have proven to be far costlier. For example, the §112/114 Proceeding generated more than $1.2 million in arbitrator fees. Add to this the individual legal expenses associated with a proceeding which consumed 41 hearing days, involved the testimony of 75 witnesses (49 on direct and 26 in rebuttal testimony), generated a transcript approaching 15,000 pages and many thousands of pages of exhibits and elicited the submission of over 1000 pages of post-hearing briefs by the parties, and it becomes clear that participation in the compulsory license rate-setting process is available only to the well-funded. This presents a double-edged problem. A major ''free-rider'' burden is placed on those companies which, for whatever reason, feel compelled to participate in the rate-setting process. These companies end up shouldering the burden for entire industries standing to benefit from the statutory licenses. From the perspective of companies which cannot, for financial or other reasons, participate in the CARP process, these entities (which are no less entitled to the statutory license) must either rely upon the records developed by the participating parties or resort to voluntary negotiations with the copyright owners on terms they may otherwise find objectionable.
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Lack of Precedential Value
Because CARP panelists are chosen to participate in a particular case and, potentially, may never participate in another CARP proceeding, there is no expectation that the panelists will develop any expertise in the subject matter or rate-setting tasks at hand that will benefit future proceedings. Decisions rendered on this basis tend to focus on reaching a bottom-line result in the given proceeding rather than on explicating a thorough and complete analysis of the relevant standards and establishing (and building on existing) industry precedent. In contrast to the typical body of federal jurisprudence, where ''first principles'' tend to guide the resolution of cases, CARP decisions have a sui generis quality which deprives this growing body of decisions of coherence and affords future litigants little guidance as to the potential outcome of their cases. These consequences are further magnified by the fact that, in certain contexts, the rate-setting proceedings recur on a two-year cycle, which further promotes narrow decision-making.
No Subpoena Power
The problems associated with the lack of normal discovery rules are magnified by the fact that the Panel has no subpoena power over third parties even if those parties possess information critical to the proceeding. A case in point is the just-concluded §112/114 Proceeding, in which the linchpin of the recording industry's case was 26 license agreements reached between the Recording Industry Association of America and various webcasters. While the Panel and the user-parties to the proceeding were interested in securing testimony from as many of these 26 entities as possible, the absence of subpoena power left the Panel with no recourse but to ''invite'' these parties to testify voluntarily. Not surprisingly, while a handful agreed, most did not.
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Inefficiency of Proceedings
The use of three arbitrators to render decisions injects further inefficiencies into the CARP process. First, the use of multiple arbitrators exponentially increases the cost of the proceedings based on hourly fees charged alone. Much hearing time is devoted to bench conferences among Panel members deliberating on evidentiary rulings and the like. Further, the decisions a CARP Panel is tasked with rendering do not benefit from the inevitable ''split-the-baby'' compromise that tends to result from resort to multiple fact-finders. This is perhaps best evidenced by the fact that virtually every CARP Panel merits ruling is appealed by virtually every party. It appears that no one ever perceives that the Panels have reached fair and equitable results.
Inflexible Statutory Deadlines and Procedures
The statutorily-imposed 180-day timeframe for conducting CARP proceedings, without regard to their complexity, is wholly unrealistic. Particularly in a proceeding like the §112/114 Proceeding, which involved four separate communities of copyright users, participation of a variety of copyright owners, and required rates and terms to be set for two separate statutory licenses for two separate statutory periods, the process affords little opportunity for meaningful development of record facts, even less time for briefing, and equally little time for due deliberation by the CARP Panel. Expedience is a desirable objective—but not at the expense of adequate hearing preparation and considered decision-making. Moreover, the inflexible nature of the regulations governing the conduct of the proceeding actually prevented certain of the parties to the §112/114 Proceeding from fulfilling the terms of a voluntary settlement which would have eliminated the need to set rates for an entire class of copyright users and thus would have substantially reduced the costs and burdens imposed on the parties and the arbitrators, not to mention the Copyright Office itself.
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Too Frequent Statutory Cycles for Rate-Setting
The statutorily imposed two-year cycles for setting rates and terms for the §112 and §114 licenses are too frequent. While the two-year cycle for rate-setting for these licenses may reflect solicitude for the need to readjust rates in new and rapidly-evolving industries, experience in the §112/114 Proceeding demonstrates that this cycle is too short, particularly if there is a delay in convening a CARP for a given cycle. Indeed, the delay in convening the §112/114 Proceeding resulted not only in two cycles of proceedings being arbitrated together, but also in the statutorily mandated ''voluntary negotiation period'' for the upcoming proceeding overlapping with a hotly-contested rate-setting proceeding for the previous cycle. The time between cycles should be extended to a five-year period.
TRANSFER OF CARP RATESETTING AND DISTRIBUTION FUNCTIONS TO A COURT
The efficacy of the operation and structure of the CARP and of the CRT which preceded it has been debated innumerable times by this Subcommittee and its predecessors since the concept of a rate-setting and distribution body to administer the compulsory licenses under the Copyright Act was first conceived. See Copyright Office Oversight Hearing Before the House Judiciary Subc. on Courts and Intellectual Property, 105th Cong. (July 23, 1998) (statement of Marybeth Peters, Register of Copyright, U.S. Copyright Office); Copyright Compulsory License Improvement Act, H.R. 3210, 105th Cong. §7 (1998) (approved by Subcommittee on Courts and Intellectual Property March 18, 1998) (establishing the Copyright Royalty Adjudication Board within the Copyright Office, which would consist of administrative copyright judges); Copyright Clarifications Act of 1996, H.R. 1861, 104th Cong. §11 (1996) (approved by Subcommittee on Courts and Intellectual Property on Dec. 13, 1995 and House Judiciary Committee on March 12, 1996) (clarifying the authority of the Librarian of Congress to make procedural and evidentiary rulings with respect to a CARP proceeding and authorizing (1) payments to arbitrators and other costs to come from the royalty pool in distribution proceedings and (2) in ratemaking proceedings, dividing such costs 50–50 between copyright owners and users unless otherwise determined by the arbitrators); Copyright Royalty Tribunal Reform Act of 1993 §2, 17 U.S.C. §801, 803 (1993) (replacing the Copyright Royalty Tribunal with Copyright Arbitration Royalty Panels); Copyright Royalty Tribunal Reform and Miscellaneous Pay Act of 1989, Pub. L. No. 101–319 (1990) (reducing the number of commissioners on the Copyright Royalty Tribunal), CRT Reform and Compulsory Licenses Hearings Before the House Judiciary Subc. on Courts, Civil Liberties, and the Administration of Justice, 99th Cong. (1985) (redesignating the Copyright Royalty Tribunal as the Copyright Royalty Court and transferring such body to the control of the judicial branch).
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In reviewing this legislative history in the light of my own experiences participating in the CARP process and litigating rate-setting cases before the ASCAP and BMI ''rate courts'' in the Southern District of New York, I have become convinced that the main responsibilities with which a CARP is tasked—namely, rate-making and distribution of royalties—do not principally involve matters which require the particularized, copyright-oriented agency expertise of the Library of Congress. Instead, these tasks require a facility with macroeconomics and with basic principles of antitrust law, the ability to assimilate facts concerning multiple media marketplaces, the ability to evaluate complex statistical and economic data put forth by the parties' experts, and the ability to sift through and properly evaluate record evidence, including making judgments on issues such as witness credibility.
Experience in the rate court context—which essentially entails the same search for a hypothetical free market, ''willing buyer/willing seller'' rate as is the object of many CARP proceedings—has shown that all of these functions are well suited to federal judicial determination. Indeed, were determinations of statutory license fees reposed in the federal courts, virtually all of the procedural flaws inherent in the existing CARP process would be remedied or, at the least, ameliorated. For instance, a trained jurist (whether a district court judge, a magistrate judge or a special master), working within federal rules of discovery and evidence, would supervise discovery, receive evidence, conduct hearings and, where appropriate, invoke summary procedures such as trials on paper records or summary judgment disposition. To keep such proceedings focused and manageable, it could be stipulated that the proceedings must be concluded within a specified period of time (subject to relaxation by the court for good cause). The trial court decision would be subject to review pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.
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Admittedly, transferring the rate-making and royalty distribution functions of CARP Panels to a federal district court requires careful consideration of Constitutional issues which are beyond the scope of this testimony. For instance, when such proposals have been considered by this Subcommittee in the past, questions have been raised, but not resolved, as to whether, because rate-making is not a judicial function, Article III judges may be tasked with conducting non-Article III functions. There is nevertheless precedent for resolving rate disputes in district courts. I have already adverted to the ASCAP and BMI rate court experience. In addition, §513 of the Copyright Act allows individual proprietors of certain categories of business establishments to resolve rate disputes with performing rights societies by bringing such matters before a district court located in the federal circuit in which the proprietor's establishment is located. To be sure, there are consent decree structures in place that contemplate such judicial rate-setting in the ASCAP/BMI setting. Such precedents and procedures, and the experience thereunder, nevertheless provide useful starting points for consideration of how an analogous rate court could function in lieu of the present CARP procedures.
Without conducting a thorough analysis of the matter, it appears at first blush that a number of steps could be taken to limit Constitutional concerns. For instance, one might consider retaining within the Copyright Office the authority to certify the existence of a rate dispute (e.g., upon the close of the voluntary negotiation period) and allowing the Copyright Office to issue a certification of dispute notice which would allow the parties to seek resolution of the case or controversy in the federal courts when voluntary resolutions are not possible. I would encourage the Subcommittee to solicit the advice of the Congressional Research Service as to whether any potential Constitutional issues could be overcome; assuming that to be the case, I commend to the Subcommittee serious consideration of transferring dispute resolution authority in the rate-setting and royalty distribution context to the federal courts.
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Alternatively, the Register of Copyrights has previously suggested establishing a permanent Board to conduct rate-making and distribution proceedings which would be housed within the Copyright Office. Under the Register's formulation, membership on the Board would be established upon recommendation of the Register of Copyrights. Such a Board could presumably also be housed within another agency, such as the Department of Commerce, in which the Patent and Trademark Office (''PTO'') resides.
There would seem to be arguments in favor and against such an approach. As the Copyright Office noted in 1998, establishing a Board within the Copyright Office (or another agency) would raise the stature of the decision makers and would result in final agency decisions that could be appealed directly to the courts, thus removing the intermediate appellate review which currently occurs within the Copyright Office. See Copyright Office Report, supra note 1, at 56. Additionally, the appointment of a permanent Board could potentially reduce costs to parties participating in the rate-setting process, especially those of three expensive arbitrators, thereby encouraging wider participation and a fuller factual record on which to base decisions. Costs would further be reduced by the elimination of the review by the Register of Copyrights and the Librarian.
A major shortcoming of establishing a permanent Board within an agency is that such a Board might be viewed to be too political. Furthermore, the efficacy of such a Board would be greatly dependent upon the procedures established to govern the orderly presentation of cases. At a minimum, any such Board should be invested with subpoena power, and rate-setting disputes should be subject to the Federal Rules of Civil Procedure.
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A FEW COMMENTS ON THE SUBSTANTIVE TESTS
EMBODIED IN SECTIONS 112, 114 AND 118 OF THE ACT
Insofar as the Subcommittee is interested in the proper administration of the statutory licenses available under the Copyright Act, a few comments are in order regarding the substantive statutory standards themselves. I am most familiar with the application of the standards contained in §112, 114 and 118 of the Act, and therefore confine my comments to those provisions. Pursuant to §114, CARP Panels are charged with establishing ''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.'' See 17 U.S.C. §114(f)(2)(B) (2001). The §118 standard, incorporated by reference in §801(b) of the Act (detailing the operation of CARP Panels), calls for the determination of ''reasonable terms and rates of royalty payments.'' In reaching these determinations in each case the Panels ''may''—but are not required to—give weight to voluntary license agreements reached in lieu of resort to the statutory license. See §112(e)(4); §114(f)(2)(B); §118(b)(3).
Practice under these provisions has spawned lively controversy as to their intended meaning. This is not the forum either to relitigate the various parties' perspectives, nor, at least for now, definitively to resolve the issue. Nevertheless, I have considerable concern over the potential misapplication of these provisions to, in effect, rubber stamp selective agreements reached by large and powerful collectives representing copyright owners (whether ASCAP or BMI, in relation to musical works performance rights, or the RIAA in relation to digital transmissions of sound recordings).
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With respect to each of these statutory directives, it would seem plain that the purpose of the exercise is to determine the fees that would have resulted from dealings between willing buyers and willing sellers in a competitive market (i.e., a market undistorted by the concentration of bargaining power in the hands of a collective society or major industry trade association). Yet, strenuous arguments have been made (and rejected in the ASCAP rate court setting) that dispositive weight ought to be given to such license agreements as copyright owners' collective agents may have been able to reach with one or more third parties. While I do not suggest that statutory ratemaking is an easy task, unless it is recognized that the core statutory objective is to approximate the value a marketplace untainted by undue market power possessed by copyright owner collectives would produce, no amount of fine-tuning or refinement of the ratemaking process will generate an economic result true to the spirit and intent of these statutory license provisions.
I thank the Members of the Subcommittee for their attention to these important matters and for the opportunity to share my views with you. I would be pleased to answer questions and elaborate further on this testimony now or later for the record.
Mr. COBLE. Ms. Peters.
STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS AND ASSOCIATE LIBRARIAN FOR COPYRIGHT SERVICES, COPYRIGHT OFFICE OF THE UNITED STATES, THE LIBRARY OF CONGRESS
Ms. PETERS. Mr. Chairman, Mr. Ranking Member, distinguished Members of the Subcommittee, I appreciate the opportunity to testify on the structure and process of the Copyright Arbitration Royalty Panel System. As you know, today's hearing is to consider how effective the CARP process has been and how it could be improved. We have had almost 9 years of experience in working with this process, and I think we have a little bit to add to the dialogue.
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I think, as you know, ad hoc Copyright Arbitration Royalty Panel deals with statutory licenses which are exceptions to the general rule in copyright law that the owner of a copyrighted work has exclusive rights which enable him to determine how his work is to be used. A statutory license allows certain uses of certain copyrighted works under terms and conditions that are specified in the law. In 1976, the Copyright Act increased the number of statutory licenses to four, and provided for the adjustment of rates at specified times, and provided a mechanism to settle disputes about the allocation of royalties that were paid into the Copyright Office.
A new administrative body having responsibility for adjusting statutory rates and for resolving disputes among the claimants to the royalty pools for cable retransmissions and performances of music on jukeboxes was created. Initially the proposal was a three-member panel that would reside in the Copyright Office. Each time there was a controversy over a distribution of royalties or there was a need to adjust royalty rates, the Register would convene the panel.
However, the Supreme Court in its decision in Buckley v. Valeo, who dealt with the issue of the constitutionality of the methods of appointing members to a legislative branch agency, led to constitutional concerns over the plan to have the Register, an employee of the legislative branch, appoint the members of the new tribunal. Wishing to avoid any constitutional question, Congress basically chose to create an independent regulatory agency, the Copyright Royalty Tribunal, whose members would be appointed by the President with the advice and consent of the Senate.
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CRT came into existence in November 1977. It was abolished in December 1993. During those years the role of the CRT expanded because two compulsory licenses were added to the workload. However, like the CARPs, there were criticisms almost from the beginning with regard to the tribunal. The major concerns seemed to be that there wasn't enough work to keep three senior-level Government employees busy. From time to time there was also criticism concerning the lack of expertise of some of the Commissioners.
Congress reduced the number of Commissioners from five to three in 1990, and in 1992 it established an ad hoc arbitration panel to adjust the satellite carrier rates, thereby undercutting the CRT's jurisdiction. It got rid of the CRT in 1993, and the CARP system was created, in the words of the House Judiciary Committee, because the workload of the CRT was episodic and not sufficient to justify three full-time, highly paid Commissioners.
From the beginning to the present day, the office has done its best to make the present system work. However, from the very beginning the office was aware of problems, and as the years passed, and new statutory and increasingly complex licenses were created, our list of shortcomings has grown. Of course, we have also heard the complaints of the parties to the various proceedings.
Two of the shortcomings make it clear that you simply can't fix the system. It is broken. Let me hit those two. The first is expertise. Statutory licenses are generally complex. The CARP process is complex. The amount of money in a number of these proceedings is considerable. It has been difficult to find arbitrators who have any familiarity with copyright law let alone the complex statutory licenses and the unique CARP procedures. Of the 10 CARP reports which the Librarian has reviewed, only three have been accepted. Several which were rejected required considerable effort to make a recommendation to the Librarian on which you could base a final order.
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The second is lack of predictability or consistency in results. Each panel is selected for one case. Its decision is for that case. The panelists then go on to other things, and then the next case, a new panel is convened. So expertise in the adjudicator and consistency of results are crucial. That is why the system is broken.
There is another shortcoming which probably could be fixed in the present system, and that is cost. This has been an issue from the very beginning, the arbitrator's rates are high. Some of the proceedings are long, complex. Other proceedings involve only small amounts. Either end of this is a problem.
There have been a number of helpful suggestions on how to address this issue. This is a most important issue. In some cases the costs preclude people from participating in this. Others copyright owners pay substantial amounts when the amount in controversy is extremely small.
In conclusion, I believe that there should be reform, but there is no consensus on what that reform should consist of. I totally agree with Bob Garrett; it is important to first look at the process. First with the CRT and then with the CARP, the emphasis was on the system; in other words, the body that would oversee the proceedings. But Congress needs to decide the appropriate process and then determine the structure. The office would be pleased to work with the Subcommittee to achieve a system that provides the necessary expertise, produces consistent results, is efficient, fair, and basically reduces costs. Thank you.
Mr. COBLE. Thank you, Ms. Peters.
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[The prepared statement of Ms. Peters follows:]
PREPARED STATEMENT OF MARYBETH PETERS
Thank you, Mr. Chairman. I am pleased to appear today before the Subcommittee and offer testimony on the structure and process of the Copyright Arbitration Royalty Panels (CARPs). As you are aware, the CARPs have been operating under the auspices of the Copyright Office and the Library of Congress since the Congress eliminated the Copyright Royalty Tribunal in 1993. Today's hearing is to consider how effective the CARP process has been to this point and, as you will hear from other members of today's witness panel, ways in which it can be improved.
I am dividing my comments into three sections. First, I will give an overview of how the statutory licenses of the Copyright Act have been administered since 1978. Second, I will discuss certain shortcomings of the existing CARP system that have been identified since 1993, and third I will offer some suggestions as to how royalty distribution and rate adjustment proceedings could be conducted in ways that might eliminate many of the shortcomings of the current system.
OVERVIEW OF COPYRIGHT STATUTORY LICENSE ROYALTY DISTRIBUTION
AND RATEMAKING
The history of the Copyright Office's and Library of Congress's involvement in the setting and adjusting of royalty rates and making royalty distributions to copyright owners is linked to the history and evolution of the statutory licenses in the copyright law. The general rule in copyright law is that the owner of a copyrighted work has the exclusive right to determine how that work is to be used. Anyone other than the owner wishing to use a copyrighted work must either obtain the owner's permission, be eligible for a statutory license, or qualify for free use under an exception. A statutory license allows certain uses of certain copyrighted works provided that the user pays the royalties and observes the terms that are set forth in the law.
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1. The 1909 Copyright Act
There was only one compulsory license in the 1909 Copyright Act. What is generally referred to as the ''mechanical license'' which allowed a person to make a sound recording of a song that had been recorded and copies of that recording had been distributed to the public in the United States, so long as that person paid the owner of the musical composition 2 cents per copy. The royalty rate was set by statute and was not subject to change. The 2 cents rate lasted from 1909 to 1978.
Because the rate was set by statute, and because the user paid the owner directly, there was no need for a government agency either to set the mechanical rate or to engage in a distribution of the mechanical royalties.
2. The 1976 Copyright Act
At the time it was drafting the 1976 Copyright Act, Congress realized that the mechanical license was flawed because a statutorily-set, never-changing royalty rate was inflexible and did not provide fair compensation. Furthermore, Congress was planning to add more statutory licenses to the law. These new statutory licenses would be in the areas of cable retransmissions of over-the-air broadcast signals, jukebox performances of music, and the use of published musical works and published pictorial, graphic and sculptural works by noncommercial educational broadcasters. Congress saw that there was a need for an administrative body that would be able to adjust the rates of these statutory licenses periodically. In addition, Congress saw a need for an administrative body to act as the distributor of the royalties collected from users in situations where there were many copyright owner claimants to the same funds and there were controversies as to how much each claimant was entitled to receive.
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The new administrative body would have responsibility for adjusting the cable, jukebox, mechanical, and noncommercial educational broadcasting royalty rates, and for distributing the cable and jukebox royalties to the proper claimants. Cable and jukebox royalties would be deposited with the Copyright Office, subject to the distribution decisions of this new administrative body. Although the Senate and House copyright subcommittees agreed that they needed to create a new administrative body, they were not sure of the structure for the new body. At first, the Senate bill created a tribunal composed of a three-member panel that would reside within the Copyright Office. The members would be appointed by the Register of Copyrights from the membership of the American Arbitration Association or a similar organization. The Register would convene the panel each time a controversy was found to exist concerning the distribution of royalties or the adjustment of royalty rates.
While the Congress was considering the proposed Senate version for the new administrative body, the Supreme Court handed down its decision in Buckley v. Valeo, 424 U.S. 1 (1976). In Buckley, the Court considered, inter alia, the constitutionality of the method of appointing members to the Federal Election Commission (''FEC''), an agency residing in the legislative branch. The law establishing the FEC provided that the President pro tempore of the Senate and the Speaker of the House would appoint a majority of members of the FEC. The Supreme Court ruled that this was unconstitutional because some of the FEC's functions were executive branch functions and consequently persons exercising those functions ''must be appointed in accordance with article II, sec. 2, clause 2 of the Constitution, the Appointments Clause.'' 424 U.S. at 126. The Appointments Clause states that the President shall nominate, with the Senate's advice and consent, all ''Officers of the United States,'' but the Congress may vest the appointment of inferior officers as it deems proper. When the Buckley opinion was issued, some of the members of Congress expressed constitutional concerns over the plan to have the Register of Copyrights, an employee of the legislative branch, appoint members of the new tribunal. Wishing to avoid placing the new structure under a constitutional cloud, the members of the subcommittees of both houses chose instead to create a completely independent regulatory agency, the Copyright Royalty Tribunal, whose members would be appointed by the President with the advice and consent of the Senate.
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3. The Copyright Royalty Tribunal, 1977–1993
The Copyright Royalty Tribunal existed from November, 1977 to December, 1993. Its jurisdiction changed during those years. In 1988, Congress created a new statutory license to govern retransmission of over-the-air television signals to home satellite dish owners. Also, in 1988, Congress moved to eliminate the jukebox compulsory license in order to comply with the Berne Convention and by 1990, there were sufficient private license agreements to allow for the elimination of the jukebox compulsory license from the Copyright Act and the Tribunal's jurisdiction.(see footnote 1) In 1992, Congress created a statutory royalty obligation for the manufacture and importation of digital audio recording technology (DART).
Even with these new responsibilities, critics of the Tribunal believed that there was insufficient work. In 1990, Congress reduced the number of Commissioners from five to three, after concluding that three Commissioners were sufficient to handle the workload. Copyright Royalty Tribunal Reform and Miscellaneous Pay Act of 1989, Pub.L.No. 101–319, 104 Stat. 290 (1990). Also, Congress established a procedure for adjusting the satellite carrier statutory license rates in 1992 by an ad hoc arbitration panel, thereby undercutting the Tribunal's otherwise exclusive jurisdiction over royalty rate adjustment and distribution proceedings.
4. The Copyright Royalty Tribunal Reform Act of 1993
In 1993, Congress passed the Copyright Royalty Tribunal Reform Act, observing that ''with 15 years' experience, a clear record of the Tribunal's workload has been established. That workload is episodic and not sufficient to justify three full-time highly paid Commissioners.'' H.R. Rep. No. 103–286, at 9 (1993).
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The House Subcommittee recalled that the original proposal for a government body to oversee the statutory licenses was for ad hoc arbitration panels convened by the Register of Copyrights. Id. The Subcommittee noted that the one experience with arbitrators setting royalty rates, the 1992 adjustment of the satellite carrier compulsory license rates, was positive. Id. at 11. Therefore, the Subcommittee believed that creating what was originally proposed in 1976—ad hoc arbitration panels—would avoid the apparent waste of having full-time Commissioners perform part-time work. The Subcommittee also believed that placing ad hoc arbitration panels under the supervision of the Register of Copyrights and the Librarian of Congress made ''good sense,'' citing the fact that ''the Copyright Office and the Library of Congress already have considerable involvement in the administration of the compulsory licenses and in the work of the Tribunal.'' Id. This ''considerable involvement'' referred to the Copyright Office's Licensing Division which receives the payment of cable, satellite and DART royalties, and the Register's Office which, through the Register, the General Counsel and the staff of the General Counsel, promulgates regulations related to the statutory licenses.
The remaining concern was whether establishing arbitration panels in the Library of Congress was constitutional. Congressman William Hughes, the chairman of the House Subcommittee, asked the Congressional Research Service (''CRS'') for its advice. CRS stated that the panels would be constitutional if the person ultimately responsible for the panels' decision was a presidential appointee or someone who owed his or her appointment to a presidential appointee. Therefore, the panels could be established under supervision of the Librarian of Congress, a presidential appointee, or the Register of Copyrights, a person owing his or her appointment to a presidential appointee. Letter from CRS to the Honorable William Hughes, February 17, 1993, at 9–10.
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Although the House Subcommittee received CRS' opinion that either the Register or the Librarian could be the supervising official, the House Subcommittee chose to make the Librarian the supervising official. There is no record as to why this choice was made. There is also nothing in the record to suggest that Congress saw any added value in an additional layer of review. The only concern voiced was that a presidential appointee, or someone who answers to a presidential appointee, needed to be placed at the head of the CARP system to satisfy the Supreme Court's ruling in Buckley v. Valeo.
5. The Current CARP System
As discussed above, the current CARP system consists of ad hoc arbitration panels that recommend the royalty rates and distribution of royalty fees collected under certain of the statutory licenses and set some of the terms and conditions of some of the statutory licenses. Each CARP is selected for a particular proceeding (examples: a rate adjustment for the cable statutory license; a distribution of DART funds) and has up to 180 days to deliver its recommendation for the rate adjustment or distribution, as the case may be. The highlights of the CARP system are as follows:
Voluntary Negotiation Period: Once it is determined that a controversy exists as to the adjustment of royalty rates or the distribution of royalty fees, as the case may be, the Office designates a period for voluntary negotiation among the parties to resolve their differences. Those parties unable to reach an agreement during this period proceed to a CARP.
Direct Cases and Discovery: Every participant in a CARP proceeding must submit a written direct case. The written direct case is the principal piece of evidence put forward by a participating party in that it sets forth all the evidence and reasons as to what the party believes the rates or distribution should be. The Office then conducts a limited discovery period during which parties may request from each other documentation that supports the assertions they make in their written direct cases.
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Selection of the Arbitrators: Once the discovery phase is concluded and the proceeding is ready for hearing, the Librarian selects two arbitrators from a list of designated arbitrators whose names are obtained from arbitration associations who then select a third arbitrator from the list to serve as their chairperson. If the two arbitrators cannot agree, then the Librarian selects the chairperson (which has never happened).
Testimony and Hearings: Once the arbitrators begin their 180 period, they consider all the testimony submitted by the parties in their written direct cases. Oral hearings of the written direct cases are typically conducted (although they are not required), and the parties often submit rebuttal testimony. At the conclusion of the hearings, the parties submit their proposed findings of fact and conclusions of law wherein they argue to the CARP how it should rule. Often, the CARP will permit oral argument on the proposed findings of fact and conclusions of law.
The CARP Report: At the conclusion of the 180-day period and after considering the evidence and testimony presented, the CARP delivers its written recommendation to the Librarian of Congress as to what the royalty rates or the distribution should be. In making the recommendation, the CARP must articulate the reasons for its recommendations and the evidence that supports its conclusions.
Review of the CARP Report: Upon receipt of the CARP report, the Librarian is given 90 days in which to either accept the determination of the CARP or to reject it. The Librarian may reject the recommendation only if he or she determines that it is arbitrary or contrary to the provisions of the Copyright Act. The Register of Copyrights is directed to advise the Librarian on his or her decision. If the Librarian rejects the CARP's recommendation, there is an additional 30 days for the Librarian to issue a final order setting forth the rate adjustment or distribution, as the case may be.
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Appeal of the Librarian's Order: Any party with an interest in the royalty rates or distribution determined by the Librarian may appeal the decision within 30 days of its publication in the Federal Register. Appeal must be made in the United States Court of Appeals for the District of Columbia Circuit.
Since the abolition of the Copyright Royalty Tribunal in 1993, the Copyright Office and the Library have conducted nine full proceedings that have resulted in delivery of CARP reports. Numerous other proceedings have settled at various stages, and the Office has several more proceedings currently pending. Six of the Librarian's decisions were appealed and in each instance the Librarian's determination was upheld.(see footnote 2)
SHORTCOMINGS OF THE CARP SYSTEM
Mr. Chairman, you will undoubtedly hear testimony from the other witnesses on today's panel as to the shortcomings and complaints of the current CARP system. In this section, I highlight some of the difficulties we have observed in the near decade of administering the system.
1. Costs.
The arbitrators selected to serve on a particular CARP must, of course, be paid. Arbitrators are typically compensated at between $200 and $400 an hour for their work which, in a hotly contested proceeding involving many parties and large amounts of testimony, can add up to considerable sums. In the case of a royalty distribution proceeding, the arbitrators are paid from the royalty funds to be distributed. In the case of a royalty adjustment proceeding where there are no royalties collected by the Copyright Office, the participants must pay the arbitrators out of their own pockets. There is no question that in some rate adjustment proceedings, some interested parties cannot afford the cost of participating. While the Copyright Office has considered allowing these parties to participate free of charge, this would certainly draw objections from the participants in the proceeding who would foot the bill.
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On an institutional scale, CARP proceedings are also very costly. They require considerable amounts of time of Copyright Office and Library personnel who must conduct various phases of the proceedings, such as discovery relating to the written direct cases and review of the CARPs' decisions. In the recent CARP rate-setting proceeding for webcasting, the cost of the arbitrators alone exceeded the entire annual budget of the Copyright Royalty Tribunal in its last year of existence.
2. Lack of Stability and Predictability of Results
Each panel of arbitrators is selected for one particular case. The decisions they make are for the purpose of deciding that one case and not for establishing lasting precedent. Furthermore, although the Librarian attempts to select arbitrators who have served well on previous panels, the individuals almost always vary from one panel to the next. Parties who are dissatisfied with one panel are tempted to return and try a different panel. Therefore, there is a lack of stability and predictability in the process, and a lack of reliable precedent upon which the parties can base the settlement of their differences.
3. Institutional Expertise
Although copyright rate setting or adjustment and distribution proceedings often involve considerable amounts of money, the fact remains that the statutory licenses and the CARP system occupy an esoteric area of the law. We have found it very difficult to find arbitrators that have any familiarity with copyright law, let alone the complex statutory licenses in that law and the unique procedures of the CARPs. Those that do have some copyright law experience typically cannot be selected due to a financial or other conflict of interest. The result is that we are forced to select arbitrators that, while bright and capable, lack knowledge and understanding of the workings and details of the copyright laws and the CARP system. This lack of expertise puts a considerable burden upon the Register and the Librarian to correct errors and oversights made by CARPs during the course of the proceeding, a burden which is exacerbated by the short review period granted the Register and the Librarian by the statute. Of the nine CARP reports which the Librarian has reviewed, only three have been acceptable. Several of the rejected reports have required considerable effort in preparing a final order.
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Because of the ad hoc nature of the CARPs, there is no institutional expertise on any given panel. As one frequent attorney participant in the CARP process recently informed the Office, the most scary day of a CARP proceeding is the first day when one encounters the level of competence of panel members that can be expected for the next six months.
RECOMMENDATIONS
Mr. Chairman, it is clear that the CARP system is far from perfect. I do believe, however, that the decision making produced by the current system is superior to that produced by the Copyright Royalty Tribunal during its tenure. I do not disparage the work of the Tribunal as they did, in most circumstances, the best they could with the resources available. But I do think that a simple return to the Tribunal system would be a mistake.
Attached to this written statement is a report prepared four years ago by the Copyright Office at the request of this Subcommittee. The report offers five different options to improve the manner in which copyright license royalty fees and rates are resolved. The options are:
Reforming the Current System: The Copyright Office proposed eleven amendments to the Copyright Act to address the CARP's most serious flaws. They include making the Register the supervising official; lengthening the time of each proceeding; expanding the use of paper proceedings to reduce the costs of hearings; reducing the number of arbitrators for small claims or having small claims resolved by staff; and capping the arbitrators' fees.
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Replacing Arbitrators with Administrative Law Judges: Under this option, administrative law judges supplied by the Office of Personnel Management would handle the royalty ratemaking and distribution cases within the Copyright Office.
Replacing Arbitrators with Presiding Officers: Under this option, arbitrators would be replaced with presiding officers who, while not administrative law judges, would perform the same functions. The precise features of this system would be established by Congress as a stand-alone system administered by the Register and not the Office of Personnel Management.
Creating a Board Within the Copyright Office: Under this option, a Board would be established within the Copyright Office that would take on more authority than presiding officers, be more autonomous, and render final agency decisions.
Creating an Independent Regulatory Agency: Under this option, a new independent regulatory agency, similar to the Copyright Royalty Tribunal but with some improvements, would be created.
The attached report discusses fully the strengths and weaknesses of each of the five options.
In 1998, Mr. Chairman, you introduced H.R. 3210, the ''Copyright Compulsory License Improvement Act.'' The bill would have amended chapter 8 of the Copyright Act to establish a Copyright Royalty Adjudication Board (''CRAB'') consisting of one full-time chief administrative copyright judge and up to four part-time administrative copyright judges selected by the Librarian of Congress. The judges would serve five year terms and be compensated at a government salary level. The Board, while within the Copyright Office, would be wholly independent and would have full authority to determine all statutory license rates and royalty distributions. The Copyright Office, however, could present formally its views to the Board on any matter, which the Board could accept or reject. Appeal of final Board decisions would be to the United States Court of Appeals for the Federal Circuit.
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Although I have concerns about some aspects of the proposals contained in H.R. 3210, it was a positive first step in addressing the issues. The Copyright Office would be pleased and interested in working with the Subcommittee, and with the parties for reform of the current system to produce a better model. In reforming the CARPs, there are several key elements that need to be addressed.
First, the best way to produce well-reasoned decisions is to create a system that permits the Copyright Office and the Library to hire full-time employees who are well-versed and experienced in the copyright law, the complexities of the statutory licenses, and who are experienced at conducting administrative proceedings. As discussed above, while we have hired capable arbitrators in CARP proceedings, it has been impossible to find arbitrators who are intimate with the details of the copyright law, the statutory licenses and the distribution/rate adjustment process. Having the same full-time decision makers who adjudicate all rate adjustment and distribution proceedings will not only raise the level of institutional expertise, but will produce balanced and stable results. Placing those decision makers in the agency with expertise in copyright and the statutory licenses will ensure that their decisions are well-reasoned.
Second, although the responsibilities of rate making and royalty distribution has risen in recent years due to an increase of compulsory licenses in the Copyright Act, we recognize that there are still periods of inactivity where no proceedings are being conducted. One of the criticisms of the Copyright Royalty Tribunal was that Commissioners were still compensated during such periods thereby effectively being paid for little or no work. Consideration should be given to whether the Register should have discretion to assign additional copyright work to the Copyright Office-based decision makers during these periods of inactivity.
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Third, a new system should permit the Register a substantive role during the process to address important policy and substantive matters that might arise during a rate adjustment or royalty distribution. Whether the role is one of having input into the decision, as was proposed in H.R. 3210, or one of being the final decision maker is an issue that should be explored.
Finally, there is the matter of costs. Hiring full-time employees at government salaries to serve as decision makers will certainly reduce the overall cost of proceedings to the parties, but there remains the question of the source of their funding. Under the current system, for those compulsory licenses for which the Copyright Office collects royalties, the costs of the arbitrators in distribution proceedings are paid for out of the royalty pool. This is an appropriate system that should be retained since those benefitting from the distribution are paying for the cost of the proceeding. However, in those circumstances where the Office does not collect royalties, such as the recent webcasting CARP proceeding, the parties currently pay the costs of the arbitrators. One of the objections to such a payment scheme is that it raises a bar to participation for those who cannot afford to pay the arbitrators. Therefore, I recommend that the salaries of the decision makers in rate adjustments in the new system, where no royalty fees are collected by the Office, be paid from appropriated funds. This would require an additional appropriation for that purpose.
The Copyright Office looks forward to working with the Subcommittee and the interested parties on this important matter. Thank you, Mr. Chairman.
Mr. COBLE. Thank you all for complying in the time frame. We impose the 5-minutes rule against ourselves as well. So I will start.
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One criticism of the CARP system is that each panel is comprised of a new set of participants, which results in an absence of stability and predictability as well as reliable precedent. Ms. Peters, do you agree with this assessment?
Ms. PETERS. Yes.
Mr. COBLE. Does anyone disagree with their assessment?
Mr. Rich, some critics have observed that the rules of the CARP system are not comparable to the Federal Rules of Evidence, thereby producing a frenetic litigation environment there, which panelists render decisions without access to critical information. And you touched on this somewhat in your testimony. For example, panelists and the Copyright Office cannot issue subpoenas under CARP rules. How could we fix this aspect of the CARP system?
Mr. RICH. My broader recommendation, Mr. Chairman, has been that we move closer to, if not adopt totally, a model of discovery that is closer to the Federal rules. I think this came home to roost in the most recent CARP. This is not for purposes of assessing substantive outcome, but anecdotally I think it is useful in identifying the issue. One of the parties main positions in the case was dependent on agreements that the industry, the record industry, had reached with third parties, nonparties to the proceeding. They had settled voluntarily, so they were not before the CARP panel. It was obvious since this was the underpinning of the case presented by the record industry that learning everything one could learn about the circumstances of those agreements would be useful. And the panel felt it in its bones every bit as much as the other side of the case did, yet the lack of subpoena power, for example, and the lack of more robust discovery tools really made it a voluntary exercise. The panel could at most invite these 26 folks to come on into New York—come on into Washington at their own expense, be subjected to what has to be regarded as a generally unpleasant experience of being examined and cross-examined. Not surprisingly, Mr. Chairman, very few did.
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That is just an example of how we don't get at the root—at issue joinder—that these complicated proceedings, I am talking about now a very large and complicated proceeding, at least, mandate.
I would be the first to suggest that you may want a scaling down of discovery and of the commensurate burden as the consequences, as the order of magnitude of cases decline. But where you are talking industrywide important precedent, major record labels, major companies and even nascent companies hoping to get a foothold, it seems to me we ought not to spare in our use of additional tools to get to the facts and get at what we elusively call the truth.
Mr. COBLE. Mr. Garrett, I have a two-part question for you. Some of the proposals submitted to our Subcommittee would increase the scope of discovery and the length of the discovery period. Would this truly eliminate the cost of participating in a rate-setting? And, B, if these proposals were adopted, but the resulting CARP structure remained outside the jurisdiction of the Federal courts, wouldn't the resulting delays force the effective copyright owners to wait perhaps even longer to be compensated for the use of their works?
Mr. GARRETT. Mr. Chairman, I believe that expanding the scope of discovery, expanding the scope of discovery procedures and mechanisms available to parties will necessarily have the effect of increasing the cost of participation in these proceedings. I don't think that is an objective that we want to achieve here.
As a truly theoretical technical matter, I mean, I certainly understand what it says here, but let's move toward a system that is more comparable to those in the Federal courts. But I don't believe that we have that luxury for the kinds of decisions that are being made here. I don't think that that kind of luxury is one that is necessarily inherent in ratemaking proceedings.
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With respect to the way I approach the issue, Mr. Chairman, I believe that the cost consideration is the most important consideration here, and if you were going to have that as your principal objective, then you cannot move toward putting these kinds of matters either within the jurisdiction of the Federal courts or else expanding the scope and types of discovery.
Mr. COBLE. Thank you, sir.
Mr. Remington I will get to you later. The red light has not appeared, but the clock did not activate. I am sure my 5 minutes have elapsed.
Mr. Berman.
Mr. BERMAN. Thank you, Mr. Chairman. This is not a balanced panel in the sense of people defending the present structure and process versus people criticizing it. If I wanted to have a balanced panel here today, where would I have gone to find the people who would defend the present structure and process? There is no one? Okay. All right. So something has got to change is the consensus of the people who participate in the process.
Mr. Rich, why don't you take the first shot at defending your suggestion for change; that is, moving to a rate court. Mr. Boucher has suggested that. Mr. Garrett has said if you want to cut costs and simplify the process, going to a rate court is not the way to do it. What is your response to that?
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Mr. RICH. Mr. Berman, as I understand Mr. Garrett's proposal, at least at the extreme it would apparently entail putting in some untested affidavits of parties, not having any discovery beneath those, and then not having the benefit of any hearing or cross-examination to test it even at a trial setting. I think it would, frankly, make a farce—with all due respect to a lawyer I respect a lot—I think it would make a farce of any serious effort to find—whether under a willing buyer/willing seller test or fairness or reasonableness standard to get at what markets that these compulsory license systems are trying to replicate would accomplish.
More directly to your question, sir, I have been through about four ASCAP rate court trial experiences now, and they have ranged from sloppy and endless and quite expensive, candidly, to extremely efficient and extremely well run. In one example, this was——
Mr. BERMAN. You have been to four.
Mr. RICH. ASCAP rate-setting processes, excuse me, representing a variety of clients.
Mr. BERMAN. You have watched the rate court work?
Mr. RICH. I have experienced it firsthand. One example is, and a favorable example that I mention to the Committee by way of structural possibility, Judge William Connor in New York, who is the supervising judge in senior status for the ASCAP consent decree, oversaw a case involving the ABC and CBS television networks involving a fee dispute covering a comparable period of years to what a typical CARP proceeding entails, from the beginning through discovery, carefully controlled by Judge Connor. He didn't let it get out of hand, brought it to trial in about a year's time, and his decision was not appealed. In other words, it went start to finish: we gave the client a budget in that case, anticipating a short track; we were kept on a short track by the judge; we kept on the budget, and it worked. We had the Federal Rules of Civil Procedure. We had the benefits of one experienced judge, very commercially savvy. There was the benefit of a developing body of precedent in terms of music performance rights, licensing traditions.
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We had, again, the protections of ample discovery and subpoena power control by the court. We had Federal Rules of Evidence, so we knew what could come in and what couldn't, and we had a very efficient process, I think, with a very bright judge who got to a very sane result. And while, as usual, some people were happier with the result than others, I think there was a sense that the matter proceeded fairly.
And so as I compare that experience and contrast it with my CARP experiences where all of it just bulges at the seams, and where nothing seems to work right, you run around frenetically, as was indicated, and you don't get discovery. This seems to be a better process.
Mr. BERMAN. One short follow-up question before I—were you or your client among the people who were more happy with the final decision than others?
Mr. RICH. In that particular case, yes, although there have been other cases where the answer in the rate court has been no.
Mr. BERMAN. Now, you had a chance to defend your suggestion and attack his suggestion. Would you like to defend your suggestion, Mr. Garrett, against his attack, with all due respect for your high regard for him?
Mr. GARRETT. I have been defending myself against attacks from Mr. Rich now for 2 years; I have been accustomed to that. As a litigator, I see a great deal of merit in what Mr. Rich says.
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As a litigator, one wants to have as much discovery as possible. One wants to be able to know in advance as much information as is possible. It is a very scary moment in these CARP proceedings when you walk up to a witness, an expert witness or a fact witness, and realize that is the first time that you are really going to hear anything that that witness has had to say. We don't have depositions.
But I have been doing that for 25 years in these proceedings, and it is my belief that we would be just as well off without having any of the limited form of discovery that we do have. And when you balance that against the considerations of cost——
Mr. BERMAN. What about the fact that now you are not going to hear and be able to cross-examine that witness under your suggestion; you are just going to be able to read his affidavit and file a counter-affidavit?
Mr. GARRETT. I think my suggestion goes beyond that, Congressman Berman. But I think that, first of all, it is important to understand that those rules will apply equally to both sides. Both sides are going to have as little or as much discovery, or as little or as much right to discovery. There is an equalization factor there that I think comes into play.
I also think that those who participate in these proceedings and simply do nothing but put in an affidavit and say, if you adopt this royalty rate you are going to put us out of business, that affidavits like that will be given if little credibility, little weight by the arbitrators, whoever is going to make the decision in that case. I think people—in order to put forth a compelling, credible case, they are going to have to engage in voluntary discovery. They are going to have to put in more than an affidavit saying, you are going to put me out of business. They are going to have to turn over their financial documents either as part of their direct case or testimony or some other kind of discovery.
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I would use a carrot, as opposed to a stick, here; and I think it is useful because it does achieve the—what I believe to be the primary objective, which should be the primary objective of cutting costs so that all parties can participate in an affordable process.
Mr. BERMAN. Thank you, Mr. Chairman. And I think my time has expired.
Mr. COBLE. Mr. Cannon.
Mr. CANNON. Thank you, Mr. Chairman. And I would like to thank the panel for the very enlightening testimony we have had thus far. And while we have my favorite witness, Ms. Peters here, if you wouldn't mind, I would like to ask a question about a related matter on instrumental music and ask you to clarify two points with regard to your DMCA, section 104, report that was issued last August.
Footnote 434 of the 104 report states that you would favor repeal of section 112(e) of the Copyright Act and the adoption of an appropriately crafted, ephemeral recording exemption that would essentially permit on-line music services to make server copies of sound recordings and compositions that facilitate authorized uses of those works without permission from or obligation to the copyright owner.
After the hearing in response to my written follow-up question, you reiterated that as you stated in the report, you would favor repeal of 112(e) and adoption of an ephemeral recording exemption. Do you still favor those statutory changes and would you recommend that this Subcommittee consider them?
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Ms. PETERS. With regard to the 104 report, it really wasn't in the scope of the 104 report, so it wasn't really a formal recommendation.
What we said in the footnote we do stand by. We would favor replacing the statutory license in 112(e) with an exemption.
What we said and we stand by is, we don't see any justification for the imposition of a royalty obligation under statutory license to make copies that have no independent economic value and are solely to enable another use that is permitted under a separate compulsory license. But in the 104 report, we have two recommendations of things that we believe in that don't become part of the formal recommendation, because we thought they were out of scope.
Mr. CANNON. That is that the scope of your report, but still within the scope of what this Committee probably needs to do.
The 104 report also concludes that public performances incidental to licensed music downloads shall result in no performance right liability. Again, in response to one of my written follow-up questions, you stated that it would be appropriate for Congress to enact legislation precluding any liability arising from the assertion of a copyright owner's public performance right with respect to any technical performance that may take place as a necessary byproduct of an authorized download so long as no audible performance actually takes place simultaneously with the download.
Again, for clarification, do you still support legislation that would make this statutory change as you stated in the 104 report?
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Ms. PETERS. Again, it is the same thing as before. It wasn't within the scope of the report, so not part of the formal recommendations; but we stand by our analysis and what we said.
Mr. CANNON. Thank you. I understand your office is working with Chairman Coble's staff and Mr. Berman's staff to develop legislation that reflects the copyright officer's recommendations associated with the 104 report and recognizing the scope of the report and our obligations here. And I look forward to reviewing these provisions in that draft bill, and thank you very much for being here.
And Mr. Chairman, I yield back.
Mr. COBLE. Thank you. Mr. Cannon, unless I missed something, you weren't charting a CARP course, were you? What you—and I am not admonishing you for that, but was I missing something?
Mr. CANNON. No, sir. This is slightly peripheral to the testimony that has happened thus far today. But the ever-capable Ms. Peters was very much with these issues, and I appreciate that information.
Mr. COBLE. The gentleman from Virginia.
Mr. BOUCHER. Thank you, Mr. Chairman. I want to join with others in thanking this panel for illuminating our Subcommittee today on questions relating to the CARP proceedings.
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I think that in response to Mr. Berman's questions, we have rather thoroughly covered the terrain of the potential of using the U.S. District Court in the alternative to CARPs. That is a subject in which I have some interest and intend to have further discussions concerning, but I believe we have given this panel an adequate opportunity to express its views on that question.
I think we have also covered, in response to Mr. Berman's questions, rather thoroughly the potential need and the pros and cons on moving to more advanced discovery. I happen to think that that would be salutary. I understand Mr. Garrett does not think so. And that also, I think, is a fruitful subject for further conversation.
I am going to take the time of these questions today to focus on the standards. There are three standards that have come to my attention that are applied by CARPs:
Section 801 applied to music distribution services, digital music distribution services other than Webcasting, and the concept of fairness of the payment is inherent in that standard;
The section 119 standard relating to the payments that are made by cable and satellite retransmitters for terrestrial television rebroadcasting, and the concept of fairness of the payment is inherent in that standard;
Applied recently by the CARP was the section 114 standard that applies only to Webcasters, and the concept of fairness of the payment is not present in the standards that were applied in that decision.
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A result was reached, which I, frankly, find very troubling. I think Mr. Billington also found it troubling. I think he took the step of setting that decision aside, and we are awaiting his decision on his more thorough consideration of the matter.
But what troubles me greatly is that in setting this rate, the consequence of the rate to the new and emerging and young and perhaps struggling Webcasters who are just getting on their feet and who measure their revenues in the tens of thousands of dollars per year was not considered. By having a one-size-fits-all approach and setting a rate of 14 cents per song played that applies to everybody, no matter what their revenues, the young companies and the small companies were severely threatened. They would have royalties alone measuring in the hundreds of thousands of dollars annually, and that strikes me as fundamentally unfair.
I think an element of what we ought to be doing as we evaluate this overall subject is to consider whether or not the standards that are being applied by the CARPs are reasonable and fair.
Now, I don't know whether you came today prepared to respond to this question or not, but I would like your opinion on the question of whether or not the standards are adequate. And specifically, do you believe that in making general revisions with regard to the CARP that we ought to be inserting the element of fairness of the payment in this section 114 standard as it is currently found in the other two standards? And who would like to respond?
Mr. Rich.
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Mr. RICH. I would be glad to take a stab at it, Mr. Boucher.
First observation, and a spin on what Ms. Peters and Mr. Garrett suggested, while process is important, I think if process doesn't lead to—isn't buttressed by a substantive standard that makes sense—the process is wasteful and the efforts of this Subcommittee therefore would be wasted; and I don't think anybody wants to see that.
I think this is a more complicated issue than the 112, 114 setting, as follows. You have a willing-buyer and willing-seller standard which is subject to various interpretations as to what it means. But one interpretation which doesn't strike me as a bad one is, it means if you had a freely competitive marketplace and you saw what even nascent Webcasters would spend in that marketplace, if you could approximate what would come out of that process and you are asking a panel to do it, it wouldn't be so bad.
I think where this has gone off the rails potentially is that there is, for example, in section 114(e) of the act an antitrust exemption which was designed to encourage negotiated resolutions by allowing collective negotiations to occur, whether through trade organizations like the RIAA or, for that matter, through collectives like ASCAP and BMI. And the result is that, acting on that statutory authority and that antitrust exemption, the collectives went out and did and tried to do what you would expect they would do, which was to obtain license fees at the best rates they could obtain from, as it turned out, a variety of generally small—with one or two exceptions—Webcasters, and then came into the CARP process and said, ''Here they are; you should accept these as market approximating.''
The problem is, they were the fruits of the antitrust exemption; they did reflect the product of market power. And, therefore, to assume, as I think the panel slipped into error, that simply because these were, quote, ''willing buyers'' and ''willing sellers'' in the sense that literally deals were struck, there must be some kernel of arms-length, fair result in it, I think led to the problem. And I think if you are dealing with new industries, with a particularly inherent imbalance in power, unless there is a clearer vision of what ''willing buyer,'' ''willing seller'' means, than I think this panel understood, I would favor a return to something closer to the 801(b) standard—which, after all, the record industry itself benefits from in other compulsory license settings like 115, where they get the benefit of the 801(b) standard as a, quote, ''user.'' .
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Why not have that as a level playing field for everyone, which explicitly recognizes the nascent nature of industries the need to encourage new players and the like, and inject back the element of fairness, if you will?
Mr. BOUCHER. Mr. Garrett, I know you want to respond to this.
Mr. COBLE. Mr. Garrett, move along quickly because the 5 minutes have elapsed and we are going to start a second round.
Mr. GARRETT. The standard that is in 114 is the same standard that is in 119. Both statutes use the term a ''willing buyer, willing seller.'' both statutes use the term ''willing buyer, willing seller.'' .
The term ''willing buyer willing seller'' has historically meant in our jurisprudence a fair market value standard—119 has fair market value; 114 has fair market value. And in my view, I see no reason, no justification, for requiring the licensing of copyrighted works at anything less than fair market value. Fair market value has an inherent concept of fairness in it, and I think it was one that was considered during the recent CARP proceeding.
Mr. COBLE. We will start a second round now.
Mr. Remington, I believe that we all agree that participation should not be limited to just, quote, ''the big players,'' close quote. There are those who would argue that participation in CARP is cost prohibitive for individuals and small entities.
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That said, I am also informed that individuals with small claims have invoked existing CARP rules to prolong proceedings and derail settlements at virtually no cost to themselves, but substantial costs to other parties. Could we correct this inequity by splitting CARP fees among parties in proportion to their participation rather than on a pro rata basis? And if not, what would you suggest?
Mr. REMINGTON. Thank you, Mr. Chairman.
I would suggest, as I stated in my written statement, that there be a much lower-cost, more expeditious system which for the $5 or $10 claim obviously wouldn't come in under that cost—that would be a sheer impossibility—but paper proceeding, summary judgment, aggressive pursuit of settlement not only by the parties, but by the people who—like a U.S. Magistrate would do, or a Federal district judge—by the person or entity that controls the process.
We are not arguing that individuals should not have access to this process. They should. If they are a bona fide songwriter and composer, under the DART statute they have access to that process. But it is downright silly to allow people to expend tens of thousands of dollars in pursuit of a claim under $10 where the Copyright Office doesn't even have authority to cut a check to pay off that amount of money.
Mr. COBLE. I concur.
CARP assists in the distribution of proceeds under a compulsory license must prescribe rates and terms that are representative of those that would have been negotiated in the marketplace, again between a willing buyer and a willing seller.
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Having said that, A, since the CARP represents the failure of marketplace negotiations, how do you all determine marketplace standards by which a rate may be set, A? And, B, if the same static rate is revived in subsequent CARPs, why should any CARP be convened?
Ms. Peters, why don't you start if you are comfortable starting?
Ms. PETERS. It is better that they start.
Mr. COBLE. Who wants to put their oar in the water initially?
All right, Mr. Garrett.
Mr. GARRETT. Mr. Chairman, again the notion of willing buyer, willing seller is one that is fundamentally ingrained in our system of American jurisprudence here.
The question, what is appropriate value, that is how fair market is defined; it is willing buyer, willing seller. So the issue of how you in any particular case define or come up with a willing-buyer or willing-seller rate is one that has been confronted over and over again in a wide variety of contexts. If you are talking about eminent domain cases or talking about these CARP proceedings or Government compulsory licensing of patents and copyrights, it is a standard that has been applied over and over again.
Having said that, the recent Webcaster proceedings is a good example of where one can spend hours and hours and tens of thousands of pages arguing about what does a willing-buyer, willing-seller rate mean in the context of any particular situation.
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But that same kind of thing goes on in other cases, as well, when you have to determine fair market value; and I believe that that is an appropriate standard here for judging the value of copyrighted works.
If you are going to compel—and we are talking about compulsory licenses here—if you are going to compel copyright owners to license their works to different types of technologies, at the very least they should be entitled to fair market value for the use of their works.
Mr. COBLE. Does anyone want to add to that?
Mr. REMINGTON. To the extent it is obviously your prerogative to create compulsory licenses; but to the extent that you set subsidy rates at lower than fair market value, you are transferring wealth from one group of people to another in our society. And that is one of the problems in several of the compulsory licenses that do not have the willing buyer, willing seller, standard.
Now, in the political sense, many people would like those types of compulsory licenses because they get a rate that is under what they would pay in the marketplace. You just have to be careful and be knowledgeable of that fact.
Mr. COBLE. Ms. Peters, I let you off early. I am going to impose on you again.
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Ms. PETERS. That is good because the terms and conditions are what we are actually really considering right now in the Webcasting proceeding, so it would be inappropriate to answer.
Mr. COBLE. That is why I was quick to recognize that.
Would eliminating all statutory licenses resolve the litany of problems which have been broached today?
Ms. PETERS. I would say hallelujah; and the answer is, yes, it would.
But my knowledge of where we are going: I think we are more likely to see more, not less; and more complex, not less complex. So it would be great because we wouldn't have to deal with what to do about the failure of the CARP system. But I think you are going to have to come and deal with it.
Mr. COBLE. I see that annoying red light looking at me now, so I recognize the gentleman from California.
Mr. BERMAN. Thank you, Mr. Chairman. Just taking off on what Mr. Rich said earlier in criticizing the willing-buyer, willing-seller standard, you talked about this example of taking some agreements between the RIAA, and I guess, what, individual DEMA members.
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Mr. RICH. Individual Webcasters.
Mr. BERMAN. Individual Webcasters, and that becoming a rate. But I am told that, in fact, the CARP throughout 25 of the 26 agreements reached during that process and only left the agreement between YAHOO and—not exactly a small Webcaster—and the RIAA and then said, but even so, that rate would not be the appropriate rate and reduce that.
Mr. Garrett, am I right about that?
Mr. GARRETT. I think you have it right, Mr. Berman.
Mr. BERMAN. So it wasn't looking at 25 unbalanced negotiations in that sense and then concluding that is the willing-buyer, willing-seller rate derived from sort of a nonmarketplace situation because of the antitrust exemption?
Well, anyhow, I guess, Mr. Remington and Ms. Peters, you hadn't spoken yet on the issue of court versus continued administrative or arbitration process. Do you have any thoughts on that?
Mr. REMINGTON. Yes, I do.
I think, fortuitously, this is the Courts Subcommittee, so this decision could not be made in a better environment. But Bruce Rich, being a good lawyer, did recognize a deep-seated constitutional question which he said he hadn't analyzed.
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I would hazard a guess that this is of very dubious constitutionality because there is no case or controversy. You would have to create a cause of action of sorts in order to invoke the litigation process and the powers of the Federal judiciary. In the BMI or ASCAP rate court context, there is a case or controversy which emanates from the administration of the consent decrees.
Second, I agree with Bob Garrett that everything that has been criticized about the defects in the CARP process, primarily costs would be exacerbated in this process; this would be more expensive and slower.
Third—and I grabbed my long-range plan for the Federal courts—the Federal judiciary from a policy perspective, as you well know, vigorously opposes the creation of specialized courts unless there is a huge societal problem at hand, something akin to maybe even to homeland security. But to create a court for copyright arbitration royalty proceedings, as a policy matter, I don't think would receive the approval of the Judicial Conference.
Ms. PETERS. I am not a constitutional scholar, so I accept Mike's questions. I really don't have a preference one way or the other. Maybe that is not true; there is a question that is raised——
Mr. BERMAN. Your life would be easier.
Ms. PETERS. Right, absolutely, and I am trying to make that happen.
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A couple of countries actually have judges involved in their tribunal-type proceedings, but it is not the same as giving it to the district court. In Australia and Canada, they really have one judge who is—part of his duty for a certain period of time is to be like the equivalent of ''chairman of the proceedings,'' if any are necessary, and then deal with stable members, who are named, whether they are from an agency like the copyright office or their equivalent of ALJs. But it does bring the adjudicator knowledge of the courts.
Now, I don't know how that kind of a system plays in with regard to our constitutional requirements. But I know that the countries that have that system seem to like that system.
Mr. BERMAN. Well, I think that does it, Mr. Chairman, for me. Thank you.
Mr. COBLE. Thank you, Mr. Berman.
Mr. Remington, I cut you off when Mr. Boucher's time expired. I will now recognize you for that comment, or have you made it?
Mr. REMINGTON. I just wanted to make a clarification. I thought I heard twice that BMI and ASCAP were part of the proceedings, and they were not. For the record, we were not part of the recent webcasting proceeding.
Mr. COBLE. Okay.
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Let me put this to you, Ms. Peters, in conclusion. It has been suggested today—let me say good-bye to Howard before he leaves.
Ms. Peters, it has been suggested here today that a possible, quote, ''fix,'' close quote, of the CARP structure and process is going directly to the Federal court system.
How would you, as Madam Register—speaking for the copyright office, how would you feel, in essence, not having to deal with the CARP system anymore?
Ms. PETERS. Let me put it this way——
Mr. COBLE. Strike that.
How would you feel about not dealing with the CARP system, A and B? What do you think about going directly to the court system?
Ms. PETERS. I am not sure about going directly to the court system. I probably don't support that.
With regard to dealing with the CARP system, I think the system that is in place right now and the work that is done by the copyright office in the review of what the panels do is not necessary, that there is a better structure.
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I am not opposing it remaining at the Copyright Office. I am just saying it has got to work better and it has got to meet the criticisms and the shortcomings that we have identified. We are not opposed to having it at the Copyright Office if that is where—when you address all of these issues, that is where the consensus seems to coalesce.
Mr. COBLE. Well, ladies and gentlemen, lady and gentlemen, we thank you all and thank those in the audience for having expressed your interest by your continued presence here. And let me conclude by thinking aloud.
If it is the consensus that we enact a bill to change the CARP system and if everyone agrees just, to some extent, to that point, it may well be helpful—again, thinking aloud—if the Copyright Office and/or our Subcommittee conducted round tables or discussions or jaw-boning with interested parties on the subject in advance of possible legislative action. I don't see that that could do any harm.
Ms. PETERS. We would be delighted to do that.
Mr. COBLE. I didn't hear you.
Ms. PETERS. We are doing very good at round tables.
Mr. COBLE. It may end up wasting time, but we always do from time to time. But you all think about that and so will I.
In conclusion, does anyone have any nagging ideas you want to bounce off before we drop the hook?
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Well, again, we appreciate, folks, your testimony and your presence today. This concludes the oversight hearing on CARP, the Copyright Arbitration Royalty Panel structure and process. The record will remain open for 1 week, so if you have additional information or if anyone has additional information, the record will be open for 1 week.
Thank you again for your cooperation and attendance; and the Subcommittee stands adjourned.
[Whereupon, at 4 p.m., the Subcommittee was adjourned.]
A P P E N D I X
Statments Submitted for the Hearing Record
PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Good afternoon. The Subcommittee will come to order.
The Founding Founders understood the importance of copyright to our nation. In keeping with this tradition, our Subcommittee has always worked to support artists by ensuring that they receive fair compensation for their creative endeavors.
Our hearing today will focus on an arcane but important component of the present system that reimburses copyright holders for their work. By way of background, and as part of the 1976 Copyright Act Amendments, Congress acknowledged the need for government to oversee the royalty rate-making and distribution process by creating the Copyright Royalty Tribunal, or CRT. The need for this entity was especially critical since the '76 Amendments also created three new compulsory licenses.
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By 1993, Congress, the Copyright Office, and rate-making participants believed that greater efficiencies could be realized under a different system, which led to the development of our present construct, the Copyright Arbitration Royalty Panel, or CARP.
Unfortunately, it now appears that history is repeating itself, as the current structure and operation of the CARP system has generated great frustration among those parties required to participate within its statutory confines.
Although some critics have characterized our efforts to develop a fair and efficient rate-making and distribution process as ''disappointing,'' I am optimistic that we will ultimately prevail in our attempt to build a better copyright mousetrap.
We have an excellent panel of witnesses today who will doubtlessly add to our individual and collective understanding of the CARP system, warts and all. I welcome them here today and thank them in advance of sharing their thoughts.
I now turn to the Ranking Member, Mr. Berman, for his statement.
PREPARED STATEMENT OF THE HONORABLE HOWARD L. BERMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Chairman,
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Thank you for holding this hearing on the Copyright Arbitration Royalty Panel.
I am a strong supporter of marketplace solutions to copyright royalty disputes. Copyright owners have every economic incentive to capture additional revenue by licensing their works, and have every right to seek the highest royalties the market will bear. If they are too short-sighted to capitalize on opportunities for new revenue—or fail to act rationally, as economists would say—the marketplace will punish them. Furthermore, when copyright owners have engaged in anti-competitive conduct, the antitrust laws have, time after time, proven adequate to remedy this conduct.
Compulsory licenses and CARPs, on the other hand, have proven to be imperfect, unwieldy and costly licensing mechanisms, at best. I suspect that many CARP participants, both licensees and copyright owners, would have found a far more satisfactory outcome had they chosen to spend their money and effort negotiating a reasonable settlement in the marketplace rather than in a CARP. Furthermore, compulsory licenses tend to outlive their purpose, and thus may create marketplace dislocations rather than address them. For example, the cable compulsory license was created to help a struggling and entrepreneurial cable industry compete with the broadcast industry. Today, the cable license continues to exist in an era where the cable industry is able to exercise market power at least comparable to that of the relevant copyright owners.
While I do not have a fondness for compulsory licenses, I recognize that we must do our best to make the ones we do have work.
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The CARP process was catapulted into national awareness this year because of the controversial webcasting CARP, which determined the royalty rate for internet radio. The outcome of the webcasting CARP—which still is under consideration by the Librarian of Congress and the Copyright Office—has garnered much attention from the press and the public.
What captured our attention about the webcasting CARP was not only the royalty rate it set, however, but the process through which it occurred. While many of the rate and distribution determinations are the subject of marked disagreement among the participants, the one thing that even the strongest opponents agree upon is that the CARP process has serious flaws and warrants improvement.
In particular, the overwhelming problem that is repeatedly voiced is the expense of the proceedings. Participants in a CARP bear not only their own substantial legal fees, but also the cost of the CARP proceeding itself. This is often millions of dollars—sometimes much more expensive than the royalty claim that the CARP is addressing. For instance, I believe Mr. Remington can address particularly egregious situations in which a participant had to pay tens of thousands of dollars for a CARP to determine the distribution of around ten dollars in royalties.
In addition to the problems of cost to the participants, I know there are great concerns over the autonomy and independence of the arbitration body, the burden it places upon the Copyright Office, and the overall fairness and consistency of the outcomes. I hope these are issues we can explore today, and begin to develop strategies to improve the royalty arbitration process. Our witnesses are experienced participants in CARP proceedings, and can speak to the problems they have encountered during CARP arbitration, along with potential solutions.
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The issue of CARP reform is not new to our subcommittee. In 1998, Chairman Coble introduced legislation to reform the methods through which the royalty rate is determined. Ultimately there was not enough support to enact his reform proposals. Given today's climate, however, I believe there is sufficient impetus and sufficient interest to seriously consider changes to the arbitration process. I anticipate an active discussion today to determine a model that most efficiently accomplishes the goals of the CARP process without unduly burdening the participants.
PREPARED STATEMENT OF THE HONORABLE JOHN CONYERS, JR., A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MICHIGAN
I agree we need to reform how licensing rates for copyrighted works are set. Everyone agrees that the current system is too expensive, time-consuming, and inefficient.
At the same time, this will be at least the third time we've changed how the rates are set. I'm all for good government, but I feel like we're playing Goldilocks here. The first system, the tribunal, was too bureaucratic. The second system, the panels we have now, are too unwieldy. So it seems like we have to find what's just right and that's what this hearing is for.
While we are discussing we should make the changes, however, it is important that any reforms made do not affect the actual rates that are set. I say this because there have been ideas—in guise of procedural reform—that really would make it harder for content owners to receive a fair price for their work.
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That is something we should not do because the very incentive for the creative works that are being licensed is the financial reward promised in the copyright laws. The reforms made to the panels must be procedural in nature and no more.
PREPARED STATEMENT OF THE HONORABLE RICK BOUCHER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Thank you Mr. Chairman for a timely hearing on the CARP process.
The CARP process is badly broken. It should be replaced with a more efficient, more affordable and fairer system. In my view the functions of the CARP should be transferred to a U.S. District Court.
The problems which beset the CARP are many.
While the CARP process was designed to produce a streamlined procedure, the lack of appropriate discovery mechanisms has prolonged the proceedings, achieving the opposite of the intended outcome.
The process is too expensive. It is beyond the ability of many interested parties to afford. Having private parties pay the fees of the arbitrators is manifestly unjust to the financially less fortunate.
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No body of expertise is developed by the arbitrators which could be applied in subsequent proceedings. Starting with a new arbitrator panel each time will lead to inconsistent judgements and a constant process of reinventing the wheel.
And the standards which are applied are demonstrably inadequate. In the recent webcasting decision, the concept of fairness of the payment was totally absent from the deliberation.
Fairness is the standard under Section 801 (b) (1) proceedings for royalty payments for digital music services other than webcasting.
Fairness is the standard under Section 119 (c) (3) (B) for royalties paid by cable and satellite companies to terrestrial broadcasters for terrestrial broadcast retransmissions.
But fairness is not an element of the standard under Section 114 applicable to webcasters. However we address the procedural problems, and I believe vesting this rate setting function in a U.S. District Court is the best approach. We also need to invest fairness of the payment as the governing standard under all CARP proceedings.
We must avoid a repeat of rulings like the most recent one, through which a one-size fits all approach was adopted, and small webcasters that measure annual revenues in the tens of thousands of dollars were saddled with royalty fees in the hundreds of thousands. A fairness standard would have prevented a ruling which threatened to put the young and small companies out of business.
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Changes must be made, and I welcome this first hearing as we explore the problem and consider a new course.
PREPARED STATEMENT OF THE HONORABLE CHRIS CANNON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF UTAH
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PREPARED STATEMENT OF THE HONORABLE DARRELL ISSA, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
Thank you, Chairman Coble and Ranking Member Berman, for holding this hearing on the process and structure of the CARP (Copyright Arbitration Royalty Panel).
With the existence of compulsory licenses, agreements are needed in order to determine the amount of licensing royalties copyright owners are entitled to receive. Unfortunately, Congress has created a flawed process in which royalty decisions are handed down. My specific concerns are directed at the exorbitant costs for arbitrators, the restrictive discovery process and the different standards for setting rates.
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The CARP forces parties to participate in laborious proceedings that result often in disputed decisions and additional lawsuits. The existing CARP process can cost both parties a high price, with attorney fees, arbitrator fees, Copyright office fees and consultant fees listed as expenses. Without reform, the current model will continue to be costly for all sides. The discovery aspect of the CARP proceedings is restrictive, because the CARP has no subpoena powers. The scope of the discovery is limited to the written testimony, with access to official documents not available to shed more light on a particular issue, thereby ensuring the system in place remains ineffective and backwards, compared to a traditional court case.
My last area of concern involves the Copyright Act and the three different standards for setting royalty rates. I have attached to my opening statement a side-by-side display of the three standards, which are found in Sections 801, 119 and 114 of the Copyright Act. The first of these standards requires rates to be the product of a four-factor balancing test, and requires rates to be ''fair'' and minimally disruptive of the relevant industries. The second standard requires the rates to represent the ''fair market value'' of the relevant activity. The third standard, which applies only to Internet radio services, lacks a fairness requirement, and only requires the arbitrators to ratify prices that would be negotiated by willing buyers and sellers in ''the marketplace.''
I believe we should consider the feasibility of a single standard, which could lead to providing assurances that the rates the CARP set are fair and reasonable for both the copyright owners and the user, and provide the Copyright office a basis in which to set future royalty rates.
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Shedding light on the problems will require greater inquiry in to what is deficient with the current system and what could be done to ensure fair decisions are rendered.
Thank you again for holding this hearing. I look forward to hearing the testimony from the panel of witnesses.
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PREPARED STATEMENT OF DAVID MANDELBROT
Yahoo is a leading provider of comprehensive online products and services to consumers and businesses worldwide. Yahoo reaches more than 237 million individuals worldwide each month.
Between March 2000 and August 2000, I was personally responsible on behalf of Yahoo for the negotiation and execution with representatives of the Recording Industry Association of America of the voluntary ''Webcasting Performance and Ephemeral License Agreement'' for Yahoo's public performance of sound recordings by noninteractive nonsubscription webcasting.
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In July 1999, Yahoo had acquired broadcast.com inc., a publicly traded company specializing in broadcasting audio and video over the Web. Broadcast.com was a leading aggregator of streaming audio and video, making available from its Website thousands of special events, several hundred local radio stations, local television stations and video networks, concerts, and Internet-only music channels. Over the two years following the acquisition of broadcast.com, Yahoo integrated the broadcast.com services into the Yahoo network.
With the acquisition of broadcast.com, Yahoo also became an aggregator of music programming created by third parties. Specifically, Yahoo offered its audience the opportunity to listen to music performances in two ways. First, radio stations transmitted their signals by phone line to Yahoo servers, which servers then originated the retransmission of those radio station signals to the Internet. Second, programmers created Internet-only channels or Internet-only programming, which was not transmitted over ordinary radio station signals and which Yahoo also made available to the public. At that time, radio retransmissions constituted approximately 90 percent of Yahoo's performances that were covered by the statutory license; Yahoo's Internet-only performances constituted the remaining 10 percent.
As of the time when Yahoo completed its acquisition of broadcast.com, Yahoo had several reasons for considering a voluntary license rather than taking advantage of the statutory license available following arbitration:
First, it would enable Yahoo to offer certainty of a negotiated RIAA license to Yahoo customers. By entering into a license agreement with the RIAA, Yahoo could offer a service to our radio station and third party music programming entities by saving them the expense and burden of arbitration or independent negotiation with the RIAA.
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Second, Yahoo would avoid the costs of arbitration. As one of the largest Internet webcast transmission services, we would incur very high litigation costs if we were to participate in the arbitration. In addition, litigation would drain time and resources from Yahoo personnel whose efforts would bring much greater value if directed toward development and execution of our site-wide streaming media implementation. Moreover, Yahoo was aware that these arbitrations could repeat every two years. In light of these factors, Yahoo was willing to enter into a voluntary license in order to avoid these litigation burdens and costs. Yahoo ultimately decided that we would much rather invest fewer resources settling than invest more resources arbitrating.
Third, Yahoo would avoid the uncertainty of the CARP rate. By negotiating a voluntary license, Yahoo could potentially quantify and control its costs. We were concerned that an unacceptably high royalty rate arrived at by the CARP could force us to stop offering particular types of content. Negotiating the fee reduced the risk of an adverse judgment inherent in any arbitration or litigation. In addition, given that radio retransmissions constituted approximately 90 percent of Yahoo's music performances, we believed that our interests were different from the other participants in the CARP; and we wanted to establish a separate and lower rate for radio retransmissions.
Fourth, Yahoo wanted to build goodwill with the record labels. We believed that by settling early, we would engender goodwill with RIAA member recording companies. We hoped that this goodwill would lead to better revenue opportunities in the future.
In light of these factors, our primary concern was the overall cost of the license, that is, the ''effective rate'' that we would pay for all performances based on our mix of radio retransmissions and Internet-only performances. Based on what we projected as the ratio of retransmissions to Internet-only transmissions, the radio retransmission fee was a much more significant factor to us.
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Although we were aware that our license could be used as a precedent prospectively, our main interest was in striking a deal that had an acceptable bottom line impact for the term of the agreement. To the extent that an arbitration resulted in lower fees going forward, we would be able to avail ourselves of that lower rate in the renewal periods or following the expiration of our Agreement with RIAA. If our license was deemed to be an industry precedent and the arbitration resulted in the same rates, we would be on an even plane with our competitors, and the Internet-only rate was not of great concern to us at that time. Either way, we looked to the costs we would save by not participating in the arbitration in agreeing to our license.
Not surprisingly, our interest was in doing what was best for our business and our business model. At that time, because of our mix of 90 percent radio retransmissions and 10 percent Internet-only transmissions, we were hoping to achieve a lower rate for radio retransmissions which would produce a lower effective rate and have a far greater financial impact on our business than the rate for Internet-only transmissions.
The fees ultimately set by the CARP in its recent report were considerably higher than any fair market outcome or any reasonable construction of the economics of the Yahoo-RIAA Agreement. The Panel did not appropriately address the unique facts and circumstances surrounding the Yahoo-RIAA Agreement, yet the Panel explicitly used certain terms of that Agreement as a benchmark for industry rate-setting. The result is that a single specific agreement based upon the unique situation of an individual company whose business model was atypical of Internet webcasters in general, has been misapplied to set excessive rates for an entire industry.
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Material Submitted for the Hearing Record
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(Footnote 1 return)
A contingent jurisdiction over public performances by means of jukeboxes remains if private jukebox licenses expire and no new license agreements are reached.
(Footnote 2 return)
In one rate adjustment proceeding under 17 U.S.C. 114, the Court of Appeals remanded for further findings a small portion of the Librarian's decision concerning the terms of payment of royalty fees.