Wednesday, June 23, 2010

DC Cir: RIAAA Must Pay Copyright Owners Late Fees - Ruling on Compulsory Licensing of Musical Works

In Recording Indus. Ass'n of America, Inc. v. Librarian of Congress, --- F.3d --- (D.C. Cir. June 22, 2010), the D.C. Circuit upheld the Copyright Royalty Board's imposition of late fees on the RIAA when it fails to pay copyright owners.

The issue arises in the case of "compulsory licenses" - that is where someone uses a musical work without the owner's permission.   Like a cover band recording a Led Zep tune without the band's permission.  The DC Circuit's decision has a nice explanation of compulsory licensing and how it works.  Excerpt below in italics:

Most songs played on the radio, sold on CDs in music stores, or digitally available on the Internet through services like iTunes embody two distinct copyrights-a copyright in the “musical work” and a copyright in the “sound recording.” See 17 U.S.C. § 102. The musical work is the musical composition-the notes and lyrics of the song as they appear on sheet music. The sound recording is the recorded musical work performed by a specific artist.

Although almost always intermingled in a single song, those two copyrights are legally distinct and may be owned and licensed separately. One party might own the copyright in the words and musical arrangement of a song, and another party might own the copyright in a particular artist's recording of those words and musical notes.

This case involves licenses in a limited category of copyrighted musical works-as opposed to sound recordings. Section 115 of the Copyright Act allows an individual to make and distribute phonorecords (that is, sound recordings) of a copyrighted musical work without reaching any kind of agreement with the copyright owner. That right does not include authorization to make exact copies of an existing sound recording and distribute it; if a musical work has been recorded and copyrighted by another artist, a licensee “may exercise his rights under the [§ 115] license only by assembling his own musicians, singers, recording engineers and equipment, etc. for the purpose of recording anew the musical work that is the subject of the [§ 115] license.” 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 8.04[A], at 8-58.5 (2009). For example, a § 115 licensee could pull together a group of musicians to record and sell a cover version of Bruce Springsteen's 1975 hit Born to Run, but that licensee could not make copies of Springsteen's recording of that song and sell them.

The § 115 licensing regime operates in a fairly straightforward manner. When a copyright owner distributes work “to the public,” § 115's provisions are triggered. 17 U.S.C. § 115(a)(1). Once that occurs, anyone may “obtain a compulsory license to make and distribute phonorecords of the work” under § 115 so long as the “primary purpose in making [the] phonorecords is to distribute them to the public for private use.” Id. Assuming the copyright has been registered with the Copyright Office, the licensee owes the copyright owner a royalty for every phonorecord “made and distributed in accordance with the [§ 115] license.” Id. § 115(c)(2). For purposes of the Copyright Act, a phonorecord is “distributed”-and an obligation to pay the copyright owner a royalty created-when “the person exercising the [§ 115] license has voluntarily and permanently parted with” the phonorecord. Id . In other words, the licensee's sale of its recording of the copyright owner's work triggers the royalty payment obligation. See Nimmer § 8.04[H][1], at 8-77.

Because the § 115 license issues without any agreement between the copyright owner and the licensee, the system needs a mechanism to figure out how much the licensee owes the copyright owner and what the terms for paying that rate should be. Although that mechanism has changed over time, the Copyright Royalty Board currently serves as the rulemaking body for this system. See generally Procedural Regulations for the Copyright Royalty Board, 70 Fed.Reg. 30,901 (May 31, 2005) (discussing the history of royalty ratemaking). The Board is a three-person panel appointed by the Librarian of Congress and removable only for cause by the Librarian.FN1 The Board sets the terms and rates for copyright royalties when copyright owners and licensees fail to negotiate terms and rates themselves. See Nimmer § 7.27[C], at 7-243.

FN1. RIAA has not raised a constitutional challenge to the method of appointment of the members of the Copyright Royalty Board. Cf. Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., 574 F.3d 748, 755-56 (D.C.Cir.2009); SoundExchange, Inc. v. Librarian of Congress, 571 F.3d 1220, 1226-27 (D.C.Cir.2009) (Kavanaugh, J., concurring).

As relevant here, the Copyright Act requires the Board to set “reasonable terms and rates” for royalty payments made under the § 115 license when the parties to the license fail to do so. 17 U.S.C. § 801(b)(1). When establishing terms and rates under that license, the Copyright Act requires the Board to balance four general and sometimes conflicting policy objectives: (1) maximizing the availability of creative works to the public; (2) providing copyright owners a fair return for their creative works and copyright users a fair income; (3) recognizing the relative roles of the copyright owners and users; and (4) minimizing any disruptive impact on the industries involved. Id. § 801(b)(1)(A)-(D).

At specified intervals, the Board holds ratemaking proceedings for licenses issued under the Copyright Act. Section 115 ratemaking proceedings can occur every five years “or at such other times as the parties have agreed.” Id. § 804(b)(4).

In 1996, the parties with an interest in the § 115 license (such as the Recording Industry Association of America, the Songwriter's Guild of America, and the National Music Publishers' Association) agreed on various terms and rates for the compulsory license. They also agreed that the settlement with respect to those terms and rates would expire 10 years later. In 2006, after the parties found they could not reach a new compromise, the Board instituted proceedings to set certain terms and rates governing the operation of the § 115 license. The process was long and complicated, involving 28 days of live testimony, more than 140 exhibits, and more than 340 pleadings, motions, and orders. See Mechanical and Digital Phonorecord Delivery Rate Determination Proceeding, 74 Fed.Reg. 4510, 4511 (Jan. 26, 2009).

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