Testimony of
Robert Alan Garrett
Arnold & Porter
Before the
Subcommittee on
Courts, the Internet, and Intellectual Property
House Committee on the Judiciary
June 13, 2002
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.
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 ½ 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.
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.
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.
· 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.
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.
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.”
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.
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;
· 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;
· 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.
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.
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.
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.
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.
· 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.
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.
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.