Statement of
Michael J. Remington
before the
House Judiciary Subcommittee on
Courts, the Internet, and Intellectual Property
on
“The CARP (Copyright Arbitration Royalty Panel”)
Structure and Process
June 13, 2002
By: Michael J. Remington
Partner
Drinker Biddle & Reath LLP
1500 K Street, N.W.
Suite 1100
Washington, D.C. 20005-1209
202-842-8839 (Telephone)
202-842-8465 (Facsimile)
remingmj@dbr.com (Email)
Statement of
Michael J. Remington
before the
House Judiciary Subcommittee on
Courts, the Internet, and Intellectual Property
on
“The CARP (“Copyright Arbitration Royalty Panel”)
Structure and Process
June 13, 2002
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.
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.
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.
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).
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.
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.
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:
· 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.
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.
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.
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.
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.
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.
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.
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:
· 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.