Before the United States House of Representatives

Committee on the Judiciary

Subcommittee on Courts, the Internet, and Intellectual Property

“Copyright Royalty and Distribution Reform Act of 2003” (H.R. 1417)

April 1, 2003

 

Testimony of R. Bruce Rich

Weil, Gotshal & Manges LLP

 

 

Mr. Chairman, Members of the Subcommittee.  Thank you for affording me the opportunity to testify before you once again on the important subject of much-needed reforms to the CARP process.  I appear in my capacity as senior partner in the law firm of Weil, Gotshal & Manges LLP.  As outlined in detail in my earlier, June 13, 2002 testimony, our Firm has for nearly twenty-five years counseled many, if not most, of the country’s largest media with respect to their copyright music license requirements, especially in relation to obtaining music performing rights from the three U.S. performing rights licensing organizations, ASCAP, BMI and SESAC, as well as negotiating the treacherous legal shoals created by the Digital Millennium Copyright Act (and its predecessor, the Digital Performance in Sound Recordings Act).  Representative clients of the Firm in this area include the ABC, CBS and NBC Television Networks, the nation’s commercial local radio and television broadcast stations, the National Association of Broadcasters, cable program services such as ESPN, MTV, Showtime, USA Networks and The Disney Channel, background music entities such as Muzak LLC and DMX MUSIC INC., and new media and webcasting entities which include AOL, RealNetworks, MTVi, and Yahoo!.

In the course of our music representations, our law firm has counseled and litigated both copyright and antitrust issues; has appeared and tried leading cases in the federal courts, including in the so-called rate courts which operate under the auspices of the ASCAP and BMI antitrust consent decrees; and has litigated through trial and the appellate process two CARP rate adjustment proceedings (on behalf of the Public Broadcasting Service and National Public Radio in a 1998 proceeding under Section 118 of the Copyright Act, and on behalf of various FCC-licensed broadcasters, as well as some twenty webcasters and DMX, 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 last appellate phase).

This deep and varied exposure to the often arcane and invariably hotly-contested world of music copyright licensing – the economic implications of which can be of enormous significance for the parties involved – has provided my colleagues and me with what I believe are useful perspectives on the legislation before this subcommittee.  The views I offer through this testimony reflect that experience, although I should hasten to add that they do not necessarily reflect the views of our clients.  What follows also reflects our experience with a particular subset of CARP cases – the so-called rate adjustment cases involving determinations of the license fees payable by particular users to groups of copyright owners for public performances or ephemeral uses of their works.  From my discussions with those more familiar than me with the other significant area of CARP litigation – involving distributions of royalty fees among competing copyright claimants – I have concluded that there may be a need for separate sets of procedures governing these distinctive types of CARP proceedings. 

CARP rate adjustment proceedings under Sections 112, 114 and 118, not differently from ASCAP and BMI rate court proceedings, attempt the impossible: to come up with rates and terms for licenses which approximate those that a freely-competitive market would bring about.  This delegation to courts, in the rate court setting, and to arbitrators, in the CARP setting, has been necessitated by the determination that the markets involved are not freely-competitive and would, without such judicial or arbitral mechanisms, produce unacceptable distortions in the licensing of the intellectual property rights involved.  As challenging are those CARP determinations (under Sections 114(f)(1)(B), 115 and 116 of the Act) which require the weighing of the four statutory factors enumerated in Section 801(b) of the Act in arriving at rates. 

Our experience in such proceedings has led us to understand just how complex and multifaceted they are, and how skillful the trier of fact and judge of the legal issues presented must be.  For these determinations invariably require a facility with macroeconomics and with basic principles of antitrust law; an ability to work through often opaque statutory language, such as pervades the DMCA; the ability to assimilate facts concerning multiple media marketplaces; the ability to evaluate complex statistical and economic data put forth by the parties’ experts; the ability to sift through and properly evaluate record evidence, including making judgments on issues such as witness credibility; and, ultimately, the ability to synthesize all of these elements into a cogent decision that is consistent with prior precedent (drawing distinctions or building upon it as appropriate) and that itself will offer precedential guidance.

In my previous testimony, I outlined what I believe are the major shortcomings of the CARP process as it exists today, and made a series of recommendations for reform.  I am delighted that H.R. 1417, the proposed Copyright Royalty and Distribution Reform Act of 2003, addresses many of those concerns, although, as I will testify this morning, I believe that several aspects of the bill as it presently is drafted could stand clarification or improvement.  I want at the outset to express my appreciation and admiration for the efforts of the Chairmen of the full Committee and of this Subcommittee, other Members who have assisted the Chairmen in crafting this legislation, and the Committee and Subcommittee staff in so thoughtfully tackling this thorny and complex issue.

1.  Elimination of Three-Arbitrator Panels.  As I previously testified, the present CARP system’s reliance on three, newly-selected arbitrators for each CARP proceeding suffers serious shortcomings, among them:

·        Transient expertise and lack of continuity of decision-makers.

·        Lack of familiarity with prior precedents and, given the lack of probability of being chosen again to be an arbitrator, little incentive to craft meaningful precedent.

·        Wasteful expenditures of time in intra-arbitrator conferences on procedural and substantive issues. 

·        An inevitable tendency to reach compromise decisions, reflected in the remarkable tendency of virtually every party to a CARP proceeding to appeal the arbitrators’ rulings.

H.R. 1417 commendably eliminates this cumbersome and inefficient approach in favor of the use of a single Copyright Royalty Judge, to be appointed for a five-year term by the Librarian of Congress.  This individual, hopefully of suitably high experience, intelligence, and independence, can bring the needed efficiency and continuity to the rate-setting and distribution process.  By way of just one example, parties to a proceeding tried to this judge will have an excellent sense of what to expect were they to try a future proceeding before him.  This will promote negotiated resolutions of rate-adjustment and distribution proceedings alike in lieu of repetitive litigation.  Such has been the experience in the ASCAP and BMI rate court setting, where there is a similar continuity of jurists overseeing such cases.

With respect to the qualifications of the new Copyright Royalty Judge proposed in § 802(a), I believe that the interests of finding a highly-qualified individual for this position would be served by eliminating “demonstrated knowledge of copyright law” as a mandated prerequisite.  As I have indicated, ratesetting proceedings implicate, first and foremost, issues of economics, not copyright law.  The federal judges who supervise the analogous ASCAP and BMI rate courts are not possessed of special copyright expertise, although, over time, they have certainly become familiar with those areas of copyright law at issue in the cases before these courts.  To require such expertise of the Copyright Royalty Judge, coupled with other appropriate requirements, such as significant litigation experience, could well make difficult identifying a highly-qualified individual free of perceived bias.  While, for example, each of the practitioners appearing before you this morning has extensive litigation experience and possesses copyright expertise, I suspect that each of us, fairly or not, has been “branded” as reflecting the biases of the clients we have come to represent in our respective practices.  These problems can be alleviated by making “demonstrated knowledge of copyright law” a potential “plus factor,” but not a necessary qualification, for the Copyright Royalty Judge.  

I would offer a similar suggestion respecting the proposed qualifications of the professional staff to assist the Copyright Royalty Judge, found in § 802(b).  Rather than limit a field of potentially strong candidates by requiring “expertise in copyright law and in the business of economics of the industries implicated,” it would, in my judgment, be preferable to cite such qualifications as desirable, but not mandatory.  A suitably intelligent individual with a proven capacity to master complex subject areas could easily get “up to speed” in subject-matter expertise quickly; indeed, the entire process might well benefit from such initial open-mindedness.

2.  Alleviation of the Exorbitant Costs of Proceedings.  I also have observed, as have many others, that the costs incurred by a party to participate in a CARP proceeding have grown exorbitant.  A principal factor in those costs has been the requirement that the parties pay the hourly fees of the three arbitrators—fees that can aggregate to $1000/hour or more.  The proposed legislation makes large strides in addressing this concern by covering the salaries of the Copyright Royalty Judge and her assistants under Copyright Office appropriations.  At the same time, § 803(e) of the bill, as drafted, is less than clear as to the types of remaining “costs” that are subject to assessment against the parties to distribution or rate-adjustment proceedings.  Are the reimbursement provisions intended to apply solely to the presumably modest remaining direct costs to be incurred by the Copyright Office and the Copyright Royalty Judge and his staff in relation to a specific proceeding (e.g., photocopying, court reporters, etc)?  Or is it contemplated that such costs would also include indirect costs, such as pro-rated salaries of other Copyright Office personnel devoting time to the proceeding, or even to general expenses associated with the use of government offices and hearing rooms? 

Also unclear is the language of § 803(e)(1)(B), which contemplates that costs remaining after deductions from not more than one percent of royalty fees “deposited or collected” are to be borne by the parties to the proceedings “in equal proportions.”  Given that many rate-adjustment and distribution proceedings are Hydra-headed affairs involving multiple parties with varying interests, the concept of cost allocation in “equal proportions” lends itself to widely varying interpretation.  Either the language should be clarified as to intent, or, in a similar fashion to current practice, such allocation decisions should be left to the Copyright Royalty Judge for determination on a proceeding-by-proceeding basis.

3.  More Rational Discovery and Other Procedures.  The stark limitations on discovery that presently accompany the CARP process, coupled with the cart-before-the-horse nature of the proceeding, arising out of the fact that the parties are required simultaneously to file written direct cases from which they cannot deviate prior to having had the opportunity to obtain discovery or otherwise ascertain the basics of the other side’s case, led me previously to observe that CARP cases are, as a result, “underdiscovered and overtried.”  Such underdiscovery leads to potential abuses in the form of the withholding of key impeaching materials and the blockading of access to critical evidence.  Cases are, as a result, overtried because: (i) trial cross-examinations that should be crisp and based on knowledge of the witness’ positions are instead transformed into labored, discovery-type fishing expeditions; and (ii) rebuttal cases, which should be of limited scope and duration, become the first opportunity for the parties – especially for their experts – to join issue.

H.R. 1417 partially addresses these concerns.  On the positive side, it extends somewhat the current 45-day discovery period to 60 days.  While a step in the right direction, I believe that a 60-day period for discovery is still not a meaningful one, at least in rate-adjustment proceedings of the magnitude of certain of those we have experienced.  I would not advocate a protracted or unbounded discovery process.  What I do recommend is that the Copyright Royalty Judge be given the discretion – in line with the discretion that judge is to be afforded with respect to the overall timetable for concluding the litigation process – to establish a discovery period not to exceed 120 days based on the judge’s assessment of the time necessary to create a meaningful pre-hearing record.

As presently drafted, the legislation is ambiguous in several important respects in terms of the timing and sequencing of discovery.  Section 803(b)(3)(c)(ii) prescribes that discovery is to be permitted for a period of 60 days and that final witness lists for the proceeding “shall not be required until the end of the discovery period.”  What is not clear from the foregoing is when the parties’ written direct cases are to be filed in relation to the 60-day discovery period.  Presently, written cases precede discovery.  Arguments can be made for retaining that practice, provided that written cases can be amended to benefit from the ensuing discovery.  Alternatively, discovery could precede the parties committing to their positions – as occurs in traditional court cases.  The worst of all worlds is to require, as the current system does, the filing of written direct cases without the opportunity to amend them following discovery.

The discovery tools to be available to litigants are not spelled out in the bill.  Under current practice, only very constricted document discovery (limited to materials that “underlie” the adversary’s case) is permitted, and there is no provision for depositions, requests to admit or interrogatories.  An expansion of discovery tools would seem warranted, closely supervised by the Copyright Royalty Judge.  One such tool, as I have previously testified, involves investing the Copyright Royalty Judge with subpoena power.  Past CARP proceedings have shown that critical evidence can lie in the hands of non-parties, such as entities that have entered into assertedly “comparable” license agreements to those in issue.  Under current practice, the parties and CARP panels must rely on the voluntary cooperation of such third parties in participating in the proceedings – a state of affairs that can lead – and in the past has led – to an incomplete and distorted fact record. 

Which leads to the important issue of who should prescribe the regulations governing the conduct of these proceedings.  The bill is not entirely clear in this regard.  Section 803(b)(3)(A) appears to contemplate that the Register of Copyright is to perform this role, while Sections 801(c) and 803(a) appear to confer relatively broad discretion in the Copyright Royalty Judge to “conduct proceedings” in accordance with the provisions of subchapter II of chapter 5 of the Administrative Procedure Act, and to “mak[e] any necessary procedural or evidentiary rulings” during and before commencement of the proceedings.

As a general matter, the interest of sound practice rules requires both a sensitivity to the policy objectives underlying these proceedings and a familiarity with litigation realities.  With due respect to the Copyright Office, it would seem beneficial not to place sole responsibility for developing rules of practice in such proceedings with that Agency, but, instead, to shape those rules with input from seasoned administrative law experts, as well as judges and practitioners.  One approach would be to require the Register to create an Advisory Committee comprising such expertise to promulgate the regulations.  I would also suggest that two existing approaches to similar procedures be referenced as appropriate examples for regulations regarding procedures for these proceedings – the use of the Federal Rules of Civil Procedure as the norm for proceedings conducted by administrative law judges, and the APA’s formal proceeding provisions, in particular Section 556.

4.  More Rational Rules of Evidence.  Currently, what ultimately comes into the record of a CARP case is governed, not by any meaningful rules of evidence, but by the whims of the arbitrators.  This can lead – and has led – to absurd and wasteful practice, especially in relation to the admission of blatant hearsay.  The bill under consideration helpfully would import into hearings the hearsay rules of the Federal Rules of Evidence, which should significantly improve the quality of the evidentiary records in such cases.  Whoever is charged with developing overall rules of practice could productively consider if additional aspects of the Federal Rules of Evidence should be made applicable to CARP proceedings. 

5.  Relaxation of the Present 180-Day Deadline for Completion of the Hearings and Issuance of a Ruling.   I earlier testified that the existing 180-day deadline from commencement of the hearing phase of a CARP to the time the arbitrators must issue their decision is, at least in CARPs of consequential scope, inadequate.  Among its deficiencies, the present system allows too little time for post-hearing briefing, and, more importantly, too little time for due deliberation by the Panel and careful exposition of its reasoning in its eventual decision.  In my view, one very undesirable side effect of this condensed time frame are decisions that scarcely address key aspects of the parties’ cases.  The ticking deadline clock virtually forces the arbitrators to reach for simple – even simplistic – rationales for their decisions, which are justified with conclusory, at best, “reasoning” attempting to rationalize the result adopted with an often very complex hearing record.

H.R. 1417 properly recognizes the need for greater flexibility by remitting to the Copyright Royalty Judge’s discretion whether to expand the 180-day period to one not exceeding one year.  This proposed revision does, however, contain an ambiguity that should be resolved.  Under current practice, the 180-day “clock” begins to run as of the conclusion of the so-called pre-controversy period, i.e., following the submission of written direct cases and the conclusion of the 45-day discovery period and just prior to commencement of hearings.  We presume the instant legislation has a similar intent.  Yet, the current wording of Sections 803(c) and 804(a) leaves open an interpretation that the 180-day-to-one-year “clock” begins to run as of the date a petition requesting a determination or adjustment of a rate has been published in the Federal Register, i.e., before direct cases have been filed and any discovery has been conducted.  Were this interpretation to be adopted, the intended benefits of a potentially lengthened period for the hearing/decision phase of these proceedings would be eviscerated. 

6.  The Appeals Process Should Be Streamlined.  Another inefficiency and needless expense associated with the current CARP process is the presence of a two-level appeals process: one to the Librarian of Congress, and a second to the United States Court of Appeals for the District of Columbia Circuit.  As I previously suggested, an upgrading of the professionalism of the trial phase of the CARP should be accompanied by adoption of a single right of appeal directly to a federal court of appeals.  The proposed legislation provides for precisely such an appellate process.  I believe, however, that its proposed standard of review – based on the “arbitrary and capricious” standard used in relation to some federal agency actions – is too restrictive.  Competence on the part of the new Copyright Judge is one thing; presumed infallibility is another.  No differently than the degree of deference given to decisions by federal district judges, decisions of the Copyright Royalty Judge should be subject to the appellate review standard of Rule 52(a) of the Federal Rules of Civil Procedure. 

7.  Consultative Role of the Copyright Office.  H.R. 1417 properly confers independence in the role and decision-making of the Copyright Royalty Judge.  Section 801(c) of the bill at the same time provides that the Copyright Royalty Judge “may consult with the Register of Copyrights” in making any rulings – presumably, even his or her ultimate merits determination – in any proceeding.  While the expertise of the Copyright Office is welcome in these proceedings, it would seem prudent to assure that any such contacts – whether on procedural or substantive issues – are on the record.  For instance, the legislation could provide for the Copyright Office to file one or more briefs as amicus curiae or intervenor expressing the Copyright Office’s views on issues pending in a given proceeding.  If there are to be more informal communications between the Copyright Royalty Judge and the Copyright Office, those should be arranged on notice to the parties with a procedure for participation.

8.  Extending the Applicable Period of Rulings.  I have advocated extending the statutory periods for which the current CARP proceedings have effect, from what are as short as two-year durations to five-year periods.  H.R. 1417 commendably adopts this approach, although the language of the technical amendments, as well as of 6(b) (Transitional Provisions), which are apparently designed to accomplish this objective, may need some “tweaking.” 

9.  Improved Procedures to Facilitate Settlements.  An important area of procedural reform is not addressed in H.R. 1417.  This relates to facilitating negotiated settlements after a rate adjustment proceeding has begun.  Current CARP procedures, as they have been interpreted by the Copyright Office, provide an unwieldy and inflexible process whereby a proposed settlement reached after initiation of the CARP process may be adopted by the Librarian of Congress in lieu of a CARP determination only after the proposal either is published for public comment and no interested party files a comment opposing the negotiated rates and terms or is otherwise submitted for scrutiny to the CARP Panel.  These procedures have proven to be particularly problematic where negotiations during a CARP proceeding have yielded a potential settlement involving some, but not all, of the parties to a proceeding.  The requirement of publication of the proposal and/or disclosure of its terms to the CARP Panel while proceedings with other non-settling parties are still ongoing can have – and recently has had – the effect of derailing settlements.

I would urge that H.R. 1417 include procedures that will facilitate settlement discussions during the pendency of the proceedings, as well as enable negotiated rates and terms in partial or complete settlement of a proceeding to be adopted without the kinds of crippling procedural conditions that now exist. 

* * *

I recognize that the legislation under consideration today addresses solely procedural CARP reform.  As I indicated in my prior testimony, however, even the best available process cannot cure deficiencies in the substantive statutory standards themselves, as those standards have been interpreted to date.  I think it important to say a few words on this all-important subject. 

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).[1]  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). 

My experience litigating under these standards has given me, and many users intended to benefit from the statutory licensing procedures, considerable concern.  The concern centers on 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).  Indeed, this concern is but a part of the larger antitrust concerns that arise out of the joint licensing activities of these collectives, matters which have triggered decades of Antitrust Division review and oversight.

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 by these owners’ collectives 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,[2] 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.

An alternative means of assuring that the market power of the copyright owners reflected in their marketplace dealings does not distort the proceedings is to reinstate, at least in Section 112 and 114 proceedings, the four objectives which govern § 114(f)(1)(B), 115 and 116 proceedings, as set forth in Section 801(b)(2) of the legislation.  There would appear to be little rationale for affording the benefits of those statutory factors to only certain § 114 statutory license determinations and not at all to § 112 determinations.

I thank the Members of the Subcommittee for their attention to these important matters and for the opportunity to share my views on H.R. 1417 with you.  I would be pleased to answer questions and elaborate further on this testimony now or later for the record. 

 


[1] The standard embodied in § 112 – that the CARP “establish rates that most clearly represent the fees that would have been negotiated in the marketplace between a willing buyer and a willing seller” – is not substantively different.  See 17 U.S.C. § 112(e)(4).

[2] It may be that, in a given industry setting, there are no voluntary agreements that are not so tainted.  To the extent that is the case, it is entirely appropriate to resort to comparable licensing benchmarks in other markets.