STATEMENT OF CARY SHERMAN

SENIOR EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL

RECORDING INDUSTRY ASSOCIATION OF AMERICA

BEFORE THE SUBCOMMITTEE ON

COURTS, THE INTERNET AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

UNITED STATES HOUSE OF REPRESENTATIVES

ON

“THE COPYRIGHT OFFICE STUDY CONDUCTED PURSUANT TO SECTION 104 OF THE DIGITAL MILLENNIUM COPYRIGHT ACT”

 

DECEMBER 12, 2001

 

Good Afternoon.  I am Cary Sherman, Senior Executive Vice President and General Counsel of the Recording Industry Association of America (“RIAA”), and I am grateful for the opportunity to present our views on the Copyright Office’s study under Section 104 of the Digital Millennium Copyright Act.

 

            I would like to begin by congratulating the Copyright Office on the thoughtful and comprehensive report that it prepared.  The careful analysis reflected in the Office’s report has already been helpful in bringing a measure of clarity to the difficult and challenging issues confronted in the report, and will undoubtedly continue to provide insights in the months ahead.

 

            I would also like to thank this Subcommittee, under the leadership of Chairman Howard Coble and Ranking Democratic Member Howard Berman, for its careful and thorough examination and development of the law in the complex area over the past several years.  The recording industry realizes and appreciates the expertise that this Subcommittee has brought to these issues, and we are grateful for the manner in which you have considered them.

 

            I will devote most of my time this afternoon to one of the subjects addressed by the study:  copies incidental to the digital performance of a musical work.  This has been an uncertain area of copyright law, and that uncertainty has been an impediment to the launch of digital music services.  It was in an effort to eliminate that uncertainty that we petitioned the Office last November to address in a rulemaking the question of whether streams implicate the reproduction right, as well as other questions concerning the copyright status of certain kinds of transmissions made by digital music services.  In its report, the Office discussed some of these questions, although it ultimately concluded that its answers to these questions were not so clear that they could be relied upon to make important business decisions.

 

But the Office’s report did provide a very helpful legal analysis and perspective that has facilitated an emerging consensus on some of the vexing legal issues confronting the music industry and its partners in the online music market.  Since the release of the report, RIAA, the National Music Publishers Association (“NMPA”) and its licensing affiliate The Harry Fox Agency (“HFA”) have been able to agree on a common interpretation of the relevant provisions of the Copyright Act, on the basis of which we have reached agreement on a framework for licensing subscription music services.  This marketplace agreement became effective on October 5, 2001, and promptly thereafter, we posted it on our web site so that anyone with an interest in these issues could read for themselves every provision of our agreement.  Not only is the agreement consistent with the legal analysis set forth in the Copyright Office’s report, but it is also a very important step in giving consumers widespread online access to the music they love.

 

A copy of the agreement and a joint explanatory letter signed by representatives of the Recording Industry Association of America, the National Music Publishers Association, and the Harry Fox Agency is attached for the hearing record.

 

I will give you some more details of this agreement in a moment, but first, so as to place it in context, I should give you a little background concerning music copyright law.  Although the members of this Subcommittee may already be experts in this arcane area of the law, I will review the basics of the copyright law as it applies to music rights for the sake of completeness of the hearing record.

 

Background

 

            Music involves two distinct copyrighted works:  a “musical work” is the notes and lyrics of a song, and a “sound recording” is a particular recorded performance of a song.  The copyrights in musical works tend to be owned by music publishers, and the copyrights in sound recordings tend to be owned by record companies.  Copyright law gives the owners of both of those copyrights various exclusive rights. 

 

In the case of musical works, one of those rights, the “performance right,” allows the copyright owner to control the playing of the work for the public, either live or by transmission (whether a broadcast, Internet transmission or otherwise).  Performance licenses typically are obtained from performing rights organizations such as ASCAP and BMI. 

 

Other of those rights are the “reproduction” right and “distribution” right.  Since 1909 there has been a compulsory license – called the “mechanical” compulsory license – that has allowed record companies and others to reproduce copies of recorded musical works and distribute them to the public.  This compulsory license is codified in Section 115 of the Copyright Act.  The vast majority of music publishers use the services of HFA to administer their mechanical licensing.

 

In 1995, Congress clarified the application of the mechanical compulsory license to digital music services.  To do that, Congress recognized a type of transmission called a “digital phonorecord delivery” or “DPD.”  A DPD is essentially the distribution of a copy by means of a digital transmission.  A compulsory license under Section 115 includes the right to make DPDs.

 

            Subscription digital music services are interested in offering consumers diverse methods of electronic music delivery.  “On-demand streams” are one kind of offering that services would like to make available to consumers.  These are real-time transmissions of recordings selected by users and delivered when the users want.  The legal issue involving on-demand streaming has been that, while streaming creates the user experience of a performance, the operation of a streaming service involves making several different kinds of reproductions.  So-called “server copies” reside on the computers used by a service to make transmissions.  Other copies, called “buffer copies” in the Office’s report, reside briefly on a user’s computer.  In between, many “transient” reproductions may be made. 

 

Until recently it has not been clear whether any of these reproductions are technically “copies,” and hence DPDs, for purposes of copyright law.  And if they are DPDs, it has not been clear how the mechanical compulsory license applies.  In particular, there has been no royalty rate for these so-called “incidental DPDs.” 

 

Services are also likely to offer what we call “limited downloads,” which are downloads that can only be played for a limited time, such as the duration of a subscription, or a limited number of times.  It likewise has not been clear how the mechanical compulsory license applies to limited downloads.

 

            The Copyright Office’s study concluded that streams do implicate the reproduction right, implying that they are DPDs.  The Office found that when a stream is licensed as a performance, certain reproductions made in connection with that performance probably qualify as a fair use, although it said that conclusion could not be relied upon with confidence in making important business decisions like whether to launch a service.  Our agreement with NMPA and HFA will allow licensing of these activities, and those licenses will give companies the assurance they need to launch services.

 

The Agreement

 

            Let me turn now to the core elements of our agreement with the music publishers:

 

Consistent with the Copyright Office’s report, RIAA, NMPA and HFA have agreed that the process of making on-demand streams through a subscription service, as well as the process of making limited downloads, from the making of a server copy to transmission and local storage, involves the making of a DPD.  Conversely, we agreed that webcasting of the kind covered by the statutory license for sound recording performances does not involve the making of a DPD.  We also recognized, that consistent with the 1995 amendments to Section 115, compulsory licenses to make on-demand streams and limited downloads are available under Section 115 of the Copyright Act.  Just as HFA administers compulsory licensing for physical product configurations, HFA now will issue licenses for on-demand streams and limited downloads through subscription services.  To the extent that they have not done so already, we expect that record companies that have licensed their recordings to digital music services together with related mechanical rights will seek and obtain such licenses very shortly.

 

            NMPA and HFA also have announced that it is their policy to license not only RIAA members but also other digital music services that wish to negotiate comparable agreements.  Thus, whether a service obtains its licenses through an RIAA member or directly from HFA, the agreement assures that an entity seeking to offer legitimate services will have the opportunity to obtain the appropriate licenses, and avoid the uncertainty that previously impeded the launch of services, promptly and through procedures that are not burdensome.  By resolving disagreements over the nature and scope of the licenses needed by services and providing a streamlined process for obtaining the necessary licenses, the agreement also fosters competition in the nascent online music marketplace.

 

            I said that there has been no statutory royalty rate for on-demand streams, and it has not been clear what royalty rate applies to limited downloads.  Our agreement contemplates that those questions will be answered by voluntary industry negotiations as authorized by Section 115 of the Copyright Act, or by arbitration if necessary.  But, as is the case with other compulsory licenses, services may commence operations in reliance on their licenses while the rate-setting process continues.  Although we intend to begin rate negotiations in the near future, the final determination of a statutory rate may take a while, so RIAA agreed to make an advance payment to HFA as a sign of good faith and to ensure that music publishers and their songwriters did not have to wait until a final rate is determined before receiving payment for the use of their musical works in subscription services.

 

            This agreement has many benefits:

 

·        Most important, the agreement will facilitate the immediate launch of licensed music services that will offer consumers a broad array of the music they love and diverse methods of electronic music delivery.  The agreement assures that an entity seeking to offer legitimate services across this range of options will have the opportunity to obtain the appropriate licenses promptly and through procedures that are not burdensome.  Indeed, the proof is in the pudding.  New licensing deals have been announced between record labels, Internet music services and music publishers; a number of Internet music services have already launched; and a number of others are scheduled to launch within days or weeks.  Legitimate services are finally commencing operations.

·        The agreement will benefit both record companies and Internet music services in launching subscription services on the Internet.  The agreement is nonexclusive, so Internet music services will have the option of obtaining licenses directly from HFA or individual publishers, or seeking authorization from record companies that take licenses under the agreement.

·        The agreement resolves legal uncertainties that have impeded the licensing of musical works for subscription services in a manner consistent not only with the law, but also Congress’ manifest intent in 1995 when it made clear that the compulsory license for musical works extends to digital delivery.  The agreement thus clears the way for more productive negotiations of terms and rates of royalty payments.

·        The agreement confirms that the compulsory mechanical license provisions of the Copyright Act are applicable not only to digital download services (i.e. selling recordings online just as they are sold on physical media), but also to the newer subscription service business models.  This will enhance the availability of new delivery options and business models from which consumers can choose. 

·        It is clear that server copies will be licensed under the agreement and that they are covered by the compulsory mechanical license provisions of the Copyright Act.  Having ready access to licenses that include the right to make server copies will be particularly reassuring for companies seeking to launch services.

·        The agreement simplifies and expedites the process for licensing mechanical rights for subscription services.  It provides for electronic “bulk” licensing to allow companies to obtain mechanical licenses very quickly.  To facilitate the launch of services, licenses issued will be retroactive to the date of request.  Moreover, for musical works owned by multiple copyright owners, HFA will issue a license if it represents any one of those owners, subject to the licensee paying the non-HFA co-owner its share of the royalties directly.

·        By resolving uncertainties over the nature and scope of the licenses needed by services and providing a streamlined process for obtaining the necessary licenses, the agreement fosters competition in the nascent online music marketplace. 

·        The agreement provides a framework to establish fair royalty rates, while ensuring that services can launch and operate in the interim.  We have always been willing to pay a fair royalty for the use of musical works.  But it has been difficult to agree on what that is in the abstract.  In the absence of legitimate music subscription services in the marketplace, offering real consumers real content in exchange for real dollars, we haven’t had the marketplace experience that would facilitate the kind of analysis leading to an agreed rate structure.  But legitimate music subscription services couldn’t launch, and provide us the needed marketplace experience, in the absence of a license.  Under the agreement, subscription services can go into business while the royalty rate is being negotiated among the affected industries.  Should we fail to agree on a fair royalty rate, we will rely on the arbitration provisions of Section 115 of the Copyright Act.  Once a royalty rate is set, whether by negotiation or arbitration, payments will be made retroactive to the date the subscription services went into business.

·        The agreement represents the type of marketplace solution that Congress has urged to resolve these business and legal issues. 

·        Having legitimate digital music services available in the marketplace sooner rather than later is very important to our continuing efforts to stem the tide of online piracy.  We recognize that legal enforcement action alone will not put an end to the proliferation and growing use of pirate services.  This agreement will allow record companies and their licensees to offer legitimate alternatives.

First Sale Doctrine

 

            I would also like to address briefly the Office’s discussion of the first sale doctrine.  We concur wholeheartedly with the Office’s conclusion that the reproduction of a new copy by means of a digital transmission is so different from the physical distribution of an existing copy that Section 109 should not be changed to address digital transmissions.  Section 109 is a limitation on the copyright owner’s distribution right, not his or her reproduction right.  It was plainly intended to apply to physical copies, where disposing of the copy means that the original is no longer retained.  To extend Section 109 to distribution by means of digital transmission, when there is no meaningful way to ensure that the original has been destroyed, would be to create a loophole that would undermine the fundamental objectives of the Copyright Act.

 

Archival Copies

 

            The other major part of the report concerns archival copying, and focuses on the interplay between the first sale doctrine and the fair use doctrine.  The Office’s suggestion that a court could conclude that copies lawfully made under the fair use doctrine may be freely distributed under Section 109 is troubling.  It is troubling because, as the Copyright Office points out, such an interpretation would clearly do serious damage to the copyright owner’s market.  We hear constantly that it is a fair use for someone to reproduce our sound recording products in their entirety for personal or backup use.  Whether or not that may be true in any particular situation, it should be clear to everyone that it would have a significant adverse effect on the market for recorded music if someone could make copies of entire recordings – perhaps a large number of such copies – and distribute them – perhaps for profit – merely because the copies ostensibly were made for personal or backup use.  If a court were to adopt the misguided interpretation referred to by the Office, I have no doubt that every piracy case we pursue would get bogged down in this issue as even street vendors selling counterfeit CDs claimed they were just disposing of copies made for fair use. 

 

This interpretation is so obviously incorrect, and it is so clear that Congress could not have intended such a result, that I think it unlikely that a court would ever adopt this mistaken view of the law. 

 

In addition, I think that creating a new exemption would be a real mistake.  We already worry about new consumer electronics devices with hard drives capable of storing the equivalent of hundreds of CDs of recorded music, either ripped from CDs, or more often, I fear, downloaded from infringing peer-to-peer systems.  If Congress were broadly to sanction “archival” copying of all copyrighted works, such devices would proliferate, and inevitably be equipped with digital outputs and probably direct Internet connections, so that they could serve as engines of piracy that would make Napster and the current generation of peer-to-peer systems look tame by comparison.

 

*          *          *

 

            The Copyright Office’s report addressed a number of important policy issues that should receive thoughtful review.  We welcome careful consideration of these issues, and look forward to playing a part in it.

 

            Thank you again for the opportunity to present our views, and I would be happy to respond to any questions you may have.