Mechanical and Digital Phonorecord Delivery Compulsory License

SUMMARY: The United States Copyright Office is issuing a final rule to implement section 115 of the Copyright Act of 1976. Section 115 establishes a compulsory license for the making and distribution of phonorecords of nondramatic musical works. Section 115, in turn, requires the Register of Copyrights to prescribe by regulation the procedures for the monthly payment of royalties and preparation and service of monthly and annual statements of account by licensees. This final rule updates the existing payment and statement-of-account regulations in response to legal and marketplace developments, including the Copyright Royalty Board's adoption of newer percentage-of-revenue royalty rate structures for certain digital music services, and changes in accounting and industry practice in the years since the rules were last substantially amended.

DATES: Effective Date: November 17, 2014.

FOR FURTHER INFORMATION CONTACT: Sarang V. Damle, Special Advisor to the General Counsel, Stephen Ruwe, Attorney-Advisor, Office of the General Counsel, or Rick Marshall, Attorney-Advisor, Office of the General Counsel, at the U.S. Copyright Office, P.O. Box 70400, Washington, DC 20024. Telephone: (202) 707-8350.

SUPPLEMENTARY INFORMATION: The Copyright Act gives owners of musical works the exclusive right to make and distribute phonorecords of those works (i.e., copies in which the work is embodied, such as CDs or digital files). 17 U.S.C. 106(1), (3). This right (often referred to as the "mechanical" right) is subject to a compulsory license under Section 115 of the Act. 17 U.S.C. 115. Under that provision--instituted by Congress over a century ago with the passage of the 1909 Copyright Act--once a phonorecord of a musical work has been distributed to the public in the United States under the authority of the copyright owner, any person can obtain a license to make and distribute phonorecords of that work. Id. In 1995, Congress confirmed that a copyright owner's exclusive right to reproduce and distribute phonorecords of a musical work, and the Section 115 license, extend to the making of "digital phonorecord deliveries" ("DPDs"). See Digital Performance Right in Sound Recordings Act of 1995 ("DPRSRA"), Public Law 104-39, sec. 4, 109 Stat. 336, 344-48 (1995) (codified at 17 U.S.C. 115(c)(3)(A)).

A person wishing to use the compulsory license must comply with several requirements imposed by statute and regulation. For instance, licensees must first file a notice of intention to use the compulsory license. See 17 U.S.C. 115(b); 37 CFR 201.18. The statute also requires payment of royalties and compliance with terms established by the Copyright Royalty Board ("CRB") in periodic ratemaking proceedings. See 17 U.S.C. 115(c)(3)(C)-(D). And, as most relevant here, the statute requires licensees to make monthly royalty payments, and provide monthly and annual statements of account, in compliance with regulations issued by the Register of Copyrights. 17 U.S.C. 115(c)(5). /1/

FOOTNOTE 1 Although, the Copyright Royalty Board ("CRB") has general authority to establish royalty rates and terms for the Section 115 license, See 17 U.S.C. 115(c)(3)(C) & (D), the Act also separately gives the Register of Copyrights responsibility for issuing regulations relating to specific aspects of that license, see id. 115(b)(1) & (c)(4)-(5). See generally 73 FR 48396 (Aug. 19, 2008) (addressing division of authority between the Copyright Royalty Judges and the Register of Copyrights under the Section 115 license). END FOOTNOTE

The Copyright Office first promulgated regulations prescribing the procedures for the payment of royalties and the preparation and service of monthly and annual statements of account in 1980; those regulations were codified in section 201.19 of title 37 of the Code of Federal Regulations. See 45 FR 79038 (Nov. 28, 1980). In that rulemaking, the Office identified a "guiding principle" that is equally applicable today: That the regulations should preserve the compulsory license as "a workable tool," while at the same time "assuring that copyright owners will receive `full and prompt payment for all phonorecords made and distributed.' " Id. at 79039 (quoting H.R. Rep. No. 94-1476, at 110 (1976)). The Office accordingly evaluated proposed regulatory features using "three fundamental criteria." Id. First, the Office stressed that "[t]he accounting procedures must not be so complicated as to make use of the compulsory license impractical." Id. Second, "[t]he accounting system must insure full payment, but not overpayment." Id. at 79310. Third, and finally, "[t]he accounting system must insure prompt payment." Id.

Although the Office has amended aspects of its payment and statement-of-account regulations from time to time, the regulations have always assumed that the compulsory mechanical license will carry a flat royalty rate per phonorecord made and distributed. That assumption is no longer true. In recent years, the CRB has adopted a "percentage-of-revenue" model for calculating royalties for newer digital products like interactive streaming and limited downloads. See, e.g., 78 FR 67938 (Nov. 13, 2013). Under that model, royalty calculations work essentially as follows, with some details omitted. First, an "all-in royalty" is defined to be a specified percentage of the service's revenues. Second, royalties that are separately paid to performing rights organizations for the public performance of musical works are subtracted from the all-in royalty. 37 CFR 385.12(b)(1)-(2), 385.22(b)(1)-(2). The resulting figure represents the total royalties that the service must pay to all copyright owners under Section 115, although there are "floors" to ensure services make at least a minimum royalty payment. The total payable royalty pool must be further allocated to individual musical works. To do so, the pool is divided by the total number of "plays" (i.e., the total number of times the service played any phonorecord of any musical work during the relevant accounting period), and the resulting "per-play" royalty rate is multiplied by the number of plays of each individual musical work to obtain a "per-work" royalty allocation. 37 CFR 385.12(b)(3), 385.22(b)(3).

After a number of stakeholders expressed concern that the Office's statement-of-account regulations do not account for these newer royalty structures, the Office proposed amendments to those regulations and requested public comment in a notice of proposed rulemaking ("NPRM"). See 77 FR 44179 (July 27, 2012). The Office received five initial comments, and eighteen reply comments. In December 2013, the Copyright Office requested additional comments concerning the proposed amendments. 78 FR 78309 (Dec. 26, 2013). The Office received one initial comment, and three reply comments. /2/

FOOTNOTE 2 All comments received in relation to this rulemaking are available on the Copyright Office Web site at http://www.copyright.gov/docs/docket2012-7/. END FOOTNOTE

The Office received a particularly significant set of comments from a group representing both copyright owners and compulsory licensees. That group, referred to herein as the "Joint Commenters," consisted of the Digital Media Association ("DiMA"), the National Music Publishers' Association, Inc. ("NMPA"), the Recording Industry Association of America, Inc. ("RIAA"), the Harry Fox Agency, Inc. ("HFA"), and Music Reports, Inc. ("Music Reports"). The Joint Commenters reached agreement on a broad range of modifications to the proposed rule, which were reflected in a set of proposed regulations they submitted along with their initial set of comments. See Joint Commenters, Initial Comments Submitted in Response to U.S. Copyright Office's July 27, 2012 Notice of Proposed Rulemaking at 2-3, exh. A (Oct. 25, 2012) ("Joint Commenters Initial Comments"). After carefully evaluating the Joint Commenters' proposal against the goals outlined above, the Office has adopted many elements of that proposal as part of the final rule. At the same time, our evaluation and consideration of the comments has led us to conclude that some aspects of the Joint Commenters' proposal would be contrary to the goal of providing a workable means of licensing mechanical rights for musical works.

II. Discussion

Section 115(c)(5) of the Copyright Act directs the Register of Copyrights to issue regulations governing monthly payments and monthly and annual statements of account for the compulsory mechanical license for nondramatic musical works. Specifically, that provision states: "Royalty payments shall be made on or before the twentieth day of each month and shall include all royalties for the month next preceding. Each monthly payment shall be made under oath and shall comply with requirements that the Register of Copyrights shall prescribe by regulation. The Register shall also prescribe regulations under which detailed cumulative annual statements of account, certified by a certified public accountant, shall be filed for every compulsory license under this section. The regulations covering both the monthly and the annual statements of account shall prescribe the form, content, and manner of certification with respect to the number of records made and the number of records distributed." 17 U.S.C. 115(c)(5). As the legislative history makes clear, the goal of this provision is to ensure "that copyright owners . . . receive full and prompt payment for all phonorecords made and distributed" and to "increase the protection of copyright proprietors against economic harm from companies which might refuse or fail to pay their just obligations." H.R. Rep. No. 94-1476, at 110-11.

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "37 CFR Parts 201 and 210"

Citation: "79 FR 56190"

Document Number: "Docket No. 2012-7"

Federal Register Page Number: "56190"

"Rules and Regulations"