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IP/Entertainment Case Law Updates

Music Choice v. Copyright Royalty Board

In appeal from rate-setting proceeding involving digital music provider Music Choice, D.C. Circuit determines that Copyright Royalty Board erred in relying on Copyright Register’s determination that all of Music Choice’s music services offered over internet were categorically excluded from lower royalty rate for preexisting service providers set forth in Digital Millennium Copyright Act and remands Board’s determination.

Appellant Music Choice is a digital broadcast music service started in the 1980s to provide music via cable television channels. Music Choice has expanded its offerings beyond cable television channels to include internet-exclusive channels and a mobile application. Since 1995, Music Choice has been entitled to a compulsory license for its use of copyrighted sound recordings as part of its service. As part of that compulsory license, Music Choice must pay a license fee to SoundExchange as determined by the Copyright Royalty Board pursuant to statutorily required rulemaking proceedings. Following the close of proceedings to determine rates for the 2018 – 2022 time period, the Board determined that Music Choice must pay market rates for its internet transmissions rather than a lower grandfathered royalty rate set forth in the Digital Millennium Copyright Act (DMCA). The Board additionally altered the long-standing audit obligations that were applied to preexisting music services. Music Choice appealed the Board’s final determination to the U.S. Court of Appeals for the D.C. Circuit, which has exclusive jurisdiction over appeals from the Board’s determinations.

The DMCA includes a provision that allows subscription-based services that predate enactment of the statute to qualify for “reasonable” royalty rates that are lower than the market-based rates set by the Board every five years. To be eligible for this lower rate, the service must “perform[] sound recordings by means of noninteractive audio-only subscription digital audio transmissions” and must have been in existence and making such transmissions “to the public for a fee on or before July 31, 1998.” The rate may be unconditional if the transmission is made via the same medium as used on or before July 31, 1998, or may be conditional if made via a different medium and if several other requirements set forth in the DMCA are met. During its proceeding, the Board referred the issue of whether Music Choice qualified as a preexisting service to the Register of Copyrights as a “novel material question of substantive law.” The Register determined that no internet transmissions, regardless of what service they were offered through, could qualify for the lower rate because the legislative history of the DMCA indicated that the rate was meant only to apply to cable or satellite transmissions. The Board adhered to that legal opinion in its Final Determination.

As an initial matter, Music Choice argued that it was procedurally improper for the Register to consider the internet transmission issue because neither Music Choice nor SoundExchange presented the legal issue to the Board. The D.C. Circuit concluded that the referral was proper because SoundExchange had argued during the royalty proceeding that Music Choice’s internet transmissions, but not its television transmissions, should be subjected to the higher market rate.

Turning to the merits of the dispute, the court concluded that the Register, and thus the Board, erred in relying on the legislative history of the DMCA, because the text of the DMCA itself did not categorically exclude internet transmissions from the rate. Instead, the “preexisting subscription service” requirement in the statute referred “to both the business entity making the transmissions … and to the ‘program offering’ the entity provides.” Because no party disputed that Music Choice offered some digital audio transmissions over the internet as of July 31, 1998, those transmissions could potentially qualify for the lower rate. The D.C. Circuit remanded the issue to the Board to determine “the precise scope of Music Choice’s service offering as it actually existed on July 31, 1998,” and whether those services were offered via the same internet transmission medium as the services currently offered by Music Choice, which will determine whether the conditional or unconditional grandfathered rates will apply. Those internet offerings that were not available in 1998, potentially including internet-exclusive offerings and mobile applications, would not benefit from the lower rate and instead would be subject to the market royalty rate.

With respect to the audit procedures, the Board had determined that SoundExchange could conduct its own independent audit on any points deemed “outside the scope” of a defensive audit undertaken by Music Choice’s own independent auditors. The court determined that these audit procedures departed from the long-standing regulatory standard of permitting Music Choice to fulfill its audit obligations through a defensive independent audit alone, and thus impacted Music Choice’s reliance on the prior audit practice. The Board therefore violated the Administrative Procedures Act, according to the court, by acting “arbitrarily and capriciously” in making a substantive change to the long-standing audit procedure.

Summary prepared by Tal Dickstein and Sarah Levitan Perry