Intercollegiate Broadcasting Systems, Inc. (IBS), an association of noncommercial webcasters that transmit digitally recorded music over the internet in educational environments like high school and college campuses, appealed the ratemaking determination of the Copyright Royalty Board (CRB) setting the default royalty rates and terms applicable to internet webcasting for 2011 through 2015 asserting that the CRB, as currently constituted, was unconstitutional. The CRB, comprising three Copyright Royalty Judges (CRJs) appointed to staggered six-year terms by the Librarian of Congress, and the CRJs' staff, sets the licensing terms over these performances. Under the Copyright Act, when a party initiates a ratemaking proceeding, the CRJs are tasked with "mak[ing] determinations and adjustments of reasonable terms and rates of royalty payments," in which “reasonable” means payments that "most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller."
IBS appealed the CRJs' determination in a ratemaking proceeding initiated by intervenor SoundExchange, a non-profit clearinghouse for musicians' webcast royalty payments, arguing that it was invalid because the CRJs' position, as currently constituted, violated the Appointments Clause of the Constitution on two grounds, first that the exercise of significant ratemaking authority by the CRJs, without any effective means of control by a superior (such as unrestricted removability), qualified them as "principal" officers who must be appointed by the President with Senate confirmation and, second, that even if the CRJs were "inferior" officers, the Librarian of Congress was not a "Head of Department" in whom Congress may vest appointment power.
The court of appeals agreed with IBS’s first contention, holding that CRJs are principal officers who must be appointed by the President and confirmed by the Senate, and that the current structure of the CRJs position violated the Appointment Clause.
As the court noted, the Appointments Clause of the Constitution provides that the President "shall nominate, and by and with the Advice and Consent of the Senate, shall appoint … Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments." To qualify as an "Officer of the United States," a person must exercise significant authority pursuant to the laws of the United States. Under the Supreme Court’s decision in Edmond v. U.S., 520 U.S. 651 (1997), an officer is "inferior" if their "work is directed and supervised at some level by others who were appointed by Presidential nomination with the advice and consent of the Senate." The Court in Edmond emphasized three factors in coming to this conclusion: (1) the officers in question were subject to the substantial supervision and oversight of officers who were appointed by Presidential nomination with the advice and consent of the Senate; (2) the officers were removable by their supervisor without cause; and (3) another entity within the executive branch had the power to reverse the officers’ decisions so that they had "no power to render a final decision on behalf of the United States unless permitted to do so by other Executive Officers."
Applying these three factors, the D.C. Circuit concluded that the CRJs are principal officers who must be appointed by the President and confirmed by the Senate, and that their currently position is unconstitutional in violation of the Appointments Clause. First, the court found the CRJs have vast discretion over the determination of rates and terms, and apply ratemaking formulas that are hugely open ended. The supervision exercised over the CRJs by the Librarian of Congress and the Register of Copyrights, while not trivial, did not provide much constraint on the rate – the issue of greatest importance – and fell short of the kind that would render the CRJs inferior officers. Under the second factor – removability – the court found the CRJs could only be removed by the Librarian for misconduct or neglect of duty. Lastly, the court found CRJs' rate determinations are not reversible or correctible by any other officer or entity within the executive branch. While the Librarian may review their procedural rules, and the Register may review their legal determinations, under the Copyright Act, the CRJs are afforded "full independence in making determinations concerning adjustments and determinations of copyright royalty rates and terms…" The CRJs issue decisions that are final for the executive branch, subject to reversal or change only when challenged in a court with jurisdiction under Article III of the constitution.
With the aim of providing an appropriate remedy causing as little disruption as possible, the circuit court followed the Supreme Court’s decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, 130 S.Ct 3138 (2010), invalidating and severing the statutory provision imposing the for-cause-only restriction on the ability of the Librarian of Congress to sanction or remove a CRJ. Giving unfettered removal power to the Librarian, the court reasoned, rendered the CRJs "inferior" rather than "principal" officers, and no constitutional problem with their authority remained, so long as the Librarian qualified as a Head of a Department for the purposes of the Appointments Clause.
The court concluded that the Librarian did qualify under the Supreme Court’s ruling in Free Enterprises Fund, in which the Court held that an entity is a Department if it is a freestanding component of the Executive branch, not subordinate to or contained within any other such component. Noting that the Library of Congress is a freestanding entity with powers generally associated with executive agencies rather than legislators (including the powers to promulgate regulations, to apply the statute to affected parties, and to set rates and terms case by case) and that the Librarian is appointed by the President with advice and consent of the Senate and is subject to unrestricted removal by the President, the court found that the Library is a component of the Executive Branch, and that the Librarian is a Head of Department who may appoint CRJs.
Because of the existence of the violations of the Appointments Clause at the time the CRJs made their ratemaking determination, the circuit court vacated and remanded the determination.