UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


RECORDING INDUST

v.

LIBRARIAN CONG


98-1263a

D.C. Cir. 1999


*	*	*


Edwards, Chief Judge: Under s 114(f) of the Copyright  Act ("Act"), 17
U.S.C. ss 101-1332, the Librarian of Congress  is charged with
establishing the rates and terms for compul- sory licenses of certain
subscription transmissions of digital  audio music. In this first-ever
proceeding under s 114, the  Librarian determined that three music
services subject to the  terms of the license must pay the Recording
Industry Associ- ation of America ("RIAA") 6.5 percent of their gross
domestic  residential revenues in exchange for the right to transmit 
digital audio music. The Librarian also imposed certain  terms and
conditions of operation on both RIAA and the  music services. RIAA now
challenges the 6.5 percent rate  set by the Librarian, claiming that
it is too low. RIAA also  challenges the additional conditions imposed
by the Librarian,  i.e., conditions imposed on RIAA in its capacity as
the collec- tion agent for copyright owners.


The rate set by the Librarian survives challenge, because  the
Librarian's interpretation and application of the statute  are
permissible and consistent with established law. We  reject the
additional conditions imposed by the Librarian,  however, for want of
support in the record. The petition for  review is denied in part and
granted in part, and the case is  hereby remanded.


I. Background


In 1990, digital audio services began transmitting sound  recordings in
the United States. At that time, United States  copyright law did not
recognize a performance right for sound  recordings. As a result,
digital audio services were not  required to pay recording companies
and recording artists for 


their performances; only the copyright owners of the notes  and lyrics
underlying sound recordings received a royalty for  the transmission
of any performance.


In 1995, Congress changed the copyright landscape by  enacting the
Digital Performance Right in Sound Recordings  Act of 1995, Pub. L.
No. 104-39, 109 Stat. 336, amending the  Copyright Act. The new law
afforded copyright owners a  separate right to the performance of
sound recordings via  digital audio transmissions. See 17 U.S.C. s
106(6). This  meant that certain digital music services would be
required to  pay recording companies and recording artists when they 
transmitted sound recordings. Although copyright owners  now have
protected interests under the 1995 law, they are  nontheless required
to give licenses to those who seek to  transmit sound recordings. The
terms of licenses are either  negotiated by the parties or set
pursuant to arbitration. See  id. s 114(f)(1).


Section 114 was amended on October 28, 1998 by the  Digital Millennium
Copyright Act, Pub. L. No. 105-304, 112  Stat. 2860, to distinguish
between transmissions by preexist- ing subscription services, such as
those operated by the  services in this case, and eligible
nonsubscription transmis- sions and new subscription services.
However, the only  changes brought by the 1998 law that are relevant
to this  proceeding are that s 114(f)(1) and (2) were renumbered to  s
114(f)(1)(A) and (B), and the license period was extended  from
December 31, 2000 to December 31, 2001. See 17  U.S.C. s 114(f)(1)(A),


On December 1, 1995, the Librarian published a notice  signaling the
commencement of a six-month period during  which the parties could
negotiate license agreements for the  performance of sound recordings
by digital audio transmis- sion. See Digital Performance Right in
Sound Recordings,  60 Fed. Reg. 61,655 (Dec. 1, 1995). If an
understanding was  reached, the Librarian could then issue a license
reflecting  the terms of the parties' agreement. See 17 U.S.C.  s
114(f)(1)(A). In the absence of an agreement, those parties  with a
significant interest in the establishment of reasonable 


terms and rates for a s 114 license were to file a petition with  the
Copyright Office no later than August 1, 1996, requesting  an
arbitration before a copyright arbitration royalty panel  pursuant to
Chapter 8 of the Copyright Act. See Digital  Performance Right in
Sound Recordings, 60 Fed. Reg. at  61,656. Under the statute, an
arbitration panel is authorized  to set a "reasonable copyright
royalty rate," which is "calcu- lated to achieve" four statutory
objectives. 17 U.S.C.  s 801(b)(1). The four statutory objectives


(A) To maximize the availability of creative works to the  public;


(B) To afford the copyright owner a fair return for his  creative work
and the copyright user a fair income under  existing economic
conditions;


(C) To reflect the relative roles of the copyright owner  and the
copyright user in the product made available to  the public with
respect to relative creative contribution,  technological
contribution, capital investment, cost, risk,  and contribution to the
opening of new markets for  creative expression and media for their


(D) To minimize any disruptive impact on the structure  of the
industries involved and on generally prevailing  industry practices.


Id.


When the parties in this case failed to reach an agreement  during the
six-month negotiation period, RIAA filed a petition  with the
Copyright Office seeking arbitration. After deter- mining that RIAA
had a significant interest in the proposed  proceeding, the Librarian
convened a copyright arbitration  royalty panel. Before the panel,
RIAA sought a rate of 41.5  percent of the digital services revenue.
The three music  services appearing in the case, Digital Music
Express, Digital  Cable Radio Associates, and Muzak, L.P., urged a
rate of 2.0  percent or less. After considering the evidence presented
in  light of the aforecited statutory objectives, the arbitration 
panel recommended a royalty rate of 5.0 percent of the  services'
gross domestic residential revenues and certain 


terms for payment and accounting for payments. See Deter- mination of
Reasonable Rates and Terms for the Digital  Performance of Sound
Recordings, 63 Fed. Reg. 25,394,  25,396 (May 8, 1998).


The Register of Copyrights then reviewed the panel's  determination.
See 17 U.S.C. s 802(f) (requiring Register to  review panel's decision
and make recommendations to Librar- ian). The Register rejected the
rate set by the panel, be- cause she found that the use of a certain
negotiated license  fee as a starting point was arbitrary. See 63 Fed.
Reg. at  25,399. The Register therefore reevaluated the record evi-
dence and recommended a rate of 6.5 percent. See id. at  25,410. When
setting this rate, the Register, like the panel,  "considered the
relevant marketplace points of reference  offered into evidence." Id.
at 25,409. She rejected RIAA's  contention, however, that she must
adopt "marketplace  rates." See id. at 25,399-400. Moreover, unlike
the panel,  the Register "gave more consideration to the rates paid
for  the performance right in the musical compositions, because  these
rates represent an actual marketplace value for a public  performance
right in the digital arena, albeit not the digital  performance right
in sound recordings." Id. at 25,409.


In addition to finding the 6.5 percent rate appropriate, the  Register
accepted the panel's recommendation to designate a  single entity,
RIAA, to collect and distribute all royalty fees.  See id. at 25,412.
She also determined that there must be  safeguards in place to monitor
the functions of RIAA, since 10  percent of the affected copyright
owners were not RIAA  members. See id. She therefore recommended that
the  Librarian adopt terms that: (1) required each performance to  be
valued equally when royalties are paid to copyright own- ers, (2)
permitted the copyright owners to audit RIAA's  practices in handling
the royalty fees, (3) specified the nature  of the costs that RIAA may
deduct from royalties before  distribution, and (4) specified how
"unknown copyright own- ers" should be treated in the distribution of
royalties. See id.  at 25,412-13.


On May 8, 1998, the Librarian accepted the Register's  recommendations
and, in accordance with those recommenda- tions, adopted new
regulations. See id. at 25,413-15 (adopt- ing 37 C.F.R. ss 260.1 to
260.7). Particularly important here  are the regulations that impose
conditions on RIAA in its  capacity as the sole collection and
disbursement agent. Sec- tion 260.2(d) requires RIAA to value each
performance equal- ly when distributing royalties, s 260.3(d) dictates
what costs  RIAA may deduct from the royalties, s 260.6(b) allows
"inter- ested parties" to audit RIAA, and s 260.7 prescribes the way 
in which RIAA must deal with unknown copyright owners.


II. Analysis


A.Standard of Review


We review the Librarian's interpretation of the relevant  statutory
provisions under the familiar two-step analysis of  Chevron U.S.A.
Inc. v. Natural Resources Defense Council,  Inc., 467 U.S. 837, 842-43
(1984).


Chevron is principally concerned with whether an agency  has authority
to act under a statute. See Chevron, 467  U.S. at 842-45. Thus, a
reviewing court's inquiry under  Chevron is rooted in statutory
analysis and is focused on  discerning the boundaries of Congress'
delegation of  authority to the agency; and as long as the agency
stays  within that delegation, it is free to make policy choices in 
interpreting the statute, and such interpretations are  entitled to
deference. Id. at 843-45, 865-66.... [T]he  question for the reviewing
court is whether the agency's  construction of the statute is faithful
to its plain meaning,  or, if the statute has no plain meaning,
whether the  agency's interpretation "is based on a permissible con-
struction of the statute." Chevron, 467 U.S. at 843.


Arent v. Shalala, 70 F.3d 610, 615 (D.C. Cir. 1995).


As for rates and conditions established by the Librarian  pursuant to s
114, the standard and scope of judicial review  are as defined in 17
U.S.C. s 802(g):


[t]he court shall have jurisdiction to modify or vacate a  decision of
the Librarian only if it finds, on the basis of  the record before the
Librarian, that the Librarian acted  in an arbitrary manner.


The standard under s 802(g) is "exceptionally deferential,"  requiring
the court to "uphold a royalty award if the Librari- an has offered a
facially plausible explanation for it in terms  of the record
evidence." National Ass'n of Broadcasters v.  Librarian of Congress,
146 F.3d 907, 918 (D.C. Cir. 1998)  ("NAB v. Librarian").


B.The 6.5 Percent Rate


The determination of appropriate rates for s 114 licenses is  governed
by 17 U.S.C. s 801(b):


Subject to the provisions of this chapter, the purposes of  the
copyright arbitration royalty panels shall be as fol- lows:


(1) To make determinations concerning the adjust- ment of reasonable
copyright royalty rates as provided  in section[ ] 114 ... and to make
determinations as to  reasonable terms and rates of royalty payments
as  provided in section 118. The rates applicable under  section[ ]
114 ... shall be calculated to achieve the  following objectives:


(A) To maximize the availability of creative works to  the public;


(B) To afford the copyright owner a fair return for  his creative work
and the copyright user a fair  income under existing economic
conditions;


(C) To reflect the relative roles of the copyright  owner and the
copyright user in the product made  available to the public with
respect to relative crea- tive contribution, technological
contribution, capital  investment, cost, risk, and contribution to the
open- ing of new markets for creative expression and  media for their


(D) To minimize any disruptive impact on the struc- ture of the
industries involved and on generally  prevailing industry practices.


The Librarian argues that the term "reasonable copyright  royalty
rates" under s 801(b)(1) takes its meaning from the  four statutory
objectives under s 801(b)(1)(A)-(D). In other  words, "reasonable
rates" are simply those that are calculated  to achieve the four
objectives. Accordingly, the 6.5 percent  rate in this proceeding was
set only after it was determined  that the rate would achieve the
cited statutory objectives.


RIAA counters that the disputed statutory language unam- biguously
"imposes two separate requirements: the Section  114 rate must be (1)
a 'reasonable copyright royalty rate' and  (2) 'calculated to achieve'
the Section 801(b)(1)(A)-(D) objec- tives." Reply Brief for Petitioner
at 5. It claims that  "reasonable copyright royalty rates" means a
rate that af- fords fair market compensation. Recognizing that there
is no  such thing as a precise fair market compensation rate, RIAA 
argues that the Librarian must first determine the range of  market
rates that are appropriate and then select a rate from  within the
range of fair market rates that meets the objec- tives of s
801(b)(1)(A)-(D). Only this interpretation, argues  RIAA, gives
meaning to both requirements.


In order for RIAA to succeed on this claim, it must show  that, under
step one of Chevron, Congress has clearly re- quired the use of market
rates in s 801(b)(1), or that, under  step two of Chevron, the
Librarian's interpretation is imper- missible. RIAA fails both parts
of the Chevron test.


RIAA's claim that the statute clearly requires the use of  "market
rates" is simply wrong. Section 801(b)(1) requires  only that
arbitration panels set "reasonable copyright royalty  rates." The
statute does not use the term "market rates,"  nor does it require
that the term "reasonable rates" be  defined as market rates.
Moreover, there is no reason to  think that the two terms are
coterminous, for it is obvious  that a "market rate" may not be


Furthermore, when Congress sought to require market  rates in the Act,
it used the term "market rate" or its 


equivalent. See, e.g., 17 U.S.C. s 119(c)(3)(B) ("In determin- ing
royalty fees under this paragraph, the copyright arbitra- tion royalty
panel ... shall establish fees for the retransmis- sion of network
stations and superstations that most clearly  represent the fair
market value of secondary transmissions.")  (emphasis added). Most
strikingly, in the recent amend- ments to s 114(f), the Librarian is
directed to "establish 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" for the new
categories of  services. Pub. L. No. 105-304, 112 Stat. at 2896
(codified as  17 U.S.C. s 114(f)(2)(B)). Notably, the statutory
criteria for  establishing rates for preexisting services, such as
those at  issue here, remain unchanged, even though both subsections 
(f)(1) and (f)(2) were revised by the 1998 legislation and are 


In sum, s 801(b)(1) does not clearly dictate the use of  market rates
when determining a "reasonable" royalty rate  under s 114. Thus, under
Chevron step two, the court must  afford the Librarian deference if
his interpretation is permis- sible. Here, the Librarian determined
that "reasonable  rates" are those that are calculated with reference
to the four  statutory criteria. This interpretation is not only
permissible  but, given that s 114 rates are to "be calculated to
achieve"  the four objectives of s 801(b)(1), it is the most natural 
reading of the statute. The Librarian's interpretation is  therefore
entitled to deference.


RIAA next argues that the Librarian also erred in setting  the rate at
6.5 percent, because he failed to follow Copyright  Royalty Tribunal
precedent as required by 17 U.S.C.  s 802(c). Prior to 1993, the
Copyright Royalty Tribunal had  jurisdiction to set rates and, in some
cases, terms for each of  the compulsory licenses and to distribute
compulsory licens- ing royalties. In 1993, Congress abolished the
Copyright  Royalty Tribunal and most of its tasks are now performed by
 copyright arbitration royalty panels. See NAB v. Librarian,  146 F.3d
at 912-13. Section 802(c) provides that copyright  arbitration royalty
panels "shall act on the basis of," among  other things, past Tribunal
precedent. 17 U.S.C. s 802(c) 


(emphasis added). This court has held that it will "defer to  the
Librarian's reasonable and permissible interpretation of  the
requirements of subsection 802(c) under the second step  of the
Chevron analysis." NAB v. Librarian, 146 F.3d at 927.


In this case, the Librarian found that only two Tribunal  decisions are
relevant, because they are the only ones in  which the s 801(b)(1)
objectives applied while the Tribunal  was still in operation. See 17
U.S.C. s 801(b) (1988 & Supp.  IV 1992) ("Subject to the provisions of
this chapter, the  purposes of the Tribunal shall be ... to make
determinations  concerning the adjustment of reasonable copyright
royalty  rates as provided in sections 115 and 116, and to make 
determinations as to reasonable terms and rates of royalty  payments
as provided in section 118. The rates applicable  under sections 115
and 116 shall be calculated to achieve the  following objectives.").
Although RIAA argues that other  decisions are also relevant, this
argument is based on its  belief that s 801(b)(1) requires two steps.
Because it was  reasonable for the Librarian to find that the term
"reasonable  copyright royalty rates" is defined by the four statutory
 objectives, there is no need to look to Tribunal precedent 
interpreting the term "reasonable rates" in other contexts.


Thus, the only relevant precedent, as the Librarian correct- ly points
out, are those cases that interpreted the statutory  language that is
at issue here. Those two decisions are the  Tribunal's s 115 decision,
Adjustment of Royalty Payable  Under Compulsory License for Making and
Distributing  Phonorecords; Rates and Adjustment of Rates, 46 Fed.
Reg.  10,466 (Feb. 3, 1981), and its s 116 decision, 1980 Adjustment 
of the Royalty Rate for Coin-Operated Phonorecord Players,  46 Fed.
Reg. 884 (Jan. 5, 1981). With respect to the s 115  decision, RIAA
argues that, because the Tribunal stated that  a rate set above what
the market could bear could not be  reasonable, "[s]urely, if an
above-market rate is not reason- able under Section 801(b)(1), a below
market rate likewise is  not reasonable; neither affords a fair
return." Brief for  Petitioner at 24. However, the s 115 decision was
affirmed  by this court specifically because the Tribunal had followed
 the statutory objectives. See Recording Indus. Ass'n of 


America v. Copyright Royalty Tribunal, 662 F.2d 1, 8-10 &  n.24 (D.C.
Cir. 1981) (noting that failure to consider the  criteria would have
been grounds for reversal). In this case,  the Librarian relied on the
statutory objectives in making his  decision, and thus his action is
consistent with the s 115  precedent. See Determination of Reasonable
Rates and  Terms for the Digital Performance of Sound Recordings, 63 
Fed. Reg. at 25,400. Moreover, the specific language upon  which RIAA
relies simply went to whether a rate that was  fixed above the market
rate could be reasonable in the  context of its rejection of the
"bargaining room theory." See  Adjustment of Royalty Payable Under
Compulsory License  for Making and Distributing Phonorecords; Rates
and Ad- justment of Rates, 46 Fed. Reg. at 10,478; Recording Indus. 
Ass'n of America v. Copyright Royalty Tribunal, 662 F.2d at  11-13
(finding that the Librarian's rejection of the "bargain- ing room
theory" was reasonable, because "Congress had  chosen to express its
will through the statutory criteria"  rather than adopting that theory
as the basis for the rate).  But there is no suggestion here that the
rate has been set  above the market value, nor is any question
regarding the  "bargaining room theory" presented. Accordingly, the
specif- ic language that RIAA relies upon is inapposite.


RIAA also argues that the Librarian failed to follow the  holding of
the Tribunal's s 116 decision. However, there is  nothing in the s 116
decision that requires the use of market  rates. To the contrary, the
Tribunal specifically acknowl- edged that although "our rate cannot be
directly linked to  marketplace parallels, we find that they serve as
an appropri- ate benchmark to be weighed together with the entire
record  and the statutory criteria." 1980 Adjustment of the Royalty 
Rate for Coin-Operated Phonorecord Players, 46 Fed. Reg.  at 888. In
addition, the Seventh Circuit recognized, in affirm- ing the s 116
decision, that the Tribunal, in arriving at its  rate, "carefully
weighed the evidence derived from the mar- ketplace analogies and
other evidence specifically in light of  the four statutory criteria
of section 801(b)." Amusement  and Music Operators Ass'n v. Copyright
Royalty Tribunal,  676 F.2d 1144, 1157 (7th Cir. 1982). The Librarian


ed this precedent to mean that marketplace analogies, along  with other
evidence, must be considered and a rate should  then be chosen
specifically based on the four statutory crite- ria. See Determination
of Reasonable Rates and Terms for  the Digital Performance of Sound
Recordings, 63 Fed. Reg.  at 25,400. Because this is a reasonable
interpretation of the  precedent, the Librarian has not violated s


RIAA does not contest the evidence in support of the  establishment of
a 6.5 percent rate; it only argues that the  Librarian erred in his
interpretation of the statute and in his  application of past
precedent. Because we have found that  the Librarian's interpretation
of s 801(b)(1) is permissible  and that he did not err in his
application of past precedent,  we deny RIAA's petition for review
with respect to the  establishment of a 6.5 percent rate.


C.Conditions Imposed on RIAA


RIAA next argues that, after fixing a rate, the Librarian  has no
authority to impose terms on the RIAA collective.  We disagree. Under
the Act, the Librarian may impose  terms "which ... shall be binding
on all copyright owners of  sound recordings and entities performing
sound recordings."  17 U.S.C. s 114(f)(1)(B). Although RIAA is not a
copyright  owner, it is the agent of the copyright owners, and, as
such,  acts on behalf of all copyright owners. Accordingly, RIAA  may
be bound by the Librarian's terms, just as copyright  owners may be.
Moreover, it is hard to imagine the imposi- tion of a royalty rate
without some indication as to how the  money collected is to be
allocated. In particular, because  RIAA does not represent all
copyright owners but will nev- ertheless collect and distribute
royalties on behalf of all  copyright owners, the Librarian obviously
has the power to  prescribe the allocations due to those who are not


We do agree, however, with RIAA's next argument that,  even if the
Librarian has the authority, the imposition of  terms here was
improper. The problem in this case is that  there is no evidence in
the record to support the terms  imposed on RIAA.


This court has jurisdiction to vacate or modify an order of  the
Librarian "if it finds, on the basis of the record before the 
Librarian, that the Librarian acted in an arbitrary manner."  17
U.S.C. s 802(g). Thus, the court is required to uphold an  award only
when "the Librarian's final award to a class  claimant bears a
rational relationship to the record evidence,  is plausibly explained
and is otherwise developed in a manner  that does not plainly
contravene applicable statutory provi- sions." NAB v. Librarian, 146
F.3d at 924 (emphasis added).  It is not enough for the Librarian
simply to offer a plausible  explanation for his actions; there must
be record evidence to  support the terms imposed. Without record
evidence to  support his decision, we are constrained to find that the


In this appeal, the Librarian concedes that there is no  evidence in
the record to support his decision with respect to  the disputed
terms; he argues, however, that his decision  should be upheld because
the terms, at least with respect to  auditing, parallel the terms
imposed on the music services for  which there is evidentiary support
in the record. See Brief  for Respondent at 53-57. This argument does
not hold  water: the Librarian cannot assume, without any evidence to 
support his decision, that RIAA and the music services should  be
treated similarly. Moreover, the other terms imposed on  RIAA are, in
fact, quite different from those imposed on the  music services,
because of RIAA's very different role as the  collection and
distribution agent. Thus, the Librarian's deci- sion cannot be upheld


Next, the Librarian argues that he "may adopt ... an  unsupported Panel
award if that decision is accompanied by  an adequate 'explanation.' "
Brief for Respondent at 56. In  support, he cites the following
passage from NAB v. Librari- an: "For example, we think the Librarian
would plainly act  in an arbitrary manner if, without explanation or
adjustment,  he adopted an award proposed by the Panel that was not 
supported by any evidence or that was based on evidence  which could
not reasonably be interpreted to support the  award." 146 F.3d at 923.
However, nowhere in the NAB  opinion does the court state that it
would allow the Librarian 


to act without regard to the record. To the contrary, the  court's
holding contradicts the Librarian's argument, because  it specifically
required the Librarian's award to bear "a  rational relationship to
the record evidence." Id. at 924.


There may be some circumstances in which the Librarian's  decision
must, for want of concrete data, be based principally  on sound
judgment. But even in these instances, a matter in  dispute must be
properly raised before the arbitration panel  so that the parties have
a fair opportunity to address it, and  so that the Librarian has the
benefit of the parties' views  before reaching a judgment. There is no
such record here.  Indeed, at oral argument, counsel for the Librarian
conceded  that the copyright arbitration royalty panel prematurely
end- ed its inquiry by failing to require the imposition of terms on 
RIAA and should have considered this issue. In the face of  such a
concession, we think it is clear that this portion of the  proceeding
must be remanded.


III. Conclusion


For the foregoing reasons, we grant RIAA's petition for  review with
respect to the terms imposed under 37 C.F.R.  ss 260.2(d), 260.3(d),
260.6(b), and 260.7, and remand for  further consideration of these
matters. We deny RIAA's  petition for review in all other respects.


So ordered.