Before the United States House of Representatives
Committee on the Judiciary
Subcommittee on Courts, the Internet, and Intellectual Property
“The Copyright Royalty Arbitration Panel Structure and Process”
June 13, 2002
Testimony of R. Bruce Rich
Weil, Gotshal & Manges LLP
Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to testify before you today. I appear today in my capacity as a partner in the law firm of Weil, Gotshal & Manges LLP. Over the past 24 years, my Firm and I have represented a diverse array of broadcast and cable television, radio broadcasting, background music, new media and webcasting entities in their music license relationships with the music performing rights organizations and, more recently, with the recording industry. That representation has embraced antitrust counseling and litigation; the rendering of copyright advice; participation in individual and industry-wide negotiations over license fees and terms; prosecution of so-called “rate court” cases under the auspices of the ASCAP and BMI government consent decrees; and serving as counsel for various clients in two CARP rate adjustment proceedings.
That background has afforded me, as both an intellectual property and antitrust practitioner, with a broad perspective on the workings of the music licensing marketplace. Particularly in respect of performance rights licensing (whether of music works or sound recordings), I have become intimately familiar with the structure and degree of competitiveness of these music markets; the challenge facing large users of copyrighted material in procuring the necessary performance rights on fair, reasonable, and competitive terms; the operations of the various compulsory license mechanisms that have been instituted as admittedly imperfect substitutes for markets that would not function competitively without them; and the efficacy of the compulsory license procedures that implement those mechanisms.
Of particular relevance to today’s hearing, in respect of music performance rights licensing, our law firm has represented the ABC and CBS Television Networks, Showtime/The Movie Channel and numerous additional cable television networks, the nation’s commercial local television broadcasters, the commercial radio industry, as well as the background music entities Muzak and DMX/AEI, in rate court proceedings conducted in the Federal District Court for the Southern District of New York, as well as in appeals to the United States Court of Appeals for the Second Circuit from such proceedings. Those proceedings fundamentally have entailed the determination of “reasonable,” i.e., competitive-market-approximating, license fees for public performances of musical works licensed by one or another of ASCAP and BMI, as well as, in some instances, the determination of the forms such licenses should take.
In 1998, our Firm and I represented the Public Broadcasting Service (“PBS”), National Public Radio (“NPR”), and the stations on whose behalf they sought rates in the CARP rate adjustment proceedings for the noncommercial educational broadcasting compulsory license available pursuant to Section 118 of the Copyright Act. See Adjustment of the Rates for Noncommercial Educational Broadcasting Compulsory License, Docket No. 96-6, CARP NCBRA. More recently, our Firm represented various FCC-licensed broadcasters, as well as some twenty webcasters, in the CARP to set rates and terms for certain uses of sound recordings pursuant to Sections 112 and 114 of the Copyright Act - a proceeding which is still in its appellate phase. In this same proceeding, we also represented DMX Music, Inc., the background music service provider, with respect to its use of ephemeral recordings subject to the § 112 license. See Digital Performance Right in Sound Recordings and Ephemeral Recordings, Docket No. 2000-9, CARP DTRA 1&2 ( “§ 112/114 Proceeding”).
Although my views on issues pertinent to today’s hearings clearly have been shaped by my experience in representing clients in these various fora, I appear today solely on my own behalf, and the views which I offer through this testimony are solely personal ones.
My testimony today (1) outlines the major procedural shortcomings inherent in the CARP process as it is currently constituted; (2) suggests that, subject to a Constitutional analysis, serious consideration be given to transferring the rate-setting and distribution functions currently carried out by CARP Panels to a court of law; and (3) comments briefly upon the governing standards for rate-setting under §§ 112, 114 and 118 of the Copyright Act.
PROCEDURAL SHORTCOMINGS IN THE CARP PROCESS
Despite the commendable efforts of the Panels convened to hear these proceedings and the Copyright Office attorneys and staff who oversee and facilitate the CARP process, the CARP structure suffers from serious shortcomings which render the proceedings inordinately expensive, inefficient, and burdensome, and which frequently lead to rulings that are substantively flawed. Although a principal motivation for establishing an arbitration process to conduct rate-setting and distribution functions was to streamline the litigation process in order to achieve efficiencies over what one would expect in a courtroom context, experience has demonstrated quite the opposite effect. Case Development and Presentation
The CARP process, as currently structured, imposes formalistic rules regarding the manner and timing of presentation of cases and the discovery that may be had, accompanied by a virtual absence of rules of evidence. In combination, these features create a frenetic litigation environment in which cases are underdiscovered and overtried.
Manner and Timing of Presentation of Cases. Parties are required, at the very outset of the proceedings, and prior to any discovery, simultaneously to submit and exchange in written form the direct testimony of each of their witnesses - lay and expert alike - together with every trial exhibit to be utilized. This places the proverbial cart before the horse - effectively locking in the parties’ trial positions before anyone has knowledge of anyone else’s factual, economic and legal arguments. The salutary effects of permitting discovery prior to requiring parties to commit to trial positions, in terms of narrowing and focusing what is to be tried, are thereby lost.
What is more, during the ensuing hearing phase, material deviation from the written direct cases is prohibited, so that neither side’s witnesses - most notably, their experts - are permitted to respond on the stand to the other parties’ written direct cases. For all of their prolixity, the parties’ governing cases are like ships passing in the night. Issue is not truly joined until the rebuttal phase of the proceedings, which, instead of being devoted to those few issues that normally remain open following presentation of cases in chief, entails further voluminous filings in order to respond to the other side’s direct testimony. This is followed by yet another round of hearings in which many of the same expert and fact witnesses are recalled to the stand to respond to that which they were prohibited from testifying about in their initial testimony. The inefficiency and undue expense of such a process is manifest.
Discovery and Evidence. CARP discovery, such as it is, is truncated and carried on under unrealistically short deadlines. Parties to the CARP are not subject to normal rules of discovery such as those found in the Federal Rules of Civil Procedure. The CARP process does not allow for depositions, requests for admission, interrogatories or any other means by which the parties can test the assertions made by their opponents prior to the presentation of hearing testimony. Instead, parties are required to produce solely those documents which “underlie” their written direct or rebuttal testimony or exhibits. 37 C.F.R. § 251.45. While this is, no doubt, intended to achieve the laudable goal of reducing expense and alleviating undue burdens on the parties, these constraints measurably distort and disrupt the litigation process. The truncated discovery process deprives the parties of the opportunity, prior to trial cross-examination, to test the assertions made by their opponents. Whereas the presumption underlying the Federal Rules of Civil Procedure is to shed light on the parties’ respective positions and thereby reduce surprise and promote the narrowing of issues for trial, the present CARP discovery rules have the opposite - and perverse - effect of blockading access to relevant evidence, enhancing the element of surprise, and broadening the scope of what is presented (and cross-examined upon) at trial. Once again, this is, in the end, costly and wasteful - especially taking account (as I do below) of the arbitration fees incurred with each hour of hearing time.
I am of course aware of the potential for open-ended discovery to spawn abuse and itself become inordinately expensive. The solution, I would submit, is to have the supervising jurist (in my proposal below, a federal judge, or his designee) carefully control the discovery process and curtail abuse.
The CARP hearings themselves lack predictable structure and suffer from the absence of more rigorous rules of evidence. Although all witnesses proffer testimony in written form in advance of their appearances, whether a given witness will rehash his or her testimony on direct examination, merely summarize it in a few minutes, or proceed directly to cross-examination is generally a matter for ad hoc determination, witness by witness, by examining counsel.
More problematic is the absence of meaningful rules of evidence, such as the Federal Rules of Evidence, to control, and make predictable, exactly what evidence will be admissible. By way of example, in the 1998 PBS/NPR CARP, in which I served as counsel, hundreds of hearsay documents (website postings, newspaper articles, and the like) were admitted into the record “for what they were worth.” I would suggest they were worth very little. But they occupied inordinate time, motion practice, and photocopy expense to contend with.
With generally sophisticated counsel and well-funded parties, there is little reason inordinately to relax rules of admissibility designed to create a trustworthy record. This is especially true where, as here, there is so little opportunity to engage in meaningful discovery of matters pertaining to your adversary’s case. As matters now stand, key impeaching documents residing in the parties’ files will safely remain there, immune from disclosure, while the parties are free to lard the record with what should be inadmissible hearsay.
Finally, the cramped discovery rules virtually require, in certain instances, seat-of-the-pants cross-examinations violating the most cardinal rule of cross-examination: don’t ask any question to which you do not already know the answer. The consequence is not merely the risk of eliciting testimony your client would sooner not have; it is also a prolongation of the process in a fashion that cumulatively wears on counsel and the Panel alike. Especially in a trial of the magnitude of the just-concluded §112/114 Proceeding, the impact of such practice on the overall length of the hearings can be significant.
Costs
The arbitrator fees and hearing costs which must be borne by any party wishing to participate in a CARP proceeding can be astronomical. Although the Copyright Royalty Tribunal (“CRT”) was abolished, in part, in order to reduce the expenses associated with maintaining a full-time body of adjudicators who were called upon to hear cases only on a part-time basis, the hourly fees and out of pocket costs charged by the arbitrators empanelled by the CARP process have proven to be far costlier. For example, the § 112/114 Proceeding generated more than $1.2 million in arbitrator fees. Add to this the individual legal expenses associated with a proceeding which consumed 41 hearing days, involved the testimony of 75 witnesses (49 on direct and 26 in rebuttal testimony), generated a transcript approaching 15,000 pages and many thousands of pages of exhibits and elicited the submission of over 1000 pages of post-hearing briefs by the parties, and it becomes clear that participation in the compulsory license rate-setting process is available only to the well-funded. This presents a double-edged problem. A major “free-rider” burden is placed on those companies which, for whatever reason, feel compelled to participate in the rate-setting process. These companies end up shouldering the burden for entire industries standing to benefit from the statutory licenses. From the perspective of companies which cannot, for financial or other reasons, participate in the CARP process, these entities (which are no less entitled to the statutory license) must either rely upon the records developed by the participating parties or resort to voluntary negotiations with the copyright owners on terms they may otherwise find objectionable.
Lack of Precedential Value
Because CARP panelists are chosen to participate in a particular case and, potentially, may never participate in another CARP proceeding, there is no expectation that the panelists will develop any expertise in the subject matter or rate-setting tasks at hand that will benefit future proceedings. Decisions rendered on this basis tend to focus on reaching a bottom-line result in the given proceeding rather than on explicating a thorough and complete analysis of the relevant standards and establishing (and building on existing) industry precedent. In contrast to the typical body of federal jurisprudence, where “first principles” tend to guide the resolution of cases, CARP decisions have a sui generis quality which deprives this growing body of decisions of coherence and affords future litigants little guidance as to the potential outcome of their cases. These consequences are further magnified by the fact that, in certain contexts, the rate-setting proceedings recur on a two-year cycle, which further promotes narrow decision-making.
No Subpoena Power
The problems associated with the lack of normal discovery rules are magnified by the fact that the Panel has no subpoena power over third parties even if those parties possess information critical to the proceeding. A case in point is the just-concluded §112/114 Proceeding, in which the linchpin of the recording industry’s case was 26 license agreements reached between the Recording Industry Association of America and various webcasters. While the Panel and the user-parties to the proceeding were interested in securing testimony from as many of these 26 entities as possible, the absence of subpoena power left the Panel with no recourse but to “invite” these parties to testify voluntarily. Not surprisingly, while a handful agreed, most did not.
Inefficiency of Proceedings
The use of three arbitrators to render decisions injects further inefficiencies into the CARP process. First, the use of multiple arbitrators exponentially increases the cost of the proceedings based on hourly fees charged alone. Much hearing time is devoted to bench conferences among Panel members deliberating on evidentiary rulings and the like. Further, the decisions a CARP Panel is tasked with rendering do not benefit from the inevitable “split-the-baby” compromise that tends to result from resort to multiple fact-finders. This is perhaps best evidenced by the fact that virtually every CARP Panel merits ruling is appealed by virtually every party. It appears that no one ever perceives that the Panels have reached fair and equitable results.
Inflexible Statutory Deadlines and Procedures
The statutorily-imposed 180-day timeframe for conducting CARP proceedings, without regard to their complexity, is wholly unrealistic. Particularly in a proceeding like the § 112/114 Proceeding, which involved four separate communities of copyright users, participation of a variety of copyright owners, and required rates and terms to be set for two separate statutory licenses for two separate statutory periods, the process affords little opportunity for meaningful development of record facts, even less time for briefing, and equally little time for due deliberation by the CARP Panel. Expedience is a desirable objective - but not at the expense of adequate hearing preparation and considered decision-making. Moreover, the inflexible nature of the regulations governing the conduct of the proceeding actually prevented certain of the parties to the § 112/114 Proceeding from fulfilling the terms of a voluntary settlement which would have eliminated the need to set rates for an entire class of copyright users and thus would have substantially reduced the costs and burdens imposed on the parties and the arbitrators, not to mention the Copyright Office itself.
Too Frequent Statutory Cycles for Rate-Setting
The statutorily imposed two-year cycles for setting rates and terms for the § 112 and § 114 licenses are too frequent. While the two-year cycle for rate-setting for these licenses may reflect solicitude for the need to readjust rates in new and rapidly-evolving industries, experience in the § 112/114 Proceeding demonstrates that this cycle is too short, particularly if there is a delay in convening a CARP for a given cycle. Indeed, the delay in convening the § 112/114 Proceeding resulted not only in two cycles of proceedings being arbitrated together, but also in the statutorily mandated “voluntary negotiation period” for the upcoming proceeding overlapping with a hotly-contested rate-setting proceeding for the previous cycle. The time between cycles should be extended to a five-year period.
TRANSFER OF CARP RATESETTING
AND DISTRIBUTION FUNCTIONS TO A COURT
The efficacy of the operation and structure of the CARP and of the CRT which preceded it has been debated innumerable times by this Subcommittee and its predecessors since the concept of a rate-setting and distribution body to administer the compulsory licenses under the Copyright Act was first conceived. See Copyright Office Oversight Hearing Before the House Judiciary Subc. on Courts and Intellectual Property, 105th Cong. (July 23, 1998) (statement of Marybeth Peters, Register of Copyright, U.S. Copyright Office); Copyright Compulsory License Improvement Act, H.R. 3210, 105th Cong. § 7 (1998) (approved by Subcommittee on Courts and Intellectual Property March 18, 1998) (establishing the Copyright Royalty Adjudication Board within the Copyright Office, which would consist of administrative copyright judges); Copyright Clarifications Act of 1996, H.R. 1861, 104th Cong. § 11 (1996) (approved by Subcommittee on Courts and Intellectual Property on Dec. 13, 1995 and House Judiciary Committee on March 12, 1996) (clarifying the authority of the Librarian of Congress to make procedural and evidentiary rulings with respect to a CARP proceeding and authorizing (1) payments to arbitrators and other costs to come from the royalty pool in distribution proceedings and (2) in ratemaking proceedings, dividing such costs 50-50 between copyright owners and users unless otherwise determined by the arbitrators); Copyright Royalty Tribunal Reform Act of 1993 § 2, 17 U.S.C. §§ 801, 803 (1993) (replacing the Copyright Royalty Tribunal with Copyright Arbitration Royalty Panels); Copyright Royalty Tribunal Reform and Miscellaneous Pay Act of 1989, Pub. L. No. 101-319 (1990) (reducing the number of commissioners on the Copyright Royalty Tribunal), CRT Reform and Compulsory Licenses Hearings Before the House Judiciary Subc. on Courts, Civil Liberties, and the Administration of Justice, 99th Cong. (1985) (redesignating the Copyright Royalty Tribunal as the Copyright Royalty Court and transferring such body to the control of the judicial branch).
In reviewing this legislative history in the light of my own experiences participating in the CARP process and litigating rate-setting cases before the ASCAP and BMI “rate courts” in the Southern District of New York, I have become convinced that the main responsibilities with which a CARP is tasked - namely, rate-making and distribution of royalties - do not principally involve matters which require the particularized, copyright-oriented agency expertise of the Library of Congress. Instead, these tasks require a facility with macroeconomics and with basic principles of antitrust law, the ability to assimilate facts concerning multiple media marketplaces, the ability to evaluate complex statistical and economic data put forth by the parties’ experts, and the ability to sift through and properly evaluate record evidence, including making judgments on issues such as witness credibility.
Experience in the rate court context - which essentially entails the same search for a hypothetical free market, “willing buyer/willing seller” rate as is the object of many CARP proceedings - has shown that all of these functions are well suited to federal judicial determination. Indeed, were determinations of statutory license fees reposed in the federal courts, virtually all of the procedural flaws inherent in the existing CARP process would be remedied or, at the least, ameliorated. For instance, a trained jurist (whether a district court judge, a magistrate judge or a special master), working within federal rules of discovery and evidence, would supervise discovery, receive evidence, conduct hearings and, where appropriate, invoke summary procedures such as trials on paper records or summary judgment disposition. To keep such proceedings focused and manageable, it could be stipulated that the proceedings must be concluded within a specified period of time (subject to relaxation by the court for good cause). The trial court decision would be subject to review pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.
Admittedly, transferring the rate-making and royalty distribution functions of CARP Panels to a federal district court requires careful consideration of Constitutional issues which are beyond the scope of this testimony. For instance, when such proposals have been considered by this Subcommittee in the past, questions have been raised, but not resolved, as to whether, because rate-making is not a judicial function, Article III judges may be tasked with conducting non-Article III functions. There is nevertheless precedent for resolving rate disputes in district courts. I have already adverted to the ASCAP and BMI rate court experience. In addition, § 513 of the Copyright Act allows individual proprietors of certain categories of business establishments to resolve rate disputes with performing rights societies by bringing such matters before a district court located in the federal circuit in which the proprietor’s establishment is located. To be sure, there are consent decree structures in place that contemplate such judicial rate-setting in the ASCAP/BMI setting. Such precedents and procedures, and the experience thereunder, nevertheless provide useful starting points for consideration of how an analogous rate court could function in lieu of the present CARP procedures.
Without conducting a thorough analysis of the matter, it appears at first blush that a number of steps could be taken to limit Constitutional concerns. For instance, one might consider retaining within the Copyright Office the authority to certify the existence of a rate dispute (e.g., upon the close of the voluntary negotiation period) and allowing the Copyright Office to issue a certification of dispute notice which would allow the parties to seek resolution of the case or controversy in the federal courts when voluntary resolutions are not possible. I would encourage the Subcommittee to solicit the advice of the Congressional Research Service as to whether any potential Constitutional issues could be overcome; assuming that to be the case, I commend to the Subcommittee serious consideration of transferring dispute resolution authority in the rate-setting and royalty distribution context to the federal courts.
Alternatively, the Register of Copyrights has previously suggested establishing a permanent Board to conduct rate-making and distribution proceedings which would be housed within the Copyright Office. Under the Register’s formulation, membership on the Board would be established upon recommendation of the Register of Copyrights. Such a Board could presumably also be housed within another agency, such as the Department of Commerce, in which the Patent and Trademark Office (“PTO”) resides.
There would seem to be arguments in favor and against such an approach. As the Copyright Office noted in 1998, establishing a Board within the Copyright Office (or another agency) would raise the stature of the decision makers and would result in final agency decisions that could be appealed directly to the courts, thus removing the intermediate appellate review which currently occurs within the Copyright Office. See Copyright Office Report, supra note 1, at 56. Additionally, the appointment of a permanent Board could potentially reduce costs to parties participating in the rate-setting process, especially those of three expensive arbitrators, thereby encouraging wider participation and a fuller factual record on which to base decisions. Costs would further be reduced by the elimination of the review by the Register of Copyrights and the Librarian.
A major shortcoming of establishing a permanent Board within an agency is that such a Board might be viewed to be too political. Furthermore, the efficacy of such a Board would be greatly dependent upon the procedures established to govern the orderly presentation of cases. At a minimum, any such Board should be invested with subpoena power, and rate-setting disputes should be subject to the Federal Rules of Civil Procedure.
A FEW COMMENTS ON THE SUBSTANTIVE TESTS
EMBODIED IN SECTIONS 112, 114 AND 118 OF THE ACT
Insofar as the Subcommittee is interested in the proper administration of the statutory licenses available under the Copyright Act, a few comments are in order regarding the substantive statutory standards themselves. I am most familiar with the application of the standards contained in §§ 112, 114 and 118 of the Act, and therefore confine my comments to those provisions. Pursuant to § 114, CARP Panels are charged with establishing “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.” See 17 U.S.C. § 114(f)(2)(B) (2001). The § 118 standard, incorporated by reference in § 801(b) of the Act (detailing the operation of CARP Panels), calls for the determination of “reasonable terms and rates of royalty payments.” In reaching these determinations in each case the Panels “may” - but are not required to - give weight to voluntary license agreements reached in lieu of resort to the statutory license. See § 112(e)(4); § 114(f)(2)(B); § 118(b)(3).
Practice under these provisions has spawned lively controversy as to their intended meaning. This is not the forum either to relitigate the various parties’ perspectives, nor, at least for now, definitively to resolve the issue. Nevertheless, I have considerable concern over the potential misapplication of these provisions to, in effect, rubber stamp selective agreements reached by large and powerful collectives representing copyright owners (whether ASCAP or BMI, in relation to musical works performance rights, or the RIAA in relation to digital transmissions of sound recordings).
With respect to each of these statutory directives, it would seem plain that the purpose of the exercise is to determine the fees that would have resulted from dealings between willing buyers and willing sellers in a competitive market (i.e., a market undistorted by the concentration of bargaining power in the hands of a collective society or major industry trade association). Yet, strenuous arguments have been made (and rejected in the ASCAP rate court setting) that dispositive weight ought to be given to such license agreements as copyright owners’ collective agents may have been able to reach with one or more third parties. While I do not suggest that statutory ratemaking is an easy task, unless it is recognized that the core statutory objective is to approximate the value a marketplace untainted by undue market power possessed by copyright owner collectives would produce, no amount of fine-tuning or refinement of the ratemaking process will generate an economic result true to the spirit and intent of these statutory license provisions.
I thank the Members of the Subcommittee for their attention to these important matters and for the opportunity to share my views with you. I would be pleased to answer questions and elaborate further on this testimony now or later for the record.