Statement of Marybeth Peters
The Register of Copyrights
Subcommittee on Courts, the Internet, and Intellectual Property
Committee on the Judiciary
United States House of Representatives
107th Congress, 2nd Session
June 13, 2002
CARP (Copyright Arbitration Royalty Panel) Structure and Process
Thank you, Mr. Chairman. I am pleased to appear
today before the Subcommittee and offer testimony on the structure and process
of the Copyright Arbitration Royalty Panels (CARPs). As you are aware, the CARPs
have been operating under the auspices of the Copyright Office and the Library
of Congress since the Congress eliminated the Copyright Royalty Tribunal in
1993. Today's hearing is to consider how effective the CARP process has been
to this point and, as you will hear from other members of today's witness panel,
ways in which it can be improved.
I am dividing my comments into three sections. First, I will give an overview
of how the statutory licenses of the Copyright Act have been administered since
1978. Second, I will discuss certain shortcomings of the existing CARP system
that have been identified since 1993, and third I will offer some suggestions
as to how royalty distribution and rate adjustment proceedings could be conducted
in ways that might eliminate many of the shortcomings of the current system.
Overview of Copyright Statutory License Royalty
Distribution And Ratemaking
The history of the Copyright Office's and Library
of Congress's involvement in the setting and adjusting of royalty rates and
making royalty distributions to copyright owners is linked to the history and
evolution of the statutory licenses in the copyright law. The general rule in
copyright law is that the owner of a copyrighted work has the exclusive right
to determine how that work is to be used. Anyone other than the owner wishing
to use a copyrighted work must either obtain the owner's permission, be eligible
for a statutory license, or qualify for free use under an exception. A statutory
license allows certain uses of certain copyrighted works provided that the user
pays the royalties and observes the terms that are set forth in the law.
1. The 1909 Copyright Act
There was only one compulsory license
in the 1909 Copyright Act. What is generally referred to as the "mechanical
license" which allowed a person to make a sound recording of a song that had
been recorded and copies of that recording had been distributed to the public
in the United States, so long as that person paid the owner of the musical composition
2 cents per copy. The royalty rate was set by statute and was not subject to
change. The 2 cents rate lasted from 1909 to 1978.
Because the rate was set by statute, and because the user paid
the owner directly, there was no need for a government agency either to set
the mechanical rate or to engage in a distribution of the mechanical royalties.
2. The 1976 Copyright Act
At the time it was drafting the 1976 Copyright
Act, Congress realized that the mechanical license was flawed because a statutorily-set,
never-changing royalty rate was inflexible and did not provide fair compensation.
Furthermore, Congress was planning to add more statutory licenses to the law.
These new statutory licenses would be in the areas of cable retransmissions
of over-the-air broadcast signals, jukebox performances of music, and the use
of published musical works and published pictorial, graphic and sculptural works
by noncommercial educational broadcasters. Congress saw that there was a need
for an administrative body that would be able to adjust the rates of these statutory
licenses periodically. In addition, Congress saw a need for an administrative
body to act as the distributor of the royalties collected from users in situations
where there were many copyright owner claimants to the same funds and there
were controversies as to how much each claimant was entitled to receive.
The new administrative body would have responsibility for adjusting
the cable, jukebox, mechanical, and noncommercial educational broadcasting royalty
rates, and for distributing the cable and jukebox royalties to the proper claimants.
Cable and jukebox royalties would be deposited with the Copyright Office, subject
to the distribution decisions of this new administrative body. Although the
Senate and House copyright subcommittees agreed that they needed to create a
new administrative body, they were not sure of the structure for the new body.
At first, the Senate bill created a tribunal composed of a three-member panel
that would reside within the Copyright Office. The members would be appointed
by the Register of Copyrights from the membership of the American Arbitration
Association or a similar organization. The Register would convene the panel
each time a controversy was found to exist concerning the distribution of royalties
or the adjustment of royalty rates.
While the Congress was considering the proposed Senate version
for the new administrative body, the Supreme Court handed down its decision
in Buckley v. Valeo, 424 U.S. 1 (1976). In Buckley, the Court
considered, inter alia, the constitutionality of the method of appointing
members to the Federal Election Commission ("FEC"), an agency residing in the
legislative branch. The law establishing the FEC provided that the President
pro tempore of the Senate and the Speaker of the House would appoint
a majority of members of the FEC. The Supreme Court ruled that this was unconstitutional
because some of the FEC's functions were executive branch functions and consequently
persons exercising those functions "must be appointed in accordance with article
II, sec. 2, clause 2 of the Constitution, the Appointments Clause." 424 U.S.
at 126. The Appointments Clause states that the President shall nominate, with
the Senate's advice and consent, all "Officers of the United States," but the
Congress may vest the appointment of inferior officers as it deems proper. When
the Buckley opinion was issued, some of the members of Congress expressed
constitutional concerns over the plan to have the Register of Copyrights, an
employee of the legislative branch, appoint members of the new tribunal. Wishing
to avoid placing the new structure under a constitutional cloud, the members
of the subcommittees of both houses chose instead to create a completely independent
regulatory agency, the Copyright Royalty Tribunal, whose members would be appointed
by the President with the advice and consent of the Senate.
3. The Copyright Royalty Tribunal, 1977-1993
The Copyright Royalty Tribunal existed from November, 1977 to December,
1993. Its jurisdiction changed during those years. In 1988, Congress created
a new statutory license to govern retransmission of over-the-air television
signals to home satellite dish owners. Also, in 1988, Congress moved to eliminate
the jukebox compulsory license in order to comply with the Berne Convention
and by 1990, there were sufficient private license agreements to allow for the
elimination of the jukebox compulsory license from the Copyright Act and the
Tribunal's jurisdiction. 1
In 1992, Congress created a statutory royalty obligation for the manufacture
and importation of digital audio recording technology (DART).
Even with these new responsibilities, critics of the Tribunal
believed that there was insufficient work. In 1990, Congress reduced the number
of Commissioners from five to three, after concluding that three Commissioners
were sufficient to handle the workload. Copyright Royalty Tribunal Reform and
Miscellaneous Pay Act of 1989, Pub.L.No. 101-319, 104 Stat. 290 (1990). Also,
Congress established a procedure for adjusting the satellite carrier statutory
license rates in 1992 by an ad hoc arbitration panel, thereby undercutting
the Tribunal's otherwise exclusive jurisdiction over royalty rate adjustment
and distribution proceedings.
4. The Copyright Royalty Tribunal Reform Act of 1993
In 1993, Congress passed the Copyright Royalty
Tribunal Reform Act, observing that "with 15 years' experience, a clear record
of the Tribunal's workload has been established. That workload is episodic and
not sufficient to justify three full-time highly paid Commissioners." H.R. Rep.
No. 103-286, at 9 (1993).
The House Subcommittee recalled that the original proposal for
a government body to oversee the statutory licenses was for ad hoc arbitration
panels convened by the Register of Copyrights. Id. The Subcommittee noted
that the one experience with arbitrators setting royalty rates, the 1992 adjustment
of the satellite carrier compulsory license rates, was positive. Id.
at 11. Therefore, the Subcommittee believed that creating what was originally
proposed in 1976-ad hoc arbitration panels-would avoid the apparent waste
of having full-time Commissioners perform part-time work. The Subcommittee also
believed that placing ad hoc arbitration panels under the supervision
of the Register of Copyrights and the Librarian of Congress made "good sense,"
citing the fact that "the Copyright Office and the Library of Congress already
have considerable involvement in the administration of the compulsory licenses
and in the work of the Tribunal." Id. This "considerable involvement"
referred to the Copyright Office's Licensing Division which receives the payment
of cable, satellite and DART royalties, and the Register's Office which, through
the Register, the General Counsel and the staff of the General Counsel, promulgates
regulations related to the statutory licenses.
The remaining concern was whether establishing arbitration panels
in the Library of Congress was constitutional. Congressman William Hughes, the
chairman of the House Subcommittee, asked the Congressional Research Service
("CRS") for its advice. CRS stated that the panels would be constitutional if
the person ultimately responsible for the panels' decision was a presidential
appointee or someone who owed his or her appointment to a presidential appointee.
Therefore, the panels could be established under supervision of the Librarian
of Congress, a presidential appointee, or the Register of Copyrights, a person
owing his or her appointment to a presidential appointee. Letter from CRS to
the Honorable William Hughes, February 17, 1993, at 9-10.
Although the House Subcommittee received CRS' opinion that either
the Register or the Librarian could be the supervising official, the House Subcommittee
chose to make the Librarian the supervising official. There is no record as
to why this choice was made. There is also nothing in the record to suggest
that Congress saw any added value in an additional layer of review. The only
concern voiced was that a presidential appointee, or someone who answers to
a presidential appointee, needed to be placed at the head of the CARP system
to satisfy the Supreme Court's ruling in Buckley v. Valeo.
5. The Current CARP System
As discussed above, the current CARP system consists
of ad hoc arbitration panels that recommend the royalty rates and distribution
of royalty fees collected under certain of the statutory licenses and set some
of the terms and conditions of some of the statutory licenses. Each CARP is
selected for a particular proceeding (examples: a rate adjustment for the cable
statutory license; a distribution of DART funds) and has up to 180 days to deliver
its recommendation for the rate adjustment or distribution, as the case may
be. The highlights of the CARP system are as follows:
Voluntary Negotiation Period: Once it
is determined that a controversy exists as to the adjustment of royalty rates
or the distribution of royalty fees, as the case may be, the Office designates
a period for voluntary negotiation among the parties to resolve their differences.
Those parties unable to reach an agreement during this period proceed to a CARP.
Direct Cases and Discovery:
Every participant in a CARP proceeding must submit a written direct case. The
written direct case is the principal piece of evidence put forward by
a participating party in that it sets forth all the evidence and reasons as
to what the party believes the rates or distribution should be. The Office then
conducts a limited discovery period during which parties
may request from each other documentation that supports the assertions they
make in their written direct cases.
Selection of the Arbitrators:
Once the discovery phase is concluded and the proceeding is ready for
hearing, the Librarian selects two arbitrators from a list of designated arbitrators
whose names are obtained from arbitration associations who then select a third
arbitrator from the list to serve as their chairperson. If the two arbitrators
cannot agree, then the Librarian selects the chairperson (which has never happened).
Hearings: Once the arbitrators begin their 180 period, they consider
all the testimony submitted by the parties in their written direct cases. Oral
hearings of the written direct cases are typically conducted (although they
are not required), and the parties often submit rebuttal testimony. At the conclusion
of the hearings, the parties submit their proposed findings of fact and conclusions
of law wherein they argue to the CARP how it should rule. Often, the CARP will
permit oral argument on the proposed findings of fact and conclusions of law.
CARP Report: At the conclusion of the 180-day period and after considering
the evidence and testimony presented, the CARP delivers its written recommendation
to the Librarian of Congress as to what the royalty rates or the distribution
should be. In making the recommendation, the CARP must articulate the reasons
for its recommendations and the evidence that supports its conclusions.
Review of the CARP Report: Upon receipt
of the CARP report, the Librarian is given 90 days in which to either accept
the determination of the CARP or to reject it. The Librarian may reject the
recommendation only if he or she determines that it is arbitrary or contrary
to the provisions of the Copyright Act. The Register of Copyrights is directed
to advise the Librarian on his or her decision. If the Librarian rejects the
CARP's recommendation, there is an additional 30 days for the Librarian to issue
a final order setting forth the rate adjustment or distribution, as the case
Appeal of the Librarian's Order: Any
party with an interest in the royalty rates or distribution determined by the
Librarian may appeal the decision within 30 days of its publication in the Federal
Register. Appeal must be made in the United States Court of Appeals for
the District of Columbia Circuit.
Since the abolition of the Copyright Royalty Tribunal in 1993, the Copyright
Office and the Library have conducted nine full proceedings that have resulted
in delivery of CARP reports. Numerous other proceedings have settled at various
stages, and the Office has several more proceedings currently pending. Six of
the Librarian's decisions were appealed and in each instance the Librarian's
determination was upheld. 2
Shortcomings of the Carp System
Mr. Chairman, you will undoubtedly hear testimony
from the other witnesses on today's panel as to the shortcomings and complaints
of the current CARP system. In this section, I highlight some of the difficulties
we have observed in the near decade of administering the system.
The arbitrators selected to serve on a particular
CARP must, of course, be paid. Arbitrators are typically compensated at between
$200 and $400 an hour for their work which, in a hotly contested proceeding
involving many parties and large amounts of testimony, can add up to considerable
sums. In the case of a royalty distribution proceeding, the arbitrators are
paid from the royalty funds to be distributed. In the case of a royalty adjustment
proceeding where there are no royalties collected by the Copyright Office, the
participants must pay the arbitrators out of their own pockets. There is no
question that in some rate adjustment proceedings, some interested parties cannot
afford the cost of participating. While the Copyright Office has considered
allowing these parties to participate free of charge, this would certainly draw
objections from the participants in the proceeding who would foot the bill.
On an institutional scale, CARP proceedings are also very costly.
They require considerable amounts of time of Copyright Office and Library personnel
who must conduct various phases of the proceedings, such as discovery relating
to the written direct cases and review of the CARPs' decisions. In the recent
CARP rate-setting proceeding for webcasting, the cost of the arbitrators alone
exceeded the entire annual budget of the Copyright Royalty Tribunal in its last
year of existence.
2. Lack of Stability and Predictability of Results
Each panel of arbitrators is selected for one
particular case. The decisions they make are for the purpose of deciding that
one case and not for establishing lasting precedent. Furthermore, although the
Librarian attempts to select arbitrators who have served well on previous panels,
the individuals almost always vary from one panel to the next. Parties who are
dissatisfied with one panel are tempted to return and try a different panel.
Therefore, there is a lack of stability and predictability in the process, and
a lack of reliable precedent upon which the parties can base the settlement
of their differences.
3. Institutional Expertise
Although copyright rate setting or adjustment and distribution
proceedings often involve considerable amounts of money, the fact remains that
the statutory licenses and the CARP system occupy an esoteric area of the law.
We have found it very difficult to find arbitrators that have any familiarity
with copyright law, let alone the complex statutory licenses in that law and
the unique procedures of the CARPs. Those that do have some copyright law experience
typically cannot be selected due to a financial or other conflict of interest.
The result is that we are forced to select arbitrators that, while bright and
capable, lack knowledge and understanding of the workings and details of the
copyright laws and the CARP system. This lack of expertise puts a considerable
burden upon the Register and the Librarian to correct errors and oversights
made by CARPs during the course of the proceeding, a burden which is exacerbated
by the short review period granted the Register and the Librarian by the statute.
Of the nine CARP reports which the Librarian has reviewed, only three have been
acceptable. Several of the rejected reports have required considerable effort
in preparing a final order.
Because of the ad hoc nature of the CARPs, there is no
institutional expertise on any given panel. As one frequent attorney participant
in the CARP process recently informed the Office, the most scary day of a CARP
proceeding is the first day when one encounters the level of competence of panel
members that can be expected for the next six months.
Mr. Chairman, it is clear that the CARP system is far from
perfect. I do believe, however, that the decision making produced by the current
system is superior to that produced by the Copyright Royalty Tribunal during
its tenure. I do not disparage the work of the Tribunal as they did, in most
circumstances, the best they could with the resources available. But I do think
that a simple return to the Tribunal system would be a mistake.
Attached to this written statement is a report prepared four years
ago by the Copyright Office at the request of this Subcommittee. The report
offers five different options to improve the manner in which copyright license
royalty fees and rates are resolved. The options are:
Reforming the Current System: The Copyright Office
proposed eleven amendments to the Copyright Act to address the CARP's most serious
flaws. They include making the Register the supervising official; lengthening
the time of each proceeding; expanding the use of paper proceedings to reduce
the costs of hearings; reducing the number of arbitrators for small claims or
having small claims resolved by staff; and capping the arbitrators' fees.
Replacing Arbitrators with Administrative Law Judges:
Under this option, administrative law judges supplied by the Office of Personnel
Management would handle the royalty ratemaking and distribution cases within
the Copyright Office.
with Presiding Officers: Under this option, arbitrators
would be replaced with presiding officers who, while
not administrative law judges, would perform the same functions. The precise
features of this system would be established by Congress as a stand-alone system
administered by the Register and not the Office of Personnel Management.
Creating a Board Within the Copyright Office:
Under this option, a Board would be established within the Copyright Office
that would take on more authority than presiding officers, be more autonomous,
and render final agency decisions.
Creating an Independent Regulatory Agency: Under
this option, a new independent regulatory agency, similar to the Copyright Royalty
Tribunal but with some improvements, would be created.
The attached report discusses fully the strengths and weaknesses of each of
the five options.
In 1998, Mr. Chairman, you introduced H.R. 3210, the "Copyright
Compulsory License Improvement Act." The bill would have amended chapter 8 of
the Copyright Act to establish a Copyright Royalty Adjudication Board ("CRAB")
consisting of one full-time chief administrative copyright judge and up to four
part-time administrative copyright judges selected by the Librarian of Congress.
The judges would serve five year terms and be compensated at a government salary
level. The Board, while within the Copyright Office, would be wholly independent
and would have full authority to determine all statutory license rates and royalty
distributions. The Copyright Office, however, could present formally its views
to the Board on any matter, which the Board could accept or reject. Appeal of
final Board decisions would be to the United States Court of Appeals for the
Although I have concerns about some aspects of the proposals contained
in H.R. 3210, it was a positive first step in addressing the issues. The Copyright
Office would be pleased and interested in working with the Subcommittee, and
with the parties for reform of the current system to produce a better model.
In reforming the CARPs, there are several key elements that need to be addressed.
First, the best way to produce well-reasoned decisions is to create
a system that permits the Copyright Office and the Library to hire full-time
employees who are well-versed and experienced in the copyright law, the complexities
of the statutory licenses, and who are experienced at conducting administrative
proceedings. As discussed above, while we have hired capable arbitrators in
CARP proceedings, it has been impossible to find arbitrators who are intimate
with the details of the copyright law, the statutory licenses and the distribution/rate
adjustment process. Having the same full-time decision makers who adjudicate
all rate adjustment and distribution proceedings will not only raise the level
of institutional expertise, but will produce balanced and stable results. Placing
those decision makers in the agency with expertise in copyright and the statutory
licenses will ensure that their decisions are well-reasoned.
Second, although the responsibilities of rate making and royalty
distribution has risen in recent years due to an increase of compulsory licenses
in the Copyright Act, we recognize that there are still periods of inactivity
where no proceedings are being conducted. One of the criticisms of the Copyright
Royalty Tribunal was that Commissioners were still compensated during such periods
thereby effectively being paid for little or no work. Consideration should be
given to whether the Register should have discretion to assign additional copyright
work to the Copyright Office-based decision makers during these periods of inactivity.
Third, a new system should permit the Register a substantive role
during the process to address important policy and substantive matters that
might arise during a rate adjustment or royalty distribution. Whether the role
is one of having input into the decision, as was proposed in H.R. 3210, or one
of being the final decision maker is an issue that should be explored.
Finally, there is the matter of costs. Hiring full-time employees
at government salaries to serve as decision makers will certainly reduce the
overall cost of proceedings to the parties, but there remains the question of
the source of their funding. Under the current system, for those compulsory
licenses for which the Copyright Office collects royalties, the costs of the
arbitrators in distribution proceedings are paid for out of the royalty pool.
This is an appropriate system that should be retained since those benefitting
from the distribution are paying for the cost of the proceeding. However, in
those circumstances where the Office does not collect royalties, such as the
recent webcasting CARP proceeding, the parties currently pay the costs of the
arbitrators. One of the objections to such a payment scheme is that it raises
a bar to participation for those who cannot afford to pay the arbitrators. Therefore,
I recommend that the salaries of the decision makers in rate adjustments in
the new system, where no royalty fees are collected by the Office, be paid from
appropriated funds. This would require an additional appropriation for that
The Copyright Office looks forward to working with the Subcommittee and the
interested parties on this important matter. Thank you, Mr. Chairman.
1 A contingent jurisdiction over public performances by means
of jukeboxes remains if private jukebox licenses expire and no new license agreements
2 In one rate adjustment proceeding under 17 U.S.C. 114, the
Court of Appeals remanded for further findings a small portion of the Librarian's
decision concerning the terms of payment of royalty fees.