A decision by the US Court of Appeals on the appeal of the Copyright Royalty Board decision as to the Sirius XM and Music Choice royalties for the public performance of sound recordings is one of the many year-end decisions important to broadcasters and digital media companies that seems to be flooding out from Courts and agencies in DC and elsewhere. The Court of Appeals rejected the appeal of SoundExchange, which was arguing that the royalties for both services should have been set higher by the CRB, and the Court also rejected the appeal of Music Choice, which argued that the royalties that were set by the CRB should have been lower. We wrote about the CRB’s decision, here, when it was initially released about 2 years ago.

The proceeding involved the Preexisting Subscription Services (“PSS”) and the Preexisting Satellite Digital Audio Services (“SDARS”), services that were singled out when Congress adopted the Digital Millennium Copyright Act in 1998 by applying a different standard to those services for use by the CRB in determining the amount of sound recording performance royalties. Instead of using the “willing buyer, willing seller” standard that applies to webcasters and any other digital music service that was not in existence in 1998, these services are evaluated under the 801(b) standard of the Copyright Act, which looks at a variety of factors including the market rate expressed by the willing buyer willing seller standard, but also at the relative financial contributions of the parties to bringing the music to the public, and the effect of royalty changes on the stability of the industries involved (see our articles here, here and here about the differences between these standards) Using this 801(b) standard, most observers believe that royalties have been set at rates lower than have prevailed in the cases involving services subject the willing buyer willing seller standard.

In this case, the Music Choice royalty for PSS services went from a previously negotiated 7.5% up to 8% in 2013 and 8.5% of gross revenues through 2017. The increase was at least partially justified by the CRB as being based on Music Choices expressed plans to vastly increase the number of channels that they would provide to users of the service. Music Choice is a music service that is routinely bundled with cable television services. The Court found that the CRB’s belief that the increased number of channels would likely result in increased music usage was reasonable, and upheld its reliance on that belief in justifying the rate increase.

For Sirius XM, the rates set by the decision increased from 9% in 2013 to 11% in 2017, reflecting slight .5% rate increases each year during the term. SoundExchange, which asked for much higher rates based on a number of factors, including an analysis by an economic expert of the rates paid by other services, including webcasters and interactive services, which he argued justified higher rates. The CRB rejected that analysis, instead looking SoundExchange’s low end of its proposal as reflecting the upper bound of reasonable royalty rates, and the rates negotiated by Sirius XM in direct deals with certain independent record labels (which were below the 8% royalty that Sirius had previously been paying) as providing the lower end of the range of reasonable rates. To figure out where in that range the royalties should be set, the Board used its own determination in its prior SDARS case as to what the marketplace rate should be before adjustment using the 801(b) factors, and used that rate as a guidepost in determining where in the range of rates the final rate should fall.

The Court found that the CRB’s reliance on this prior decision was reasonable, and it rejected many other claims brought by SoundExchange raising technical issues as to whether the decision of the CRB was reasonable. The Court gives deference to expert agency decisions, including those by the CRB, and unless a decision is arbitrary and capricious (meaning essentially that it could not be justified based on the record evidence developed during the CRB’s proceeding, not necessarily whether the Court would have decided it the same way if it looked at the same facts, but that there was at least a basis in the record to make the decision that the CRB did), it is upheld. The Court concluded that this decision was not arbitrary, and therefore upheld it against the challenges raised by the parties. 

One final note of interest, as they have been so much in the news lately, was the Court’s decision to leave in place the CRB’s determination that Sirius XM should be able to deduct from its royalty payments a percentage of its revenue equal to the percentage of pre-1972 sound recordings played by the service. The CRB reasoned that these recordings were not licensed by SoundExchange but instead by the states, and therefore SoundExchange deserved no royalty for their use. While the Court acknowledged that the question of whether pre-1972 sound recordings were entitled to any public performance royalty under state law was one that was being litigated in a number of states (see our articles here and here), the Court upheld the deduction from the SoundExchange royalty. The Court rejected SoundExchange’s somewhat convoluted arguments that allowing these deductions was somehow “double-dipping.” So the Court’s decision confirms that pre-1972 sound recordings are not part of the SoundExchange payments, but does little else to clarify the state litigation that is ongoing.

Overall, the Court decision is most interesting for lawyers looking at procedural and evidentiary questions that may be of importance in future cases. On a practical level for most webcasters, digital music companies and others, perhaps the most important thing that can be taken from the case is that the Court is willing to give great deference to any decision by the CRB that is supported by evidence in the record. This CRB decision was a controversial one when it was adopted, as the decision was a 2 to 1 vote, with the single Copyright Royalty Judge who had heard prior webcasting and SDARS cases dissenting, arguing that the rates should have been set at higher levels. That Judge is now gone, and the Chief Judge who presided over this decision is heading the CRB in hearing the current proceeding considering webcasting royalties, along with two totally new judges. Will that make a difference in this case, with the CRB being less deferential to SoundExchange’s proposals? Only time will tell for sure.