[Federal Register: October 1, 2008 (Volume 73, Number 191)]
[Proposed Rules]               
[Page 57033-57040]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc08-22]                         

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LIBRARY OF CONGRESS

Copyright Royalty Board

37 CFR Part 385

[Docket No. 2006-3 CRB DPRA]

 
Mechanical and Digital Phonorecord Delivery Rate Determination 
Proceeding

AGENCY: Copyright Royalty Board, Library of Congress.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Copyright Royalty Judges are publishing for comment 
proposed regulations that set the rates and terms for the use of 
musical works in limited downloads, interactive streaming and 
incidental digital phonorecord deliveries.

DATES: Comments and objections, if any, are due no later than October 
31, 2008.

ADDRESSES: Comments and objections may be sent electronically to 
crb@loc.gov. In the alternative, send an original, five copies, and an 
electronic copy on a CD either by mail or hand delivery. Please do not 
use multiple means of transmission. Comments and objections may not be 
delivered by an overnight delivery service other than the U.S. Postal 
Service Express Mail. If by mail (including overnight delivery), 
comments and objections must be addressed to: Copyright Royalty Board, 
P.O. Box 70977, Washington, DC 20024-0977. If hand delivered by a 
private party, comments and objections must be brought to the Copyright 
Office Public Information Office, Library of Congress, James Madison 
Memorial Building, Room LM-401, 101 Independence Avenue, SE., 
Washington, DC 20559-6000. If delivered by a commercial courier, 
comments and objections must be delivered between 8:30 a.m. and 4 p.m. 
to the Congressional Courier Acceptance Site located at 2nd and D 
Street, NE., Washington, DC, and the envelope must be addressed to: 
Copyright Royalty Board, Library of Congress, James Madison Memorial 
Building, LM-403, 101 Independence Avenue, SE., Washington, DC 20559-
6000.

FOR FURTHER INFORMATION CONTACT: Richard Strasser, Senior Attorney, or 
Gina Giuffreda, Attorney-Advisor, by telephone at (202) 707-7658 or e-
mail at crb@loc.gov.

SUPPLEMENTARY INFORMATION:

Background

    Section 115 of the Copyright Act, title 17 of the United States 
Code, also known as the mechanical compulsory license, requires a 
copyright owner of a nondramatic musical work to grant a license to any 
person who wants to make and distribute phonorecords of that work, 
provided that the copyright owner has allowed phonorecords of the work 
to be produced and distributed, and that the licensee complies with the 
statute and regulations.
    On November 1, 1995, Congress passed the Digital Performance Right 
in Sound Recordings Act of 1995 (``DPRSRA''), Public Law No. 104-39, 
109 Stat. 336, which extended the mechanical license to digital 
phonorecord deliveries. 17 U.S.C. 115(c)(3). Consequently, the license 
now covers digital transmissions of phonorecords in addition to the 
physical copies such as compact discs, vinyl and cassette tapes.
    Until it was abolished in 1993, the Copyright Royalty Tribunal 
(``CRT'') had authority to adjust the statutory rates for the making 
and distributing of physical phonorecords and did so in 1987. See 1987 
Adjustment of the Mechanical Royalty Rate, Docket No. CRT 87-3-87 MRA, 
52 FR 22637 (June 15, 1987). In 1993, Congress replaced the CRT with a 
system under which the mechanical royalty rate was determined by 
Copyright Arbitration Royalty Panels (``CARP'') under the supervision 
of the Librarian of Congress. See Copyright Royalty Tribunal Reform Act 
of 1993, Public Law No. 103-198, 107 Stat. 2304. Unlike the CRT, the 
CARPs were authorized to adopt terms, in addition to setting the rates, 
for the mechanical license. The rates and terms for the mechanical 
license were adjusted periodically under the CARP system and appear in 
37 CFR Part 255. However, in the Copyright Royalty and Distribution 
Reform Act of 2004, Public Law No. 108-419, Congress transferred 
jurisdiction over these rates and terms to the Copyright Royalty Judges 
(``Judges''). 17 U.S.C. 801(b)(1).
    On January 9, 2006, pursuant to 17 U.S.C. 803(b)(1)(A)(i)(V), the 
Judges published a notice in the Federal Register announcing the 
commencement of the proceeding to determine rates and terms for the 
compulsory license under section 115 and requesting interested parties 
to submit their petitions to participate. Adjustment or Determination 
of Compulsory License Rates for Making and Distributing Phonorecords, 
Docket No. 2006-3 CRB DPRA, 71 FR 1454 (January 9, 2006). Petitions to 
participate were received from the following entities: Royalty Logic, 
Inc; the Songwriters Guild of America; the National Music Publishers' 
Association, Inc., the Songwriters Guild of America, and the Nashville 
Songwriters Association International, jointly (collectively, 
``Copyright Owners''); Apple Computer, Inc.; America Online, Inc.; 
RealNetworks, Inc.; Napster, LLC; Sony Connect, Inc.; Digital Media 
Association (``DiMA''); Yahoo! Inc.; MusicNet, Inc.; MTV Networks, 
Inc.; and Recording Industry Association of America (``RIAA'').
    The Judges set the schedule for the proceeding for both the direct 
and rebuttal phases of the proceeding, including the dates for the 
filing of written statements and the dates for oral testimony for each 
phase. During the oral presentation of the rebuttal phase, the parties 
informed the Judges that they had reached a settlement regarding the 
rates and terms for ``limited downloads and interactive streaming, 
including all known incidental digital phonorecord deliveries.'' See 
Joint Motion to Adopt Procedures for Submission of Partial Settlement 
at 1 (filed May 15, 2008). The proposed rates and terms codifying the 
settlement agreement were filed on September 22, 2008.\1\
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    \1\ The parties were unable to reach agreement regarding the 
rates and terms for the use of musical works in the making and 
distributing of physical phonorecords, permanent digital downloads, 
and ringtones. Consequently, the rates and terms for these products 
were the subject of a full hearing before the Judges. The Judges 
will determine these rates and terms, and those rates and terms also 
will be contained in proposed Part 385 of title 37 of the Code of 
Federal Regulations. Today's notice of proposed rulemaking discusses 
only the proposed regulations regarding limited downloads, 
interactive streaming and incidental digital phonorecord deliveries.
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    Section 801(b)(7) of the Copyright Act authorizes the Judges to 
adopt rates and terms negotiated by ``some or all of the participants 
in a proceeding at any time during the proceeding'' provided they are 
submitted to the Judges for approval. This section provides that in 
such event:


[[Page 57034]]


    (i) The Copyright Royalty Judges shall provide to those that 
would be bound by the terms, rates, or other determination set by 
any agreement in a proceeding to determine royalty rates an 
opportunity to comment on the agreement and shall provide to 
participants in the proceeding under section 803(b)(2) that would be 
bound by the terms, rates, or other determination set by the 
agreement an opportunity to comment on the agreement and object to 
its adoption as a basis for statutory terms and rates; and
    (ii) The Copyright Royalty Judges may decline to adopt the 
agreement as a basis for statutory terms and rates for participants 
that are not parties to the agreement, if any participant described 
in clause (i) objects to the agreement and the Copyright Royalty 
Judges conclude, based on the record before them if one exists, that 
the agreement does not provide a reasonable basis for setting 
statutory terms or rates.

17 U.S.C. 801(b)(7)(A). Rates and terms adopted pursuant to this 
provision are binding on all copyright owners of musical works and 
those using such musical works in limited downloads, interactive 
streaming and incidental digital phonorecord deliveries.
    As part of this notice of proposed rulemaking, the Judges are 
modifying one aspect of the proposed rates and terms. The parties have 
included language in their proposal that states that such rates have no 
precedential effect and may not be introduced or relied upon in any 
governmental or judicial proceeding. The Judges decline to include such 
language within our regulations. Our task, as set forth in section 115 
and chapter 8 of the Copyright Act, is to adopt rates and terms for the 
compulsory license for the making and distributing of physical and 
digital phonorecords. It is not our task to offer evaluations, 
limitations or characterizations of the rates and terms, or make 
statements about their use or value in proceedings other than this one. 
See Noncommercial Educational Broadcasting Statutory License, Docket 
No. 2006-2 CRB NCBRA, 72 FR 19138, 19139 (April 17, 2007).

List of Subjects in 37 CFR Part 385

    Copyright, Phonorecords, Recordings.

Proposed Regulations

    For the reasons set forth in the preamble, the Copyright Royalty 
Judges propose to add Part 385 to Chapter III of title 37 of the Code 
of Federal Regulations to read as follows:

PART 385--RATES AND TERMS FOR USE OF MUSICAL WORKS UNDER COMPULSORY 
LICENSE FOR MAKING AND DISTRIBUTING PHYSICAL AND DIGITAL 
PHONORECORDS

Subpart A--[Reserved]

Subpart B--Interactive Streaming, Other Incidental Digital 
Phonorecord Deliveries and Limited Downloads

Sec.
385.10 General.
385.11 Definitions.
385.12 Calculation of royalty payments in general.
385.13 Minimum royalty rates and subscriber-based royalty floors for 
specific types of services.
385.14 Promotional royalty rate.
385.15 Timing of payments.
385.16 Reproduction and distribution rights covered.
385.17 Effect of rates.

    Authority: 17 U.S.C. 115, 801(b)(1), 804(b)(4).


Sec.  385.10  General.

    (a) This subpart establishes rates and terms of royalty payments 
for interactive streams and limited downloads of musical works by 
subscription and nonsubscription digital music services in accordance 
with the provisions of 17 U.S.C. 115.
    (b) Legal compliance. A licensee that makes or authorizes 
interactive streams or limited downloads of musical works through 
subscription or nonsubscription digital music services pursuant to 17 
U.S.C. 115 shall comply with the requirements of that section, the 
rates and terms of this subpart, and any other applicable regulations.


Sec.  385.11  Definitions.

    For purposes of this subpart, the following definitions shall 
apply:
    Interactive stream means a stream of a sound recording of a musical 
work, where the performance of the sound recording by means of the 
stream is not exempt under 17 U.S.C. 114(d)(1) and does not in itself 
or as a result of a program in which it is included qualify for 
statutory licensing under 17 U.S.C. 114(d)(2). An interactive stream is 
an incidental digital phonorecord delivery under 17 U.S.C. 115(c)(3)(C) 
and (D).
    Licensee means a person that has obtained a compulsory license 
under 17 U.S.C. 115 and its implementing regulations.
    Licensed activity means interactive streams or limited downloads of 
musical works, as applicable.
    Limited download means a digital transmission of a sound recording 
of a musical work to an end user, other than a stream, that results in 
a specifically identifiable reproduction of that sound recording that 
is only accessible for listening for--
    (1) An amount of time not to exceed 1 month from the time of the 
transmission (unless the service, in lieu of retransmitting the same 
sound recording as another limited download, separately and upon 
specific request of the end user made through a live network 
connection, reauthorizes use for another time period not to exceed 1 
month), or in the case of a subscription transmission, a period of time 
following the end of the applicable subscription no longer than a 
subscription renewal period or 3 months, whichever is shorter; or
    (2) A specified number of times not to exceed 12 (unless the 
service, in lieu of retransmitting the same sound recording as another 
limited download, separately and upon specific request of the end user 
made through a live network connection, reauthorizes use of another 
series of 12 or fewer plays), or in the case of a subscription 
transmission, 12 times after the end of the applicable subscription.
    (3) A limited download is a general digital phonorecord delivery 
under 17 U.S.C. 115(c)(3)(C) and (D).
    Offering means a service's offering of licensed activity that is 
subject to a particular rate set forth in Sec.  385.13(a) (e.g., a 
particular subscription plan available through the service).
    Promotional royalty rate means the statutory royalty rate of zero 
in the case of certain promotional interactive streams and certain 
promotional limited downloads, as provided in Sec.  385.14.
    Publication date means [date regulations adopted as final].
    Record company means a person or entity that
    (1) Is a copyright owner of a sound recording of a musical work;
    (2) In the case of a sound recording of a musical work fixed before 
February 15, 1972, has rights to the sound recording, under the common 
law or statutes of any State, that are equivalent to the rights of a 
copyright owner of a sound recording of a musical work under title 17, 
United States Code;
    (3) Is an exclusive licensee of the rights to reproduce and 
distribute a sound recording of a musical work; or
    (4) Performs the functions of marketing and authorizing the 
distribution of a sound recording of a musical work under its own 
label, under the authority of the copyright owner of the sound 
recording.
    Relevant page means a page (including a web page, screen or 
display) from which licensed activity offered by a service is directly 
available

[[Page 57035]]

to end users, but only where the offering of licensed activity and 
content that directly relates to the offering of licensed activity 
(e.g., an image of the artist or artwork closely associated with such 
offering, artist or album information, reviews of such offering, 
credits and music player controls) comprises 75% or more of the space 
on that page, excluding any space occupied by advertising. A licensed 
activity is directly available to end users from a page if sound 
recordings of musical works can be accessed by end users for limited 
downloads or interactive streams from such page (in most cases this 
will be the page where the limited download or interactive stream takes 
place).
    Service means that entity (which may or may not be the licensee) 
that, with respect to the licensed activity,
    (1) Contracts with or has a direct relationship with end users in a 
case where a contract or relationship exists, or otherwise controls the 
content made available to end users;
    (2) Is able to report fully on service revenue from the provision 
of the licensed activity to the public, and to the extent applicable, 
verify service revenue through an audit; and
    (3) Is able to report fully on usage of musical works by the 
service, or procure such reporting, and to the extent applicable, 
verify usage through an audit.
    Service revenue. (1) Subject to paragraphs (2) through (5) of the 
definition of ``Service revenue,'' and subject to U.S. Generally 
Accepted Accounting Principles, service revenue shall mean the 
following:
    (i) All revenue recognized by the service from end users from the 
provision of licensed activity;
    (ii) All revenue recognized by the service by way of sponsorship 
and commissions as a result of the inclusion of third-party ``in-
stream'' or ``in-download'' advertising as part of licensed activity 
(i.e., advertising placed immediately at the start, end or during the 
actual delivery, by way of interactive streaming or limited downloads, 
as applicable, of a musical work); and
    (iii) All revenue recognized by the service, including by way of 
sponsorship and commissions, as a result of the placement of third-
party advertising on a relevant page of the service or on any page that 
directly follows such relevant page leading up to and including the 
limited download or interactive streaming, as applicable, of a musical 
work; provided that, in the case where more than one service is 
actually available to end users from a relevant page, any advertising 
revenue shall be allocated between such services on the basis of the 
relative amounts of the page they occupy.
    (2) In each of the cases identified in paragraph (1) of the 
definition of ``Service revenue,'' such revenue shall, for the 
avoidance of doubt,
    (i) Include any such revenue recognized by the service, or if not 
recognized by the service, by any associate, affiliate, agent or 
representative of such service in lieu of its being recognized by the 
service;
    (ii) Include the value of any barter or other nonmonetary 
consideration;
    (iii) Not be reduced by credit card commissions or similar payment 
process charges; and
    (iv) Except as expressly set forth in this subpart, not be subject 
to any other deduction or set-off other than refunds to end users for 
licensed activity that they were unable to use due to technical faults 
in the licensed activity or other bona fide refunds or credits issued 
to end users in the ordinary course of business.
    (3) In each of the cases identified in paragraph (1) of the 
definition of ``Service revenue,'' such revenue shall, for the 
avoidance of doubt, exclude revenue derived solely in connection with 
services and activities other than licensed activity, provided that 
advertising or sponsorship revenue shall be treated as provided in 
paragraphs (2) and (4) of the definition of ``Service revenue.'' By way 
of example, the following kinds of revenue shall be excluded:
    (i) Revenue derived from non-music voice, content and text 
services;
    (ii) Revenue derived from other non-music products and services 
(including search services, sponsored searches and click-through 
commissions); and
    (iii) Revenue derived from music or music-related products and 
services that are not or do not include licensed activity.
    (4) For purposes of paragraph (1) of the definition of ``Service 
revenue,'' advertising or sponsorship revenue shall be reduced by the 
actual cost of obtaining such revenue, not to exceed 15%.
    (5) Where the licensed activity is provided to end users as part of 
the same transaction with one or more other products or services that 
are not a music service engaged in licensed activity, then the revenue 
deemed to be recognized from end users for the service for the purpose 
of the definition in paragraph (1) of the definition of ``Service 
revenue'' shall be the revenue recognized from end users for the bundle 
less the standalone published price for end users for each of the other 
component(s) of the bundle; provided that, if there is no such 
standalone published price for a component of the bundle, then the 
average standalone published price for end users for the most closely 
comparable product or service in the U.S. shall be used or, if more 
than one such comparable exists, the average of such standalone prices 
for such comparables shall be used. In connection with such a bundle, 
if a record company providing sound recording rights to the service
    (i) Recognizes revenue (in accordance with U.S. Generally Accepted 
Accounting Principles, and including for the avoidance of doubt barter 
or nonmonetary consideration) from a person or entity other than the 
service providing the licensed activity and;
    (ii) Such revenue is received, in the context of the transactions 
involved, as consideration for the ability to make interactive streams 
or limited downloads of sound recordings, then such revenue shall be 
added to the amounts expensed by the service for purposes of Sec.  
385.13(b). Where the service is the licensee, if the service provides 
the record company all information necessary for the record company to 
determine whether additional royalties are payable by the service 
hereunder as a result of revenue recognized from a person or entity 
other than the service as described in the immediately preceding 
sentence, then the record company shall provide such further 
information as necessary for the service to calculate the additional 
royalties and indemnify the service for such additional royalties. The 
sole obligation of the record company shall be to pay the licensee such 
additional royalties if actually payable as royalties hereunder; 
provided, however, that this shall not affect any otherwise existing 
right or remedy of the copyright owner nor diminish the licensee's 
obligations to the copyright owner.
    Stream means the digital transmission of a sound recording of a 
musical work to an end user--
    (1) To allow the end user to listen to the sound recording, while 
maintaining a live network connection to the transmitting service, 
substantially at the time of transmission, except to the extent that 
the sound recording remains accessible for future listening from a 
streaming cache reproduction;
    (2) Using technology that is designed such that the sound recording 
does not remain accessible for future listening, except to the extent 
that the sound recording remains accessible for future listening from a 
streaming cache reproduction; and

[[Page 57036]]

    (3) That is also subject to licensing as a public performance of 
the musical work.
    Streaming cache reproduction means a reproduction of a sound 
recording of a musical work made on a computer or other receiving 
device by a service solely for the purpose of permitting an end user 
who has previously received a stream of such sound recording to play 
such sound recording again from local storage on such computer or other 
device rather than by means of a transmission; provided that the user 
is only able to do so while maintaining a live network connection to 
the service, and such reproduction is encrypted or otherwise protected 
consistent with prevailing industry standards to prevent it from being 
played in any other manner or on any device other than the computer or 
other device on which it was originally made.
    Subscription service means a digital music service for which end 
users are required to pay a fee to access the service for defined 
subscription periods of 3 years or less (in contrast to, for example, a 
service where the basic charge to users is a payment per download or 
per play), whether such payment is made for access to the service on a 
standalone basis or as part of a bundle with one or more other products 
or services, and including any use of such a service on a trial basis 
without charge as described in Sec.  385.14(b).


Sec.  385.12  Calculation of royalty payments in general.

    (a) Applicable royalty. Licensees that make or authorize licensed 
activity pursuant to 17 U.S.C. 115 shall pay royalties therefor that 
are calculated as provided in this section, subject to the minimum 
royalties and subscriber-based royalty floors for specific types of 
services provided in Sec.  385.13, except as provided for certain 
promotional uses in Sec.  385.14.
    (b) Rate calculation methodology. Royalty payments for licensed 
activity shall be calculated as provided in paragraph (b) of this 
section. If a service includes different offerings, royalties must be 
separately calculated with respect to each such offering. Uses subject 
to the promotional royalty rate shall be excluded from the calculation 
of royalties due, as further described in this section and the 
following Sec.  385.13.
    (1) Step 1: Calculate the All-In Royalty for the Service. For each 
accounting period, the all-in royalty for each offering of the service 
is the greater of
    (i) The applicable percentage of service revenue as set forth in 
paragraph (c) of this section (excluding any service revenue derived 
solely from licensed activity uses subject to the promotional royalty 
rate), and
    (ii) The minimum specified in Sec.  385.13 of the offering 
involved.
    (2) Step 2: Subtract Applicable Performance Royalties. From the 
amount determined in step 1 in paragraph (b)(1) of this section, for 
each offering of the service, subtract the total amount of royalties 
for public performance of musical works that has been or will be 
expensed by the service pursuant to public performance licenses in 
connection with uses of musical works through such offering during the 
accounting period that constitute licensed activity (other than 
licensed activity subject to the promotional royalty rate). While this 
amount may be the total of the service's payments for that offering for 
the accounting period under its agreements with performing rights 
societies as defined in 17 U.S.C. 101, it will be less than the total 
of such public performance payments if the service is also engaging in 
public performance of musical works that does not constitute licensed 
activity. In the latter case, the amount to be subtracted for public 
performance payments shall be the amount of such payments allocable to 
licensed activity uses (other than promotional royalty rate uses) 
through the relevant offering, as determined in relation to all uses of 
musical works for which the public performance payments are made for 
the accounting period. Such allocation shall be made on the basis of 
plays of musical works or, where per-play information is unavailable 
due to bona fide technical limitations as described in step 4 in 
paragraph (b)(4) of this section, using the same alternative 
methodology as provided in step 4.
    (3) Step 3: Determine the Payable Royalty Pool. This is the amount 
payable for the reproduction and distribution of all musical works used 
by the service by virtue of its licensed activity for a particular 
offering during the accounting period. This amount is the greater of
    (i) The result determined in step 2 in paragraph (b)(2) of this 
section, and
    (ii) The subscriber-based royalty floor resulting from the 
calculations described in Sec.  385.13.
    (4) Step 4: Calculate the Per-Work Royalty Allocation for Each 
Relevant Work. This is the amount payable for the reproduction and 
distribution of each musical work used by the service by virtue of its 
licensed activity through a particular offering during the accounting 
period. To determine this amount, the result determined in step 3 in 
paragraph (b)(3) of this section must be allocated to each musical work 
used through the offering. The allocation shall be accomplished by 
dividing the payable royalty pool determined in step 3 for such 
offering by the total number of plays of all musical works through such 
offering during the accounting period (other than promotional royalty 
rate plays) to yield a per-play allocation, and multiplying that result 
by the number of plays of each musical work (other than promotional 
royalty rate plays) through the offering during the accounting period. 
For purposes of determining the per-work royalty allocation in all 
calculations under this step 4 only (i.e., after the payable royalty 
pool has been determined), for sound recordings of musical works with a 
playing time of over 5 minutes, each play on or after October 1, 2010 
shall be counted as provided in paragraph (d) of this section. 
Notwithstanding the foregoing, if the service is not capable of 
tracking play information due to bona fide limitations of the available 
technology for services of that nature or of devices useable with the 
service, the per-work royalty allocation may instead be accomplished in 
a manner consistent with the methodology used by the service for making 
royalty payment allocations for the use of individual sound recordings.
    (c) Percentage of service revenue. The percentage of service 
revenue applicable under paragraph (b) of this section is 10.5%, except 
that such percentage shall be discounted by 2% (i.e., to 8.5%) in the 
case of licensed activity occurring on or before December 31, 2007.
    (d) Overtime adjustment. For licensed activity on or after October 
1, 2010, for purposes of the calculations in step 4 in paragraph (b)(4) 
of this section only, for sound recordings of musical works with a 
playing time of over 5 minutes, adjust the number of plays as follows:
    (1) 5:01 to 6:00 minutes--Each play = 1.2 plays
    (2) 6:01 to 7:00 minutes--Each play = 1.4 plays
    (3) 7:01 to 8:00 minutes--Each play = 1.6 plays
    (4) 8:01 to 9:00 minutes--Each play = 1.8 plays
    (5) 9:01 to 10:00 minutes--Each play = 2.0 plays
    (6) For playing times of greater than 10 minutes, continue to add 
.2 for each additional minute or fraction thereof.
    (e) Accounting. The calculations required by paragraph (b) of this 
section shall be made in good faith and on the basis of the best 
knowledge, information and belief of the licensee at the time payment 
is due, and subject to the additional accounting and certification

[[Page 57037]]

requirements of 17 U.S.C. 115(c)(5) and Sec.  201.19 of this title. 
Without limitation, a licensee's statements of account shall set forth 
each step of its calculations with sufficient information to allow the 
copyright owner to assess the accuracy and manner in which the licensee 
determined the payable royalty pool and per-play allocations (including 
information sufficient to demonstrate whether and how a minimum royalty 
or subscriber-based royalty floor pursuant to Sec.  385.13 does or does 
not apply) and, for each offering reported, also indicate the type of 
licensed activity involved and the number of plays of each musical work 
(including an indication of any overtime adjustment applied) that is 
the basis of the per-work royalty allocation being paid.


Sec.  385.13  Minimum royalty rates and subscriber-based royalty floors 
for specific types of services.

    (a) In general. The following minimum royalty rates and subscriber-
based royalty floors shall apply to the following types of licensed 
activity:
    (1) Standalone non-portable subscription--streaming only. Except as 
provided in paragraph (a)(4) of this section, in the case of a 
subscription service through which an end user can listen to sound 
recordings only in the form of interactive streams and only from a non-
portable device to which such streams are originally transmitted while 
the device has a live network connection, the minimum for use in step 1 
of Sec.  385.12(b)(1) is the lesser of subminimum II as described in 
paragraph (c) of this section for the accounting period and the 
aggregate amount of 50 cents per subscriber per month. The subscriber-
based royalty floor for use in step 3 of Sec.  385.12(b)(1) is the 
aggregate amount of 15 cents per subscriber per month.
    (2) Standalone non-portable subscription--mixed. Except as provided 
in paragraph (a)(4) of this section, in the case of a subscription 
service through which an end user can listen to sound recordings either 
in the form of interactive streams or limited downloads but only from a 
non-portable device to which such streams or downloads are originally 
transmitted, the minimum for use in step 1 of Sec.  385.12(b)(3) is the 
lesser of the subminimum I as described in paragraph (b) of this 
section for the accounting period and the aggregate amount of 50 cents 
per subscriber per month. The subscriber-based royalty floor for use in 
step 3 of Sec.  385.12(b)(3) is the aggregate amount of 30 cents per 
subscriber per month.
    (3) Standalone portable subscription service. Except as provided in 
paragraph (a)(4) of this section, in the case of a subscription service 
through which an end user can listen to sound recordings in the form of 
interactive streams or limited downloads from a portable device, the 
minimum for use in step 1 of Sec.  385.12(b)(1) is the lesser of 
subminimum I as described in paragraph (b) of this section for the 
accounting period and the aggregate amount of 80 cents per subscriber 
per month. The subscriber-based royalty floor for use in step 3 of 
Sec.  385.12(b)(3) is the aggregate amount of 50 cents per subscriber 
per month.
    (4) Bundled subscription services. In the case of a subscription 
service made available to end users with one or more other products or 
services as part of a single transaction without pricing for the 
subscription service separate from the product(s) or service(s) with 
which it is made available (e.g., a case in which a user can buy a 
portable device and one-year access to a subscription service for a 
single price), the minimum for use in step 1 of Sec.  385.12(b)(1) is 
subminimum I as described in paragraph (b) of this section for the 
accounting period. The subscriber-based royalty floor for use in step 3 
of Sec.  385.12(b)(3) is the aggregate amount of 25 cents per month for 
each end user who has made at least one play of a licensed work during 
such month (each such end user to be considered an ``active 
subscriber'').
    (5) Free nonsubscription/ad-supported services. In the case of a 
service offering licensed activity free of any charge to the end user, 
the minimum for use in step 1 of Sec.  385.12(b)(1) is subminimum II 
described in paragraph (c) of this section for the accounting period. 
There is no subscriber-based royalty floor for use in step 3 of Sec.  
385.12(b)(3).
    (b) Computation of subminimum I. For purposes of paragraphs (a)(2), 
(3) and (4) of this section, and with reference to paragraph (5) of the 
definition of ``service revenue'' in Sec.  385.11 if applicable, 
subminimum I for an accounting period means the aggregate of the 
following with respect to all sound recordings of musical works used in 
the relevant offering of the service during the accounting period--
    (1) In cases in which a record company is the licensee under 17 
U.S.C. 115 and a third-party service has obtained from the record 
company the rights to make interactive streams or limited downloads of 
a sound recording together with the right to reproduce and distribute 
the musical work embodied therein, 17.36% of the total amount expensed 
by the service in accordance with U.S. Generally Accepted Accounting 
Principles, which for the avoidance of doubt shall include the value of 
any barter or other nonmonetary consideration provided by the service, 
for such rights for the accounting period, except that for licensed 
activity occurring on or before December 31, 2007, subminimum I for an 
accounting period shall be 14.53% of the amount expensed by the service 
for such rights for the accounting period.
    (2) In cases in which the relevant service is the licensee under 17 
U.S.C. 115 and the relevant service has obtained from a third-party 
record company the rights to make interactive streams or limited 
downloads of a sound recording without the right to reproduce and 
distribute the musical work embodied therein, 21% of the total amount 
expensed by the service in accordance with U.S. Generally Accepted 
Accounting Principles, which for the avoidance of doubt shall include 
the value of any barter or other nonmonetary consideration provided by 
the service, for such sound recording rights for the accounting period, 
except that for licensed activity occurring on or before December 31, 
2007, subminimum I for an accounting period shall be 17% of the amount 
expensed by the service for such sound recording rights for the 
accounting period.
    (c) Computation of subminimum II. For purposes of paragraphs (a)(1) 
and (5) of this section, subminimum II for an accounting period means 
the aggregate of the following with respect to all sound recordings of 
musical works used by the relevant service during the accounting 
period--
    (1) In cases in which a record company is the licensee under 17 
U.S.C. 115 and a third-party service has obtained from the record 
company the rights to make interactive streams and limited downloads of 
a sound recording together with the right to reproduce and distribute 
the musical work embodied therein, 18% of the total amount expensed by 
the service in accordance with U.S. Generally Accepted Accounting 
Principles, which for the avoidance of doubt shall include the value of 
any barter or other nonmonetary consideration provided by the service, 
for such rights for the accounting period, except that for licensed 
activity occurring on or before December 31, 2007, subminimum II for an 
accounting period shall be 14.53% of the amount expensed by the service 
for such rights for the accounting period.
    (2) In cases in which the relevant service is the licensee under 17 
U.S.C. 115 and the relevant service has

[[Page 57038]]

obtained from a third-party record company the rights to make 
interactive streams or limited downloads of a sound recording without 
the right to reproduce and distribute the musical work embodied 
therein, 22% of the total amount expensed by the service in accordance 
with U.S. Generally Accepted Accounting Principles, which for the 
avoidance of doubt shall include the value of any barter or other 
nonmonetary consideration provided by the service, for such sound 
recording rights for the accounting period, except that for licensed 
activity occurring on or before December 31, 2007, subminimum II for an 
accounting period shall be 17% of the amount expensed by the service 
for such sound recording rights for the accounting period.
    (d) Computation of subscriber-based royalty rates. For purposes of 
paragraph (a) of this section, to determine the minimum or subscriber-
based royalty floor, as applicable to any particular offering, the 
service shall for the relevant offering calculate its total number of 
subscriber-months for the accounting period, taking into account all 
end users who were subscribers for complete calendar months, prorating 
in the case of end users who were subscribers for only part of a 
calendar month, and deducting on a prorated basis for end users covered 
by a free trial period subject to the promotional royalty rate as 
described in Sec.  385.14(b)(2), except that in the case of a bundled 
subscription service, subscriber-months shall instead be determined 
with respect to active subscribers as defined in paragraph (a)(4) of 
this section. The product of the total number of subscriber-months for 
the accounting period and the specified number of cents per subscriber 
(or active subscriber, as the case may be) shall be used as the 
subscriber-based component of the minimum or subscriber-based royalty 
floor, as applicable, for the accounting period.


Sec.  385.14  Promotional royalty rate.

    (a) General provisions. (1) This section establishes a royalty rate 
of zero in the case of certain promotional interactive streaming 
activities, and of certain promotional limited downloads offered in the 
context of a free trial period for a digital music subscription service 
under a license pursuant to 17 U.S.C. 115. Subject to the requirements 
of 17 U.S.C. 115 and the additional provisions of paragraphs (b) 
through (e) of this section, the promotional royalty rate shall apply 
to a musical work when a record company transmits or authorizes the 
transmission of interactive streams or limited downloads of a sound 
recording that embodies such musical work, only if--
    (i) The primary purpose of the record company in making or 
authorizing the interactive streams or limited downloads is to promote 
the sale or other paid use of sound recordings by the relevant artists, 
including such sound recording, through established retail channels or 
the paid use of one or more established retail music services through 
which the sound recording is available, and not to promote any other 
good or service;
    (ii) Either--
    (A) The sound recording (or a different version of the sound 
recording embodying the same musical work) is being lawfully 
distributed and offered to consumers through the established retail 
channels or services described in paragraph (a)(1)(i) of this section; 
or
    (B) In the case of a sound recording of a musical work being 
prepared for commercial release but not yet released, the record 
company has a good faith intention of lawfully distributing and 
offering to consumers the sound recording (or a different version of 
the sound recording embodying the same musical work) through the 
established retail channels or services described in paragraph 
(a)(1)(i) of this section within 90 days after the commencement of the 
first promotional use authorized under this section (and in fact does 
so, unless it can demonstrate that notwithstanding its bona fide 
intention, it unexpectedly did not meet the scheduled release date);
    (iii) In connection with authorizing the promotional interactive 
streams or limited downloads, the record company has obtained from the 
service it authorizes a written representation that--
    (A) In the case of a promotional use commencing on or after October 
1, 2010, except interactive streaming subject to paragraph (d) of this 
section, the service agrees to maintain for a period of no less than 5 
years from the conclusion of the promotional activity complete and 
accurate records of the relevant authorization and dates on which the 
promotion was conducted, and identifying each sound recording of a 
musical work made available through the promotion, the licensed 
activity involved, and the number of plays of such recording;
    (B) The service is in all material respects operating with 
appropriate license authority with respect to the musical works it is 
using for promotional and other purposes; and
    (C) The representation is signed by a person authorized to make the 
representation on behalf of the service;
    (iv) Upon receipt by the record company of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular service is in a material manner 
operating without appropriate license authority from such copyright 
owner, the record company shall within 5 business days withdraw by 
written notice its authorization of such uses of such copyright owner's 
musical works under the promotional royalty rate by that service;
    (v) The interactive streams or limited downloads are offered free 
of any charge to the end user and, except in the case of interactive 
streaming subject to paragraph (d) of this section or in the case of a 
free trial period for a digital music subscription service, no more 
than 5 sound recordings at a time are streamed in response to any 
individual request of an end user;
    (vi) The interactive streams and limited downloads are offered in a 
manner such that the user is at the same time (e.g., on the same web 
page) presented with a purchase opportunity for the relevant sound 
recording or an opportunity to subscribe to a paid service offering the 
sound recording, or a link to such a purchase or subscription 
opportunity, except--
    (A) In the case of interactive streaming of a sound recording being 
prepared for commercial release but not yet released, certain mobile 
applications or other circumstances in which the foregoing is 
impracticable in view of the current state of the relevant technology; 
and
    (B) In the case of a free trial period for a digital music 
subscription service, if end users are periodically offered an 
opportunity to subscribe to the service during such free trial period; 
and
    (vii) The interactive streams and limited downloads are not 
provided in a manner that is likely to cause mistake, to confuse or to 
deceive, reasonable end users as to the endorsement or association of 
the author of the musical work with any product, service or activity 
other than the sale or paid use of sound recordings or paid use of a 
music service through which sound recordings are available. Without 
limiting the foregoing, upon receipt of written notice from the 
copyright owner of a musical work or agent of the copyright owner 
stating in good faith that a particular use of such work under this 
section violates the limitation set forth in this paragraph 
(a)(1)(vii), the record company shall promptly cease such use of that 
work, and within 5 business days withdraw by written notice its 
authorization of such use by

[[Page 57039]]

all relevant third parties it has authorized under this section.
    (2) To rely upon the promotional royalty rate, a record company 
making or authorizing interactive streams or limited downloads shall 
keep complete and accurate contemporaneous written records of such 
uses, including the sound recordings and musical works involved, the 
artists, the release dates of the sound recordings, a brief statement 
of the promotional activities authorized, the identity of the service 
or services where each promotion is authorized (including the internet 
address if applicable), the beginning and end date of each period of 
promotional activity authorized, and the representation required by 
paragraph (a)(1)(iii) of this section; provided that, in the case of 
trial subscription uses, such records shall instead consist of the 
contractual terms that bear upon promotional uses by the particular 
digital music subscription services it authorizes; and further provided 
that, if the record company itself is conducting the promotion, it 
shall also maintain any additional records described in paragraph 
(a)(1)(iii)(A) of this section. The records required by this paragraph 
(a)(2) shall be maintained for no less time than the record company 
maintains records of usage of royalty-bearing uses involving the same 
type of licensed activity in the ordinary course of business, but in no 
event for less than 5 years from the conclusion of the promotional 
activity to which they pertain. If the copyright owner of a musical 
work or its agent requests a copy of the information to be maintained 
under this paragraph (a)(2) with respect to a specific promotion or 
relating to a particular sound recording of a musical work, the record 
company shall provide complete and accurate documentation within 10 
business days, except for any information required under paragraph 
(a)(1)(iii)(A) of this section, which shall be provided within 20 
business days, and provided that if the copyright owner or agent 
requests information concerning a large volume of promotions or sound 
recordings, the record company shall have a reasonable time, in view of 
the amount of information requested, to respond to any request of such 
copyright owner or agent. If the record company does not provide 
required information within the required time, and upon receipt of 
written notice citing such failure does not provide such information 
within a further 10 business days, the uses will be considered not to 
be subject to the promotional royalty rate and the record company (but 
not any third-party service it has authorized) shall be liable for any 
payment due for such uses; provided, however, that all rights and 
remedies of the copyright owner with respect to unauthorized uses shall 
be preserved.
    (3) If the copyright owner of a musical work or its agent requests 
a copy of the information to be maintained under paragraph 
(a)(1)(iii)(A) of this section by a service authorized by a record 
company with respect to a specific promotion, the service shall provide 
complete and accurate documentation within 20 business days, provided 
that if the copyright owner or agent requests information concerning a 
large volume of promotions or sound recordings, the service shall have 
a reasonable time, in view of the amount of information requested, to 
respond to any request of such copyright owner or agent. If the service 
does not provide required information within the required time, and 
upon receipt of written notice citing such failure does not provide 
such information within a further 10 business days, the uses will be 
considered not to be subject to the promotional royalty rate and the 
service (but not the record company) will be liable for any payment due 
for such uses; provided, however, that all rights and remedies of the 
copyright owner with respect to unauthorized uses shall be preserved.
    (4) The promotional royalty rate is exclusively for audio-only 
interactive streaming and limited downloads of musical works subject to 
licensing under 17 U.S.C. 115. The promotional royalty rate does not 
apply to any other use under 17 U.S.C. 115; nor does it apply to public 
performances, audiovisual works, lyrics or other uses outside the scope 
of 17 U.S.C. 115. Without limitation, uses subject to licensing under 
17 U.S.C. 115 that do not qualify for the promotional royalty rate 
(including without limitation interactive streaming or limited 
downloads of a musical work beyond the time limitations applicable to 
the promotional royalty rate) require payment of applicable royalties. 
This section is based on an understanding of industry practices and 
market conditions at the time of its development, among other things. 
The terms of this section shall be subject to de novo review and 
consideration (or elimination altogether) in future proceedings before 
the Copyright Royalty Judges. Nothing in this section shall be 
interpreted or construed in such a manner as to nullify or diminish any 
limitation, requirement or obligation of 17 U.S.C. 115 or other 
protection for musical works afforded by the Copyright Act, 17 U.S.C. 
101 et seq. For the avoidance of doubt, however, except as provided in 
paragraph (a) of this section, statements of account under 17 U.S.C. 
115 need not reflect interactive streams or limited downloads subject 
to the promotional royalty rate.
    (b) Interactive streaming and limited downloads of full-length 
musical works through third-party services. In addition to those of 
paragraph (a) of this section, the provisions of this paragraph (b) 
apply to interactive streaming, and limited downloads (in the context 
of a free trial period for a digital music subscription service), 
authorized by record companies under the promotional royalty rate 
through third-party services (including Web sites) that is not subject 
to paragraphs (c) or (d) of this section. Such interactive streams and 
limited downloads may be made or authorized by a record company under 
the promotional royalty rate only if--
    (1) No cash, other monetary payment, barter or other consideration 
for making or authorizing the relevant interactive streams or limited 
downloads is received by the record company, its parent company, any 
entity owned in whole or in part by or under common ownership with the 
record company, or any other person or entity acting on behalf of or in 
lieu of the record company, except for in-kind promotional 
consideration used to promote the sale or paid use of sound recordings 
or the paid use of music services through which sound recordings are 
available;
    (2) In the case of interactive streaming and limited downloads 
offered in the context of a free trial period for a digital music 
subscription service, the free trial period does not exceed 30 
consecutive days per subscriber per two-year period; and
    (3) In contexts other than a free trial period for a digital music 
subscription service, interactive streaming subject to paragraph (b) of 
this section of a particular sound recording is authorized by the 
record company on no more than 60 days total for all services (i.e., 
interactive streaming under paragraph (b) of this section of a 
particular sound recording may be authorized on no more than a total of 
60 days, which need not be consecutive, and on any one such day, 
interactive streams may be offered on one or more services); provided, 
however, that an additional 60 days shall be available each time the 
sound recording is re-released by the record company in a remastered 
form or as a part of a compilation with a different set of sound 
recordings than the original release or any prior compilation including 
such sound recording.

[[Page 57040]]

    (4) In the event that a record company authorizes promotional uses 
in excess of the time limitations of paragraph (b) of this section, the 
record company, and not the third-party service it has authorized, 
shall be liable for any payment due for such uses; provided, however, 
that all rights and remedies of the copyright owner with respect to 
unauthorized uses shall be preserved. In the event that a third-party 
service exceeds the scope of any authorization by a record company, the 
service, and not the record company, shall be liable for any payment 
due for such uses; provided, however, that all rights and remedies of 
the copyright owner with respect to unauthorized uses shall be 
preserved.
    (c) Interactive streaming of full-length musical works through 
record company and artist services. In addition to those of paragraph 
(a) of this section, the provisions of this paragraph (c) apply to 
interactive streaming conducted or authorized by record companies under 
the promotional royalty rate through a service (e.g., a Web site) 
directly owned or operated by the record company, or directly owned or 
operated by a recording artist under the authorization of the record 
company, and that is not subject to paragraph (d) of this section. For 
the avoidance of doubt and without limitation, an artist page or site 
on a third-party service (e.g., a social networking service) shall not 
be considered a service operated by the record company or artist. Such 
interactive streams may be made or authorized by a record company under 
the promotional royalty rate only if--
    (1) The interactive streaming subject to this paragraph (c) of a 
particular sound recording is offered or authorized by the record 
company on no more than 90 days total for all services (i.e., 
interactive streaming under this paragraph (c) of a particular sound 
recording may be authorized on no more than a total of 90 days, which 
need not be consecutive, and on any such day, interactive streams may 
be offered on one or more services operated by the record company or 
artist, subject to the provisions of paragraph (b)(2) of this section); 
provided, however, that an additional 90 days shall be available each 
time the sound recording is re-released by the record company in a 
remastered form or as part of a compilation with a different set of 
sound recordings than prior compilations that include that sound 
recording;
    (2) In the case of interactive streaming through a service devoted 
to one featured artist, the interactive streams subject to this 
paragraph (c) of this section of a particular sound recording are made 
or authorized by the record company on no more than one official artist 
site per artist and are recordings of that artist; and
    (3) In the case of interactive streaming through a service that is 
not limited to a single featured artist, all interactive streaming on 
such service (whether eligible for the promotional royalty rate or not) 
is limited to sound recordings of a single record company and its 
affiliates and the service would not reasonably be considered to be a 
meaningful substitute for a paid music service.
    (d) Interactive streaming of clips. In addition to those in 
paragraph (a) of this section, the provisions of this paragraph (d) 
apply to interactive streaming conducted or authorized by record 
companies under the promotional royalty rate of segments of sound 
recordings of musical works with a playing time that does not exceed 
the greater of
    (1) 30 seconds, or
    (2) 10% of the playing time of the complete sound recording, but in 
no event in excess of 60 seconds. Such interactive streams may be made 
or authorized by a record company under the promotional royalty rate 
without any of the temporal limitations set forth in paragraphs (b) and 
(c) of this section (but subject to the other conditions of paragraphs 
(b) and (c) of this section, as applicable). For clarity, this 
paragraph (d) is strictly limited to the uses described herein and 
shall not be construed as permitting the creation or use of an excerpt 
of a musical work in violation of 17 U.S.C. 106(2) or 115(a)(2) or any 
other right of a musical work owner.
    (e) Activities prior to the publication date. Notwithstanding 
paragraphs (a) through (d) of this section, in the case of licensed 
activity prior to the publication date, the promotional royalty rate 
shall apply to promotional interactive streams, and to limited 
downloads offered in the context of a free trial period for a digital 
music subscription service, that in either case are authorized by the 
relevant record company, if the condition set forth in paragraph 
(a)(1)(i) of this section is satisfied, subject only to the additional 
condition in paragraph (b)(1) of this section, and provided that a free 
trial period for a digital music subscription service authorized by the 
relevant record company shall be considered to be of 30 days' duration. 
In the event of a dispute concerning the eligibility of licensed 
activity prior to the publication date for the promotional royalty 
rate, a service asserting that its licensed activity is eligible for 
the promotional royalty rate shall bear the burden of proving that its 
licensed activity was authorized by the relevant record company and 
shall certify that the condition in paragraph (b)(1) of this section 
was satisfied.


Sec.  385.15  Timing of payments.

    Payment for any accounting period for which payment otherwise would 
be due more than 180 days after the publication date shall be due as 
otherwise provided under 17 U.S.C. 115 and its implementing 
regulations. Payment for any prior accounting period shall be due 180 
days after the publication date.


Sec.  385.16  Reproduction and distribution rights covered.

    A compulsory license under 17 U.S.C. 115 extends to all 
reproduction and distribution rights that may be necessary for the 
provision of the licensed activity, solely for the purpose of providing 
such licensed activity (and no other purpose).


Sec.  385.17  Effect of rates.

    In any future proceedings under 17 U.S.C. 115(c)(3)(C) and (D), the 
royalty rates payable for a compulsory license shall be established de 
novo.

    Dated: September 25, 2008.
James Scott Sledge,
Chief Copyright Royalty Judge.
 [FR Doc. E8-23184 Filed 9-30-08; 8:45 am]

BILLING CODE 1410-72-P