us copyright office: joint-sports-reply

8/14/2019 US Copyright Office: joint-sports-reply

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REPLY COMM ENT #7

Before theCOPYRIGHT OFFICEC O N GWashington, D.C.

In the Matter ofection 109 R eport to Congressocket No. 2007-1Regarding C able and Satellitetatutory LicensesREPLY COMMENTS OF JOINT SPORTS CLAIMANTSThe O ffice of the Comm issioner of Baseball, National Basketba ll Association, National

Football League, National Hockey Leagu e, Wom en's National Basketball Association and TheNational Collegiate Athletic Association ("Joint Sports Claimants" or "JSC ") submit these replycomm ents in response to the Copyright Office's Notice of Inquiry for the Section 109 Rep ort toCongress, 72 Fed. Reg. 19039 (April 16, 2007) ("NOI") and 72 Fed. Reg. 33776 (June 19, 2007).

In these reply comm ents, JSC demonstrates that the proposals for compulsory licenseamen dments raised by Section 111 and 119 licensees w ould distort the fundamental nature of thelicenses and unfairly reduce even further the minimal below-market royalty payments ma de bythese licensees. JSC also reiterates the concern it has repeatedly expressed abo ut being requiredto participate in a compulsory license regime -- pa rticularly one that does no t provide copyrightowners w ith marketplace compen sation for the retransmission of their copyrighted programming.If the Section 111 and 119 compu lsory licenses rem ain in some form, JSC urges the C opyrightOffice ("Office") to recomm end that Congress: (1) amend the current licenses to provide thepayme nt of marketplace rates to copyright owners -- through voluntary negotiations amongcopyright owners and licensees or, if necessary, a proceeding before the Copyright Royalty


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Judges ("CRJs"); (2) require licensees to share in license adm inistration costs; and (3) grantcopyright owners the right to negotiate (or obtain in a CR J proceeding) terms a nd conditions forthe Section 111 and 119 licenses -- including an audit right -- similar to those they routinelynegotiate in the marketplace and that copyright owners rece ive under other compulsory licenses.The Office also should reject Capitol Broadcasting's proposal to expand the Section 111 licenseto encompass retransm issions of broadcast programm ing over the "open" Internet.

I.HE OFFICE SHOULD NOT RECOMMEND THE PIECEMEAL CHANGES TOINTERTWINED COM PULSORY LICENSE PROVISIONS SOUGHT BY THESECTION 111 AND 119 LICENSEES.If the Office sup ports retention of the existing broadcast com pulsory licenses, it should

reject wholesale rew riting of those licenses in an impossible attempt to ac hieve so-called"parity". Each license reflects comprom ises and decisions among com peting priorities made b yCongre ss and by the affected parties. The relevant business and policy considerations underlyingeach license we re different and reflected the technology and Circumstance s at the time of licenseadoption. It is appropriate to implement cha nges that improve the efficiency of the licenses andthat better ensure com pliance with existing license provisions, and the royalty rates for bothlicenses need to be increase d to reflect the current marke tplace -- not the emb ryonic industriesthat were originally rewarded w ith below-market com pulsory licensing rates. But the Office andCongress should not attempt to change the funda mental nature of the licenses to achieve perfectharmon ization, or further reduce the below-m arket compen sation to copyright owners. Instead,the focus should be on providing copyright owners with the level of compensation and othercontractual rights that they would receive in a free ma rketplace absent com pulsory licensing.

Cable operators and ce rtain satellite carriers ask for piecem eal changes to the com pulsorylicenses. Many of the comp onents of the licenses cannot be fine-tuned or adjusted withoutstarting a new nego tiation over all aspects of the com pulsory licenses, including the intertwined

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aspects of comm unications and copyright law acknowledged by the licensees. See, e.g.,EchoStar Satellite L.L.C. ("EchoStar") Com ments at 15 (interdependence of copyright andcomm unications law is a major stumbling block to license reform); Tr. 18-19 (Burstein) 1(Section 111 royalty calculation is intertwined w ith old and current FCC rules).

The National Cable Television Association ("NCTA"), while acknowledging the"bargain" and "com promise that led to the adoption of the com pulsory license in the first place"and the "delicate balance of interests" in Section 111 (Tr. 17, 20 (Burstein)), seeks an en d topaym ent for so-called "phantom signals" by authorizing proration beyond that w hich is permittedunder Section 111(f) of the Copyright Act. NCT A Com ments at 18-19; Tr. 21 (Burstein); se ealso Tr. 28-29 (Cinnamon ) (ACA objects to "non-use license"). But the current system ofpayme nt embodied in the statute w as explicitly established by Cong ress and is part of the bargainto which the cable industry agreed w hen the license was adopted. That bargain also includesreliance on the since-rescinded Federal Communications Commission ("FCC") market quotarules to which the American Cab le Association ("AC A") objects so strongly. S ee ACACom ments at 5-10; Tr. 24-28 (Cinnamo n). The below-market rates established for carriage of"permitted" signals were established by Congress with the understanding that copyright ownerswould be e ligible to receive higher, marketplace-oriented rates for "non-perm itted" signals.

EchoStar a lso complains about aspects of the S ection 119 license "that are unfair tosatellite," such as be ing limited to importing two distant network stations into a market a nd beingsubject to the unserved household test. Tr. 145-46 (Sahl); EchoStar Comments at 14. In place ofthe license to which it agreed, Echo Star proposes a unified license across all technologies, at

Citations to the hearing transcript of the Section 109 Extension and R eauthorization hearingsheld from July 23-25, 2007 refer first to the transcript page and then to the surnam e of the quotedwitness or speaker.

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least for the retransmission of d igital signals. S ee EchoStar C omm ents at 4 and 8-9; Tr. 114-15(Dodge), Tr. 154-56 (Sahl).

How ever, as several other parties to the licenses have noted, any attempt atharmon ization of the cable and satellite licenses would be problematic. NCT A's representativeexplained:

[H]armonization, while no doubt a w orthy goal, has its ownchallenges. . . . [T]he Section 111 roya lty calculation scheme isintertwined not only with old FCC rules, but also with current FCCrules. The pursuit of "parity" would, at minimum, require re-exam ination of these rules, as well. There is no "simple" route toharmonization, and it is hard to predict how the settled expectations ofconsumers would be affected. Moreover, even a "partialharmonization" approach that sought me rely to achieve a "revenuen e u t r a l " s i m p l i f i c a t i o n o f t h e r a t e c a l c u l a t i o n u n d e r S e c t i o n 1 1 1 c o u l d c a u s e s u b s t a n t i a l i n c r e a s e s i n t h e f e e s c u r r e n t l y p a i d b y s m a l l c a b l esystems. . . . In short .. , the burden is on prop onents of chan ge toshow that it can be accom plished without upsetting the delicatebalance of interests that are inviting [sic] in Section 111.

Tr. 18-20 (Burstein). The w itness for Program Suppliers testified that in the past the satellitecarriers had failed to carry their burden of justifying harmonization attempts:

[I]n a broader c ontext of political reality and established practices, [aconsolidated digital license applying to cable, satellite and a ll videoproviders regardless of technology] probably is not a good idea. TheSection 119 license is very different from the S ection 111 license. . . .[W]hen w e went through the political debate after the CA RP rate-setting of the satellite fees . . . . EchoStar, and D IREC TV for thatmatter, was going a ll around the Hill trying to show that they w erepaying mu ch more than cable operators. I dutifully followed themaround, and I showed that in specific instances, cable operators werepaying a lot m ore than satellite carriers. The fact is they're twototally different structures. In som e situations, cable systems paymore, and in other situations, they pay less than w hat the satellitecarrier is paying.Tr. 356-57 (Attaway ). EchoStar's suggestion that Congre ss should create a unitary license fordigital signals while analog signals remain under the c urrent dual-license system would notsimplify the effort at harm onization. Instead, having different systems for analog and digital

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signals, with different regulatory requirements and stateme nts of account to calculate royaltypayments, would be even m ore complicated.

DIRECTV, Inc. ("DIRECTV"), the other major Section 119 licensee, likewise concludesthat Congress should not attempt to rewrite the com pulsory licenses. S ee DIRECTV Commentsat 12-13; Tr. 109-10, 141 (Nilsson). JSC agrees with that assessment, and recomm ends that anychanges in the com pulsory licenses focus on allowing copyright owners and licensees tonegotiate marketplace rates, terms and conditions for the Section 111 and 119 licenses. Absent anegotiated agreement, the CRJs should conduct a proceeding to adjust the current royalty ratesprovided by Sections 111 and 119 to m arket levels and adopt term s and conditions that arecomparable to those that would exist in a free market absent compulsory licensing.

II. THE OFFICE SHOULD MAKE MARKETPLACE COMPENSATION FORCOPYRIGHT OWNERS A PRIMARY GOAL AND REJECT ANY PROPOSEDCHANGES TO SECTIONS 111 AND 119 THAT W OULD REDUCE ALREADYBELOW -MARKET COMPENSATION TO COPYRIGHT OWNERS.Although characterized as proposals for "parity," "harmonization" or "improvem ent,"

the recommendations of the cable and satellite licensees have one unifying theme -- they seek areduction in royalty payments to copyright owners. But royalty paym ents are w ell belowmarketplace levels already, and the Office should reject any direct or indirect royalty reductionstrategy that could lead to a decline in already inadequate compensation to copyright owners.

A.ection 111 and 119 Royalty Rates Should B e Increased to Provide FairMarket Com pensation for Copyright Owners.1.ection 111 royalty rates do not provide fair m arket compensation tocopyright owners.Contrary to NCT A's assertion, copyright owners have not been "well-compensated"through the Section 111 license rates. S ee NCTA Comm ents at 3. As JSC and other copyrightowners have demonstrated repeatedly, the royalty rates paid by cable operators are not

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marketplace rates by any measure. E.g., JSC Comm ents at 2-9; see also Tr. 329 (Ostertag); Tr.303-05 (Attaway); Comm ents of ASCAP, BM I and SESAC at 2-3, 16-18.

NC TA refers to the statutory rate increases negotiated between cable operators andcopyright owners a s evidence of gen erous royalty rates and "significant increases" in those rates.Tr. 14-15 (Burstein). But the statutory standard for adjusting Section 111 rates (17 U.S.C. 801(b)(2)(A)) does not even attem pt to provide fair market com pensation to copyright owners.Instead, it permits only periodic inflation adjustments -- a djustments that are g eared to thebelow-m arket rates adopted in the Copyright Act of 1976. NCTA representatives, of course,claimed that the cable industry pays rates that are above fair market value. If NC TA trulybelieved that to be the case, it mo st assuredly would not ha ve declined the O ffice's invitation toaccept a fair market rate-setting standard. S ee Tr. 101-03 (Brenner).

NCTA and AC A both choose to focus on the 3.75% marketplace-based rate. But thatrate applies to only a small fraction of distant signals carried by only a very few of the largest(Form 3) cable systems. S ee Tr. 290-92 (Stew art) (limited applicability of 3.75% ra te that

reflects some marketplace factors). NCTA an d ACA ignore the fact that cable operators payrates that are substantially below the 3.75% rate for the vast majority of signals that they carrypursuant to the Section 111 compulsory license.

NC TA com pares the average 3.75% royalty rate to a range of basic cable network licensefees and says that the 3.75% royalty rate is higher than those license fees. S ee NCTA Comm entsat 12-13. That com parison, however, is simply invalid because it fails to include the basic cablenetworks with program ming m ost closely analogous to that on distant signals. Certainly NCTAnever provides any explanation as to why the program ming on the cable netw orks that it choseshould be considered rep resentative. In contrast, the twelve ne tworks used in the JSC analysis(see JSC Com ments at 5-7) were included precisely because the last CA RP to consider cablenetworks as a m arketplace proxy found that these "popular" networks we re distributed to about

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90% of ca ble households and were the "closest alternative to receiving retransmitted broadcaststations." S ee R eport of the Panel in Rate A djustme nt for the S atellite Carrier Comp ulsoryLicense, Docket No. 96-3 CA RP-SRA at 18-19 (August 28, 1997); aff'd, Final Rule and Order,In re R ate A djustme nt for the Satellite Carrier Com pulsory L icense, 62 Fed. Reg. 55742, 55748(October 28, 1997). Not surprisingly, every one of the netwo rks selected by NCT A has a licensefee lower than the lowest-priced cable license fee for any network used in the CAR P marketplacebenchmark analysis.

To provide one glaring example of the misleading nature of NCT A's analysis, NC TAfailed to include ESPN (which contains JSC program ming) in its collection of cable networks.Indeed, none of the cable networks chosen by NCTA contains any JSC programming,notwithstanding that JSC re ceived over one-third of the cable roya lties in the last litigated cableroyalty distribution proceeding. The impact of NC TA's improperly excluding cable networkswith JSC program ming is substantial. For exam ple, the average 2007 m onthly license fee for theset of cable networks included in the CAR P benchm ark (which includes ESPN w ith JSC

program ming) is $0.58. If ESPN w ere erroneously excluded from the set of analogous networks,the average 2007 m onthly license fee for that incomplete set wo uld be $0.34 -- or about 40percent lower than it should be. S ee JSC Comm ents at 5-6.

2.ection 119 royalty rates do not provide fair m arket compensation tocopyright owners.Satellite carriers have put forward a va riety of reasons why they should pay lower royaltyrates or why they are allegedly already paying m arketplace rates. But as JSC and the otherCopyright Ow ners have dem onstrated, the royalty rates that satellite carriers pay are well belowmarketplace rates. S ee JSC Com ments at 2-9; Program Supplier Comments at 24. W hile anycompa rison with cable rates is difficult to make b ecause the system s are so different, see NCTA

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Com ments at 14-19; Tr. 356-57 (Attawa y), by any measure satellite rates are well belowmarketplace rates.

Indeed, the Office already found in its SHVERA Report that the Section 119 ratesprovide below-marketplace compensation. The Office found that "copyright owners are harmedby the current operation of the sec tion 119 license, and [ ] the current section 119 royalty rates donot reflect the fair market value of broadc ast programm ing contained on network stations andsuperstations." S ee Satellite Hom e Viewe r Extension and Reauthorization Act 110 Report(February 2006) ("SHV ERA Report") at 44-45. The O ffice should reiterate that conclusion in itsSection 109 Report.

Representatives for EchoStar and DIR ECT V argue that because the latest satellite royaltyrates were negotiated with copy right owners, the rates could not be "discount" rates. Tr. 171-73(Sahl); see also Tr. 173 (Nilsson). But the Office correc tly rejected this argument in itsSHVERA Report. As the Office explained, "[i]t is , true that section 119 prov ides, that in theevent the parties negotiating the satellite royalty fee . . . cannot reach agreem ent," the fees

determined in a proceeding m ust be those "that most clearly represent the fair market value ofsecondary transm issions," 17 U .S.C. 119(c)(1)(F)(ii), but

the political context of the most re cent negotiated royaltyadjustment suggests that it did not result in true market rates. . . .[T]he provision in section 119 as amen ded by SHV ERA foradjusting the satellite royalty fee for d igital transmissions providedthat in the event the royalty fees were n ot arrived at by means ofnegotiation, then the royalty fees determ ined in the ensuing rateadjustment proceeding based upon fair market value would be`reduced by 22.5 perce nt,' suggesting a process sim ilar to thatwhich occurred when Congress reduced the fair market valueroyalty fees arrived at by the CAR P and the Librarian in the 1997proceeding.SHVERA Report at 44-45.

EchoStar a lso has suggested, w ithout providing verifiable data, that it pays less forretransmission consent rights than it pays under Section 119. S ee Tr. 172-73 (Sahl). Assuming

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this is correct, which JSC ha s no w ay to verify, the com parison is flawed. Retransmissionconsent is intended by the communications laws to provide a means for broadcasters to receivecompen sation only for carriage of their signals -- not for the copyrighted programm ing on thosesignals. The retransmission consent agreements are part of a com plex regulatory regime and c anhardly be called the results of an unfettered free market. S ee NCTA C omments at 11("Retransmission consent also is a poor surrogate for establishing marketplac e rates, becausethere is no free m arket at work for local broadcast retransmission."). DIRECTV's representativealso suggested that the costs of providing satellite distant signal service, including determiningwhether subscribers are unserve d, must be factored into the cost of the license to satellitecarriers. S ee Tr. 173 (Nilsson). Once again, these costs are unquantified, and any balancing ofcosts would have to take into account the compulsory license administrative costs borne solelyby copyright owners (see discussion infra at page 22).

In contrast to these undocumented claims, JSC once again provided Kagan networklicense fee data similar to that used by the 1997 sate llite rate-setting CARP to dete rmine a "fairmarket" royalty fee before that fee was discounted heavily by Congress. S ee JSC Comments at5-7; see also Tr. 349 (Padden) (Kagan data historically has been widely used as an industrybenchmark); NCT A C omme nts at 12-13 (chart and text relying on Kagan data). That analysisdemonstrates tha t satellite carriers (like cable operators) pay com pulsory licensing royalties thatare far below marketplace levels.

B.able Operators Should Not Be Perm itted to Disrupt the CompulsoryLicensing Scheme Th rough Piecemeal Changes That Low er Compensation toCopyright Owners.NCTA and ACA suggest eliminating discrete elements of the Section 111 compulsory

license scheme. However, these eleme nts are part of an overall licensing arrangement thatalready provides cable operators with the ability to retransmit valuable copyrighted programming

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without paying fair mark et value. Eliminating these elemen ts would unfairly reduce even furtherthe below-marke t Section 111 royalty payments.

1.he Office should recommend retention of FCC "m arket quota" rulesto determine signals subject to 3.75% fees.

AC A suggests the elimination of reliance on prior FCC "market quota" rules in favor of ageneral rule that if carriage is permitted under FC C regulations it should be permitted underSection 111. S ee ACA Comm ents at 5-10; Tr. 28 (Cinnamon). However, ACA conceded that itsillustrations of the negative effects o f the m arket quota rules w ere hypothetical, and that it couldnot provide any examples of actual cable systems to illustrate the point. Tr. 95 (Cinnamon). Thechange proposed by A CA would allow cable operators to carry all distant signals at the lowerbelow-ma rket levels even if they exceed ed the limits on distant signal carriage that existed at thetime of the comprom ise that led to Section 111.

It would be particularly egregious to eliminate the concept of "nonpe rmitted" signalsfrom the license because the 3.75% rate fees are the only aspect of the Section 111 license thatyields anything approaching m arketplace rates for copyright owners. W hen it established the3.75% rate, the Copyright Royalty Tribunal ("CRT") found that Cong ress intended the"nonpermitted" signal rate to be a marketplace rate. S ee Final Rule, In re A djustm ent of theRoy alty R ate for Cable S ystem s, Docke t No. CRT 81-2, 47 Fed. Reg. 52146, 52153-54 (Nov. 19,1982) ("We do not find in the compulsory license, as it exists today, any public policyjustification for establishing royalty rates below reasonable m arketplace expe ctations of thecopyright owners."). The D.C. Circuit affirmed that determination. S ee N at'l Cable T elevisionA ss'n v. C opyright Roy alty T ribunal, 724 F.2d 17 6, 183 (D.C. C ir. 1983). Treating all signalscarried in accordance w ith FCC regulations as "permitted" would ignore congressional intent andeffectively eliminate the only marketplace c ompensa tion available to copyright owners underSection 111.

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2.he law should not be am ended to allow additional proration ofroyalty payments based on subscriber groups.NCT A and A CA criticize what they refer to as payments for "phantom signals." Theyclaim that, if any subscriber does not receive a particular distant signal, the fees paid by thatsubscriber should be excluded from the "gross rece ipts" calculation mandated by Se ction 111 --so that cable operators who merge their systems can reduce the royalty fees that they areotherwise required to pay under Sec tion 111. S ee NCTA Comments at 18-19; ACA Com mentsat 10-13.

As JSC has previously explained, the cable industry's position on so-called "phantomsignals" is squarely contrary to the law. C ongress specified in Section 111 the limited instanceswhere cable operators may engage in "proration." Nothing in Section 111 or its legislativehistory permits the type of proration sought by NCTA and ACA for such "phantom signals."See generally Comments of the Joint Sports Claimants, In re Com pulsory L icense for andMerger of Cable Systems, Docket No. R M 89-2 (D ec. 1, 1989) (Exhibit 1). The Office has

agreed with JSC and other copyright owners. See id. Nevertheless, some cable operatorscontinue to disregard the O ffice's pronouncements on this issue, erroneously believing (perhapsbecause of the NCT A's pending petition to reconsider) that this is still an open issue. The Officeshould reject that petition and again make c lear that cable operators m ay not prorate grossreceipts based upon their "phantom signal" theory.

Likewise, the Office should reject the cable industry's calls to change the law o n thisissue. Requiring royalties to be based upon all distant signals offered by a single cable systemwithout proration to account for those subscribers that do not receive ce rtain signals is part of thecompromise underlying the Section 111 royalty calculations. Absent that element, the royaltyrates themselves would no doubt have been higher. Cable operators should not be allowed topick and choose am ong the different elemen ts of the royalty calculation, retaining those that lead

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to lower royalties while ignoring those that have the contrary effect. These are the types ofissues that are best left to negotiations or a C RJ proceeding w ith the objective of establishingmarket rates.

3.he m inimal payment for the privilege of having the Section 111license available should be retained.NCTA and ACA also propose to eliminate the "minimum fee" cable operators pay if theycarry no distant signals. S ee NCTA Comm ents at 15-16; ACA C omments at 13-14. Once again,eliminating this provision in the Section 111 license is contrary to the ba lance that w as struck inSection 111, and would unfairly reduce compe nsation for copyright owners beyond the alreadybelow-market levels.

NCTA and ACA inaccurately call the payment a minimum fee for local signals, id., an dsay that cable should not have to pay the fee because sa tellite does not pay a minimum fee forlocal signals. But this characterization is incorrect. The statutory text at 17 U.S.C. 111(d)(1)(B)(i) establishes the minimum fee "for the privilege of further transmitting anynonnetwork program ming of a primary transmitter in whole or in part beyond the local servicearea of such p rimary transm itter." Thus the plain language of the statute indicates that theminimum fee is paid for the availability of the distant signal license, not for retransmission oflocal signals. The legislative history is equally clear.

Every cable system pays .675 of 1 percent of its gross receiptsfor the privilege of retransmitting distant non-networkprogramm ing . . . . The purpose of this initial rate . . . is toestablish a basic payment, w hether or not a particular cablesystem elects to transmit non-network p rogramm ing. It is not apaymen t for the retransm ission of purely "local" signals, as isevident from the provision that it applies to and is deductiblefrom the fee payable for any "distant signal equivalents."

H.R. Rep. 94-1476 at 104 (Sept. 3, 1976) (internal quotations om itted).

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The minimum payme nt under Section 111 thus has its direct counterpart in establishedcable industry practice. Cable operators routinely charge their subscribers for the privilege ofbeing able to view particular channels of programming included in the packages that cableoperators choose to offer. Cable subscribers pay for these chann els regardless of whether they infact view them . They pay in part for the privilege of being able to view those channels at anytime -- just as Section 111 requires cable opera tors to pay for the privilege of retransmittingdistant signals at any time w ithout having to negotiate with, or even notify, affected cableoperators.

4.he Office should not attem pt to reclassify Fox stations from"independent" stations to "network" stations.

NCTA and AGA propose to treat Fox stations as network stations under Section 1 11b yreplacing the Section 111 definition of "network stations" with the current FCC definition. S eeNCTA Comm ents at 17; Tr. 22 (Burstein); ACA Comm ents at 14-15. This change would alsodisrupt the overall license scheme to the econom ic detriment of copyright owners, who receiveless compensation for the distant retransmission of network stations as comp ared to independent(nonnetwork ) stations. For royalty calculation purposes, network stations are valued at one-quarter of a distant-signal equivalent ("DSE") while independent stations are valued a s a w holeDSE.

This issue has been briefed on multiple occasions over the years, including the 1990-92Cable Distribution Proceeding, Docket No. 94-3 CARP CD-90-92, where it was determined that

programm ing on Fox stations would not be treated as network programm ing, see 61 Fed. Reg.55653, 55660 (October 28, 1996), and in a pending rulemaking proceeding, In re CableCompulsory License: Definition of a Network Station, Docket No. RM-000-, 65 Fed. Reg.6946 (Feb. 11, 2000). NC TA has also subm itted an additional rulemaking pe tition on the issue.

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Once again, JSC agrees with NCTA and ACA that the Office should make a definitivestatement on the treatm ent of Fox stations. Clarification would preve nt cable operators fromusing the pending petitions for rulemaking as an excuse to treat the issue as unresolved and toclassify Fox stations as network stations on their SOA s. But the only clarification that the Officecan properly issue is one that upholds the interpretation of "network" under S ection 111 andreiterates that it does not apply to Fox. The O ffice should not ma ke a unilateral decision tochange a statutory definition at the regulatory level, as NC TA and A CA urge it to do. S ee NCTAComm ents at 17; Tr. 22 (Burstein); AC A C omments at 14-15.

Congress is perfectly capa ble of amen ding the definition of "network stations" to addressthe status of Fox stations, as it has chosen to do w ith respect to Section 119, but not Section 111.The definitions of "network stations" in Sections 111 and 119 w ere identical until 1994, whenCongre ss broadened the Section 119 de finition of "netwo rk station" to include Fox stations. S eeCom ments of the Joint Sports Claimants, In re Cable Compulsory License: Definition of aNe twork S tation, Dock et No. RM 2000-2 (Ap ril 11, 2000) (Exhibit 2). As explained in thoseJSC Com ments, Fox stations do not broadcast the amount of network programm ing broadcast byAB C, CB S and NB C stations, which is necessary to qualify as a network station under Section111 as currently drafted.

III. THE OFFICE SHOULD RECOMMEND THE ESTABLISHMENT OF LICENSETERM S AND CONDITIONS FOR THE SECTION 111 AND 119 COMPU LSORYLICENSES.If the compulsory licenses are m aintained, JSC proposes the addition of a provision for

setting "terms and conditions" to the Section 111 and 119 co mpulsory licenses. The ability toestablish terms and conditions such as audit rights that go beyond the establishmen t of royaltyrates would at least m ove in the right direction of making the com pulsory licenses more typical

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of the licenses negotiated by copyright owners in the free marketplace, and would also beconsistent with other copyright compulsory licenses. JSC Com ments at 9-10.

A.here Is a W ell-Documented Need for an Audit Right.One of the terms and c onditions that is most sorely lacking in Sections 111 and 1 19 is an

audit right. Other copyright ow ners agreed with JSC that the Office should recomm end an auditright to Congress. S ee Comments of ASC AP, BMI and S ESAC at 21 (audit right should becombined w ith "more robust and frequent reporting"); Tr. 351 (Attawa y) (Program Sup pliersagree audit right is needed under com pulsory licenses). Copyright ow ner representatives alsotestified that audit rights are a n integral part of licensing arrangem ents reached in themarketplace. See Tr. 330-31 (Ostertag). As noted by JSC, the Office has already recomm endeda right of audit for satellite license cop yright owners in its SHVE RA Report to Con gressconcerning the Section 119 license. JSC Co mm ents at 10, quoting SHVERA Report at vi-vii;see also id. at 45-46. The SHVER A Rep ort endorsed an audit procedure similar to that currentlyused under the Section 114 statutory licenses as "appropriate". SHVERA Report at 46. TheOffice should strongly reiterate that recomm endation and apply it to the cable license as w ell.The audit right is especially important for the cable license given the complex D SE-basedformula used to comp ute cable license royalties.

The O ffice questioned several licensee represe ntatives about the request for an auditright. While licensees expressed concerns abo ut this proposal, see, e.g., Tr. 46-47 (Burstein)(terms and conditions would be a w ay to get around com pulsory license), it appeared that theydid not understand how the process of setting terms and conditions works as a part of the Section114 licenses, e.g. Tr. 50 (Burstein) ("I'm not sure how it works in Section 114"), w hich is theprocess suggested by JSC as a model. JSC Comments at 9-10. Licensee representatives raisedconcerns about the logistics and complexity of audits. See, e.g., Tr. 48-49 (Cinnamon) (ACA

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witness raises concerns about cost and complexity of audit rights); Tr. 50 (Burstein) (NCTAwitness raises "issues about co nfidentiality, cost, things of that nature"); Tr. 486 (Deutsch)(Verizon representative describes "potential for a lot of mischief since you have thou sands andthousands of copyright owners each of whom could potentially conduct one of these audits").

As described at greater length at the h earing, the process that has been used to ado ptterms and conditions for Section 114 has focuse d on negotiations among the p arties, which havebeen used successfully to reach agreement on the great majority of terms and conditions includedin the license regulations. Thus, under the Section 114 licenses the parties hold voluntarynegotiations over what term s and conditions should be incorporated into the compu lsory licensein order to improve its effectiveness and efficiency. Only after that process has taken placewould parties go before the Copyright Royalty Judges ("CRJs") to adjudicate any remainingdisputed terms and con ditions, as well as to obtain final approval for the incorporation of theiragreed-upon terms a nd conditions in the regulations applicable to the license. See Tr. 363-64(Garrett). This procedure has been used by the parties and CR Js (and formerly the CopyrightArbitration Royalty Panels ("CARPS") and the Register) to negotiate and adopt the terms andconditions that apply to the Section 114 licenses. See 37 C.F.R. 260-62 (terms and conditionsfor pre-existing subscription services, certain eligible nonsubscription services, and newsubscription services).

The concerns expressed by licensee representatives are squarely addressed by theprotections built into the audit provisions of Section 114. Each audit provision containsconfidentiality requirements, limits the number and freque ncy of audits, requires the auditingparties to pay the costs of the audit (except in the case of a significant underpay ment) andprovides that all interested parties must participate in a single audit. See 37 C.F.R. 260.5 and260.6 (verification of statements of account and roya lty payments from pre -existing subscriptionservices); 37 C.F.R. 261.6 and 261.7 (verification of statements of acc ount and royalty

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paymen ts from certain eligible nonsubscription services); 37 C.F.R. 262.6 and 262.7(verification of statements of account and roya lty payments from c ertain eligible nonsubscriptionservices and new subscription services). The parties would be able to negotiate for similarprotections for audits conducted under S ections 111 and 119. In the unlikely event that theparties could not agree on such protections based on e xisting precedent for other compulsorylicenses, the dispute would be referred to the CRJs, who would have the authority to adoptsimilar provisions as part of the regulations implementing the proposed term s and conditions.The goal of the audit right is to help the efficient administration of the compulsory licenses. SeeTr. 48 (Sandros).

The other category of comments on audit rights from licensees involved questioning theneed for an audit right. See, e.g., Tr. 49 (Burstein) ("[A]s a general matter, I don't really thinkthere is a problem in the adm inistration of [the] compulsory license in terms of problems with thestatements of account."). Contrary to the statement of NC TA's representative, copyright ownershave demonstrated numerous real problems with current reporting on statements of account("SOAs") and made a strong case for an audit right. Copyright owners have also providedextensive evidence about the problems they have in determining from information currently onthe SOAs that licensees are meeting their royalty obligations, and the documented instances inwhich licensees have not met those obligations. At the sam e time, EchoStar's representativepoints out that satellite royalty payment verification should not be too complicated , Tr. 519(Sahl) ("If it is a flat per sub fee structure, then the audit itself is fairly straightforward."), yetcopyright owners have found m ultiple errors in satellite SO As over the years. See JS CCom ments at 11 (describing inability to verify accuracy of Section 111 and 119 roya ltypayments and citing JSC SHVERA Comm ents, Section 111 digital transition rulemakingcomments, and Section 111 cable SO A rulemaking comments); Joint Comm ents of Copyright

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Ow ners at 3-6 (incorporating Section 111 comme nts by reference); see also Tr. 351 (Attaway)(problems with Section 111 stateme nts of account are increasing over time).

B.ports Blackout Protection Under the Compulsory Licenses Is Deficient.As JSC indicated in its initial comm ents, it seeks the opportunity to expand the current

minimal FC C sports blackout protection in voluntary negotiations over the terms and c onditionsof the Section 111 and 119 licenses. JSC Com ments at 9 n.6 (citing JSC SHVE RA StudyCom ments and sup porting materials therein). Testimony reiterated the point that protectionprovided by the FCC Sports Rule (see 47 C.F.R. 76.111, 120 and 127-130) is m inimal andfalls far short of the type of protection that sports leagues and associations routinely negotiatewith carriers and others in the marketplace. Tr. 360-63-(Ostertag and Garrett). For instance theFCC Sports Rule protection applies only if a game is not telecast over the a ir by a local televisionstation. Tr. 360-61 (Ostertag). A sports team that televises about 100 gam es over its flagshipstation in the course of a year m ight have only 4-6 games blacked out by cable system s within a35-mile region. Tr. 361-62 (Garrett). Sports leagues and associations would insist on moreextensive protection in the marketplace. They should at least have the opportunity to negotiatefor similar protection under the broadcast com pulsory licenses.

IV. COMPULSORY LICENSING SHOULD NOT BE EXTENDED TO THE "OPEN"INTERNET.As JSC explained in its Com ments, the compulsory license regime for broadcast

programm ing should not be extended to the "op en" Internet, either through existing licenses (asproposed by C apitol Broadcasting Com pany, Inc. ("Capitol")) or a separate license. JSCComments at 11-12. Numerous Copyright Owners joined JSC in opposing extension ofcomp ulsory licensing to the "open" Internet for a host of reasons. See, e.g., Comments ofProgram Suppliers at 22 (global distribution over the Internet exposes copyright owne rs to the

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dangers of distribution of "perfect and infinite" copies of works); Com ments of AS CA P, BMIand SESA C at 13 (global reach of the Internet makes it difficult to apply compulsory licenseconcepts and limits (e.g., distant signal)); Written Statement of The Walt Disney Com pany

("Walt D isney") at 5 (extending broadcast licenses to the Internet w ould run afoul of variousbilateral and multilateral agreements). At the same time, except for the C apitol proposal, nolicensee support for extension of comp ulsory licensing to the "open" Internet w as dem onstratedin the comme nts or at the hearing.

A.here Is No Marketplace Failure to Justify an Internet Com pulsory License.There is simply no need for an "op en" Internet compu lsory license. Instead, there is

extensive evidence to the co ntrary -- no m arketplace failure justifies consideration of an Internetcompu lsory license. JSC m embers are ag gressively pursuing Internet content-delivery strategiesin the marketplace w ith multiple options for video and audio programm ing available on theirInternet websites. Tr. 331-32 (Ostertag). For example, Major League Baseball offers various

-MLB.TV packages, the NFL makes similar options available on the NFL Network, the NHL hasthe NHL Center Ice package, the NBA offers NBA TV programming and NBA TV League Passon the Internet, and the WN BA ha s a broadband package ava ilable for Internet viewing. Othercopyright ow ners are pursuing similar strategies. For instance, Walt Disney plans to "follow theconsume r and make [its] product available on a well-timed, well-priced basis, wherever theconsume r seeks to have access to it." Tr. 339 (Padden); se e Tr. 338-343 (Padden ) (describingextensive Internet availability of ABC network program ming reaching tens of millions ofviewers on ABC.com and iTunes); Tr. 322-23 (Padden) (discussing ABC Internet streamingplans). S ee also Comments of ASCAP, BMI and SESAC at 14 (third-party sites includingiTunes, Vongo and m yTV are offering licensed video programm ing via the Internet).

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In short, the marketplace for Internet content delivery is thriving and there is no need foran Internet compulsory license to cover broadcast programm ing. The Office should stronglyreiterate its conclusion that no Internet license is necessary. See A Review of the CopyrightL icensing Re gime s Cov ering Re transm ission of B roadcast S ignals, August 1, 1997 ("1997Report") at x iii; see also id. at 97-99. In addition to the technological and reg ulatory differencesthat led to a negative recomme ndation in 1997, the record against an Internet compulsory licensehas been overwh elmingly strengthened by evidence of a thriving marketplace for the delivery ofprogramm ing over the Internet.

B.he O ffice Should R eject Capitol's Risky and U nnecessary Proposal toCreate an Internet Cable System.Capitol's proposal to allow television stations to create "cable systems" ov er the "open"

Internet to retransmit programm ing within their local marke t areas is not currently permitted bySection 111 and , despite Capitol's assurances, raises serious concerns. The concerns abo utcompu lsory licensing for the "open" Internet have not changed since 1997, whe n the Officedeclined to recomm end com pulsory licensing for the Internet. S ee 1997 Report at xiii; see alsoid. at 97-99.

Capitol states that it intends to restrict its Internet cable system to its local DM A an d thatit could use several levels of security and digital rights managem ent ("DRM ") to do so. S eeCom ments of Capitol Broadcasting at 4-11, Tr. 201-03, 210-12 (Goodm an). As the Register ofCopyrights ("Register") pointed out at the hearing, no access co ntrol system is ever foolproof.Tr. 267-68 (Peters) ("we've never seen any DRM that can't be broken or that doesn't have aproblem"). In addition, while Capitol may intend to keep its operations within the DMA , what itis actually asking the Office to conclude is that a broadca ster or other entity which retransmitsbroadcast program ming over the "open" Internet is a "cable system" for purposes of Section 111and entitled to the Section 111 compulsory license. If such an entity were a cable system (and it

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is not), then it would be a ble (under Section 111) to retransm it broadcast signals anywhere w ithinthe United States -- because Sec tion 111 does not require cable systems to retransmit a broadcastsignal only within its DMA . Indeed, in response to Office que stioning, Capitol's representativeconceded a n intent to expand o perations to include the retransmission of distant signals. Tr. 244-45 (Goodman).

Whe n copyright holders such as sports leagues and a ssociations decide to offerprogramm ing over the Internet, they can negotiate prices in the free m arket that reflect the riskthat security measures will fail and perfect copies of their copyrighted programming w ill becom eavailable worldwide. They can also require contractual provisions that allow them to test andmonitor access controls and D RM policies. If they are not satisfied with the security measures orthe price they are paid to take the risk of distributing copyrighted programm ing on the Internet,they can choose to w ithhold or withdraw their programming from this part of the marketplace.Under a co mpulsory license, copyright holders would no longer hav e control over the risks ofdistributing their programm ing on the Internet. Instead, each broadcaster or other entity wou ldhave the freedom to start an Internet "cable system." Even if the security features described byCapitol were m ade a part of any Internet com pulsory license, it would be unwieldy, if notimpossible, to monitor compliance with such tech nical requirements, let alone to adapt them onthe frequent basis required to assure use of state-of-the-art security and DR M features. Thelogistical difficulties of securing an Internet c ompulsory license, together with the thrivingdevelopment of video program services in the marketplace, demonstrate that the Office shouldnot recomm end that Congress create an Internet compulsory license.

V. THE COPYRIGHT OFFICE SHOULD IMPLEMENT SECTION 111REGULATORY CHANGES WITHOUT DELAY.Additional evidence compiled at the recent Section 109 hearings further corroborates the

need for the Office to act now on pending rulemaking proceedings addressing Sec tion 111 digital21


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cable and cable SOA issues. S ee Joint Comm ents of Copyright Ow ners (July 2, 2007). TheOffice should rely on the extensive ex isting record supporting those proposals and prom ulgatethe necessary rule chan ges as quickly as possible. Id. at 3-6 (incorporating Section 111comments by reference).

At the Se ction 109 hearings, witnesses testified that there are c ontinuing problems withcable SOAs that require immediate attention. S ee Tr. 351 (Attaway) (desc ribing issues withcable statements of accoun t that are "getting worse and w orse over time"); Tr. 332-33 (Ostertag)(requesting prompt action in pending Section 111 rulemaking proceedings). At the same time,statements by licensee repre sentatives reflect confusion about the application of the existingregulations. S ee, e.g., Tr. 62-67 (Burstein, Cinnamon) (c able industry witnesses assert thatdigital boxes do not hav e to be included in gross receipts); Tr. 490-91 (Seikin) (Verizonrepresentative describes filing statements of account on a DMA -by-DM A basis even thoughsystems are conn ected). The overall efficiency of the Section 111 license system for all partieswill improve with Office a ction clarifying the regulatory issues that are raised in these tworulemaking proceedings.VI. COPYRIGHT OWNERS SHOULD NOT BE FORCED TO PAY ALL ROYALTYDISTRIBUTION ADMINISTRATIVE COSTS.

NPS is wro ng in saying that content owners pay n one of the adm inistrative costs ofdistributing the co mpu lsory license royalties (see NPS Com ments at 8) -- in fact the situation isjust the opposite. The copyright ow ners pay all the costs related to having to p articipate inannual Section 111 and 119 royalty distribution proceed ings, as well as the Office's expenses foradministering the compulsory licensing scheme. Putting that entire burden on copyright ow nersis unfair and should be changed. The expenses to copyright owners have becom e steeper withthe passage of the Copyright Royalty and Distribution Reform Act ("CRDRA") and thesubsequent failure of Congress to appropriate funds for the CRB. Under the CR DR A, satellite

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carriers and cable operators may pa rticipate in rate adjustment proceedings before the C RJswithout bearing any of the c osts of those proceedings -- in fact copyright own ers of televisionprogramm ing are even forced to pay expen ses related to the operation of compulsory licenses(such as the Section 115 license) in which most of them h ave no interest whatsoever. And JSCand the other copyright ow ners lack any control over all these administrative expenses. TheOffice deduc ts its expenses to administer the licenses from Sec tion 111 and 119 royalties, andcopyright owners have no a bility to manage or otherw ise control these expense s.

JSC ma de exactly this point in its SHV ERA Report comm ents about harm to CopyrightOw ners from the Section 119 license (incorporated into the record of this proceeding byreference in JSC Com ments at 1 n.1). In its SHVERA R eport, the Office agreed that copyrightowners w ere harmed by the bu rden of "cover[ing] a large portion of the adm inistrative costs ofthe Copyright Royalty Board, including costs incurred by the Boa rd in proceedings that have norelation whatsoever to the Section 119 statutory license." SHVERA Report at 46. The samepoint applies with equal force to Section 111. S ee JSC SHVERA Comm ents at 6-7 (describingadministrative costs); see also Devo tional Claimants' Comm ents at 4 (cable and satelliteroyalties fund the administrative costs of the Office and other com pulsory licensing systems).Thus NP S's implied conclusion that royalty rates should decline to account for these costs, NPSCom ments at 8, is also flawed. In fact, based on NP S's logic, rates paid to copyright ownersshould increase to offset the royalties lost through the payment of all license-relatedadministrative costs. In the SHVER A Repo rt, the Office suggested that Congress consider sometype of surcharge for this purpose. S ee SHVERA Report at 47. Consistent with its SHVERAReport recom menda tions, the Office should recom mend to C ongress that a full appropriation bemade for CRB operations, and that licensees be ar their fair share of the costs of adm inistering thecompulsory license that is extremely ben eficial to them.

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CONCLUSIONIf the Section 111 and 119 compulsory licenses rema in in some form, JSC urges the

Copyright Office to recom mend that C ongress (1) amend the c urrent licenses to provide thepayme nt of marketplace rates to copyright owners -- through voluntary negotiations amongcopyright owners and licensees or, if necessary, a proceeding before the Copyright RoyaltyJudges; (2) require licensees to share in license adm inistration costs; and (3) grant copyrightowne rs the right to negotiate (or obtain in a C RJ proceeding) terms and conditions for theSection 111 a nd 119 licenses-- including an a udit right -- similar to those they routinely negotiatein the marketplace and that copyright owners receive under other com pulsory licenses. TheOffice also should reject Capitol Broa dcasting's proposal to expand the Section 1 11 license toencomp ass retransmissions of broadcast programming over the open Internet.

October 1, 2007

Respectfully submitted,

JOINT SPORTS CLAIMANTS

Robert Alan Garrett VMichele J. WoodsCatherine RowlandARNOLD & PORTER LLP555 Twelfth Street, N.W.Washington, D.C. 20004-1206202.942.5000 (voice)202.942.5999 (facsimile)Michele [email protected] forthe Off ice of theCommissioner of Baseball

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Philip R. HochbergLAW OFFICES OF PHILIP R. HOCHBERG11921 Rockville Pike, Suite 300Rockville, MD 20852301.230.6572 (voice)301.230.2891 (facsimile)Counsel f or the National Bask etballAssociation, National FootballLe ague, National Hockey Le ague andW om en's National B asketball A ssociation

Ritchie T. ThomasQUIRE, SANDERS & D EMPSEY L.L.P.1201 Pennsylvania Avenue, N.W.Washington, D.C. 20004202.626.6600 (voice)202.626.6780 (facsimile)Counsel f or The N ational CollegiateA thletic A ssociationOf C ounsel:Thomas J. Ostertag'Senior Vice President and General CounselOFFICE OF THE COMMISSIONEROF BASEBALL245 Park AvenueNew York, NY 10167212.931.7800 (voice)212.949.5653 (facsimile)


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Before theCOPYRIGHT OFFICELIBRARY OF CONGRESSWashington, D.C.

In the Matter of

Compulsory License for andMerger of Cable SystemsDocket No. RM 89-2

COMMENTS OF THE JOINT

Major League Baseball, the National BasketballAssociation, the National Hockey League and the NationalCollegiate Athletic Association ("Joint SportsClaimants" or "JSC") submit the following comments inresponse to the Copyright Office's "Notice of Inquiry"published at 54 Fe d. Reg. 38390 (1989) ("Notice").

STATEMENT OF POSITIONSection 111(f) of the Copyrig ht Act, 17 U.S.C.

111(f), provides in part:For purposes of determining the royaltyfee under subse ction (d)(1), two ormore cable systems in contiguouscommunities under common ownership orcontrol or operating from one head-endshall be considered as one system.


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The Copyright Office has sought comment regarding theeffectof this "contiguous communities" provision on theSection 111 royalty calculations of cable systems whichmerge with each other. The focus of the CopyrightO f f i c e ' s i n q u i r y i s w h e n t h e m e r g i n g s y s t e m s c a r r ydifferent distant signals and where the systems havedifferent responsibiliti es for payment of the 3.75royalty rate. Before responding to the specific isimportant to underscore certain fundamental principlesgoverning royalty calculations for merged systems.

First, the royalty calculation issues identifiedin the Notice do not arise solely in connection withm e r g e d s y s t e m s . T h e s a m e i s s u e s m a y s u r f a c e i f o n ecable system expands into an adjoining community bybeing awarded a franchise for that community. TheCopyright Act does not draw any distinction betweensystems which acquire new service areas through mergerand those which do so through the franchisi ng process;the same principles concerning Section 111 royaltycalculations apply. While mergers and acquisitions ofadjoining systems may now be occurring at a greater pace"given the current climate of cable system expansion,"Notice, 54 Fed. Reg. at 38391, the issues raised in thisproceeding have existed for some time -- and, in fact,already have been addressed to an extent by the


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Copyright Office in prior rulings dealin g with singlesystems.

Second, t h e p l a i n l a n g u a g e o f S e c t i o n 1 11( f )requires that merged systems in contiguous communitiesbe treated as "one syste m" for purposes of calculatingSection 111 royalties. This is not a matter within theCopyright Office's discretion. The Copyright Officecannot permit such statutorily consolidated systems tofile separate statements of a ccount or otherwise todetermine their royalties as multiple systems.. Theymust calculate and pay their royalties as any othersingle system.

Third, in some instances the merger of twoadjoining cable systems will have no effect on theirtotal royalty obligation; the cons olidated system willpay the same royalty as the total royalty paid by itsc o mp o n e n t s y s t e m s p r i o r t o m e r g e r . I n o t h e r c a s e s ,however, a necessary result of merger may be to in creasethe royalty obligation. The clearest example is wheretwo smaller systems (Form 1 or 2) merge and, by virtueof their combined gross receipts, become a Form 3system. Section 111(f) of the Copyright Actcontemplates that the economic benefits of consolidatingsmaller systems should be shared in part with copyrightowners whose works are expropriated by such systemspursuant to compulsory licensing.


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Mirth, where the merging systems carry different'distant signals, the consolidated system must calculateits royalties like any other single system whose distantsignals are received by a portion, rather than all, ofits subscribers.s the Copyright Office hasconsistently ruled, the full DSE value of each signalcarried by a cable system must be applied against thetotal gross receipts of that s ystem -- even though "onepart of [the] cable system receives more distantsecondary transmissions than other parts of the system."44 Fed. Reg. 73123, 73124 (1979); efts also 49 Fe d. Reg.13029, 1303 5 & n.15 (1984) (Copyright Act does not allow.cable operators to allocate gross receipts or to proratethe DSE to reflect the portion of subscribers actuallyreceiving a secondary transmission); 37 C.F.R.If 201. 17(b)(1) & (f)(3).ccordingly, if System X(retransmitting only distant signal WWOR) merges withcontiguous System Y (retransmitting only distant signal .WGN), the consolidated System Z has a total of twoDSE's; System Z's royalty (assuming it is a Form 3system) is calculated by applying the v alue of the twoDSE's against the total gross receipts of System Z. 11 The cable operator has the option in such a case ofextending the carriage of one or both signals to all itssubscribers, without increasing its royalty obligation.It also may drop one signal and reduce its royaltyobligation. Under Section 111, of course, copyright[Footnote continued on next page]


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Cable operators have argued that they may reducetheir gross receipts (and thus their royalty payments)by failing to account for revenues derived fromsubscribers who do not actually receive a particulardistant signal (e.g., because the subscribers arelocated in a geographic area of the system where thesignal is not offered or because they do not pay for thetier of service on which the signal is offered). Thisargument -- variously styled as an "actual carriage,""subscriber grouping" or "phantom signal" theory -- hasbeen rejected by the Copyright Office on severaloccasions; the rationale of these rulings applies fullyin the context of merged systems. 2

[Footnote continued from previous page]owners are deprived of comparable flexibility; they arecompelled to make their works available to cable systemsat a nonnegotiable royalty, without regard to whetherthey wish to do so at that price or any other price.2 Aft 44 Fed. Reg. 73123, 73124 (1979); 49 Fed. Reg.13029, 13035 & n.15 (1984); Brief for Copyright Officeat 44-45 (filed June 12, 1987) in Cablevision SystemsDevelopment Co s . v. um, 836 F.2d 599 (D.C. Cir.), cert.denie4, 108 S.Ct. 2901 (1988) ("Cablevision")(d i s c u s s i n g r e a s o n s f o r r e j e c t i n g N CTA s u b s c r i b e rgrouping theory); Supplemental Statement of NCTA inCopyright Office Docket No. 80-2 at 10-11 (filed August28, 1981) (acknowledging that Copyright Office'sinterpretation of the Act does not permit apportionmentof gross re ceipts where "contiguous communities areprovided different complements of distant stations");Testimony of Robert W. Ross, NCTA in Copyright OfficeDocket No. 80-2 at 13 (July 24, 1981) (sameacknowledgment).

The cable industry also has been unsuccessful in[Footnote continued on next page]


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There is simply nothing in the language,legislative history or underlying policies of theCopyright Act which contemplates the reduction of amerged system's gross receipts or dilution of it s DSEvalues to account for "actual carriage". To thecontrary, the Copyright Act makes clear that a cableoperator must pay Section 111 compulsory licensingroyalties even if none of its subscribers receives envdistant signals whatsoever. lee 17 U.S.C. 111(d)(1)(B)(i), (C) & (D). Like wise, the MPAA/NCTACompromise Agreement from which Section 111 was derivedprovided that: "Each distant signal authorized by theFCC will be subject to the rate s chedule regardless ofthe amount of that signal's programming which is

actually carried by the subject cable system." As theCourt of Appeals observed in Cablevision,Congress never contemplated a precisecongruence of the royalties paid andthe amount of distant non-networkprogramming actually carried. Instead,C o n g r e s s p i c k e d a convenient r e v e n u ebase and used the DSEs to discount itin a reasonable manner.

[Footnote continued from previous page]persuading Congress to amend the Copyright Act toprovide that "in the case of any secondary transmissionsmade to a limited number of subscribers, gross receiptsshall be limited to those gross receipts derived fromsubscribers receiving such secondary transmissions").See H . R . 6 1 6 4 , 9 8 t h C o n g . , 2 d S e s s . 2 0 2 ( 1 9 8 4 ) .


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836 F.2d at 611 (emphasis in original). 3The formula adopted by Congress in Section 111

contemplates a broad revenue base in return for therather minuscule royalty rates which are applied againstthat base. As th e Copyright Office explained to theCourt of Appeals in Cablevision, N CTA's subscribergrouping theory finds no support in the structure ofthat formula:

Congress intended that calculation ofroyalty fees under section 111 would bebased upon- a formula which is onlyloosely related to the amount ofprotected programming actually carriedby cable systems to subscribersWhen Congress enacted section 111, itelected a trade-off. The royaltys c h e dul e wa s n o t c r a f t e d t o r e f l e c tactual carriage; on the other hand, thestatutory formula provided for thepayment of copyright royalties whichNCTA itself conceded to be "minimal."B r i e f f o r C o p y r i g h t O f f i c e i n Cablevision at 34-35(filed June 12, 1987). 43 Accord, 45 Fed. Reg. 45270, 45271 (1980) ("Congressclearly did not intend to establish an open-ended policyof permitting the reduction of DSE values to correspondto actual signal carria ge").4 The fallacy of the cable industry's position isparticularly evident in the context of merged systems.Assume, for example, that System X (a Form 3 system withno distant signals) merges with System Y (a Form 3system with only one distant signal) to produceconsolidated System Z. Prior to merger, System X wasclearly required to pay compulsory licensing royaltiesfor the carriage of o ne DSE (even though it did notcarry any distant signals). 21t 17 U.S.C.1 1 1 ( d ) ( 1 ) ( B ) ( i ) .o w e v e r , u n d e r t h e " p h a n t o m s i g n a l "[Footnote continued on next page]


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Furthermore, the plain language of Section111(d)(1) of the Copyright Act, 17 U.S.C. I 111 (d)(1),requires cable operator s to include all their "grossreceipts" from all their subscribers in making royaltycalculations. The only exception to this requirementset forth in the Act concerns "partially distantsignals." gas 17 U.S.C. 111(d)(1)(B).5 Likewise,Section 111(f), 17 U.S.C. 111(f), requires that a fullDSE value be assigned to each distant signal carried --except in certain narrowly defined- circumstances notrelevant her e. as 37 C.F.R. 201.17(f)(3). The factthat Congress ha s explicitly . defined only limitedsituations where gross receipts or DSE values may bereduced is itself a compelling reason why additional

[Footnote continued from previous page]theory, no royalties would be paid post-merger on thebasis of System X's gross receipts; thus, the r oyaltypaid by System Z would actually be less than that paidby its constituent Systems X and Y prior to merger.There is absolutely no statutory basis for allowing theact of merger to reduce a cable operator 's copyrightliability.5 Section 111 (d)(1)(B) provides in part that "[I]nthe case of any cable system located partly within andpartly without the local service area of a primarytransmitter, gross recei pts shall be limited to thosegross receipts derived from subscribers located withoutthe local service area of such primarytransmitter "


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reductions should not be carved out. Se. 45 Fed. Reg.45270, 45271-72 (1980). 6

Finally, a more difficult question arises wherethe merging systems have disparate 3.75 royaltyobligations. 7 In determining the applicability of the3.75 rate, the Copyright Office has focused on whetherthe cable system carries an "additional distant signalequivalent" which was not permitted under the former FCCrules. Thus, it has concluded that a cable system whichexpands carriage of a permitted signal into a newgeographic community is not liable for the 3.75 percentrate on that signal -- even if the signal could not havebeen carried in that community under the former FCCrules -- because the system has not "added" any DSE. 49Fed. Rag. 14944, 14948 (1984); sea also 37 C.F.R.6 In its Supplemental Statement filed August 28, 1981i n C o p y r i g h t O f f i c e D o c k e t N o . 8 0-2 , N CTA a r g u e d :"[W]here contiguous communities are provided differentcomplements of distant stations the 'system's' grossreceipts should be apportioned . . . t 1 1 .NCTA acknowledged that the "logical conclusion" of thisactual carriage theo ry is that royalty fe es "wouldreflect use on a per program or per hour of v iewingb a s i s . " I d . at 2. This acknowledgment itself providesa telling basis for rejecting NCTA's theory. The samerationale that supports this theory would support suchabsurd results as basing royalty calculations on thenumber of hours a distant signal is retransmitted.7 This may arise, for example, where the mergingsystems provide service to communities with different"market quotas" under the former FCC distant signalrules, or where the signal in question is not"grandfathered" in all the communities served by themerged system.


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201.17(h)(7). As the Copyright Office has recognized,the rationale of thi s ruling (which presumes that thecable operator prior to deregulation had included in itsgross receipts calculation revenues from the expansioncommunity) is necessarily inapplicable in cases ofmerged systems. Notice, 54 Fed. Reg. at 38391. 8

For the reasons set forth in their Comments filedMarch 1, 1983 in Copyright Office Docket No. 83-3 ("JSCComments"), JSC continue to believe that a cableoperator should be required to pay 1) the 3.75 percentrate on gross receipts derived from subscribers locatedin communities where the particular signal could nothave been carri ed under the former FCC rules; and 2) thestatutory (non-3.75 percent) rates on gross receiptsderived from all other subscribers. JSC believe thatthis method of royalty calculation is consist ent withand furthers clearly articulated Congressional policyunderlying the rate adjustment provisions of the

8 See also Letters dated March 11, 1983, from Registerof Copyright to various partie s at 2 ("With respect toexpanded geographic coverage we observe that anyargument that the 3.75% rate does not apply must assumethat the particular cable system prior to the FCC rulechange has reported all gross receipts from allsubscribers in that entire geographic area for the basicservice of providing secondary transmissions of primarybroadcast transmitters and paid royalties accordingly,even if some subscribers in tha t same area did notformerly receive the signal.")


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Copyright Act and the Tribunal's decision implementingthose provisions. See generally JSC Comments.

RESPONSES TO SPECIFIC QUESTIONS

1. In the hypothetical case posited above, wherecontiguous Systems A & B carry the same twoindependent station signals (and System B carries anadditional signal) but, before the merger, System Amust pay the 3.75% rate for the independent signals,and the two systems are s ubsequently purchased bythe same entity, how should the proper royalty feed e t e r m i n a t i o n b e m a d e a n d s h o u l d t h e C o p y r i g h tOffice continue to require Systems A & B to file asingle statement of account?

Under Section 111(f) Systems A and B are now "onesystem" for royalty calculation purposes and must,therefore, file a single statemen t of account. Themerged system's royalty (assuming it is a Form 3 system)is the sum of a) 3.75 percent of the gross receipts ofSystem A and System B (for carriage of the "System Badditional sig nal"); b) 7.5 percent (3.75% x 2) ofSystem A's gross receipts (for carriage o f the twoSystem A distant independents); and c) 1.456 percent(.893% - + .563%) of System B's gross receipts (forcarriage of the two System B distant independents). 99 The above example assumes that the two independentsignals are permitted signals; thus, they are paid forat the rate s set forth in 37 C.F.R. 0 308.2(0(1)-(3)(i.e., .893 of 1 percentum for the first DSE and .563 of1 percentum for the second DSE).


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2 . Should the merged system be required to .pay the3.75% rate for the two independent station signalsfor all the subscribers to the system (subscribersto both A & H), or should the two signals be treatedas permitted (non-3.75% rate) signals for the entiresystem, and, if so , why? Or, should the system bea l l o w e d t o a l l o ca t e t h e r a t e s a m o n g t h e f o r m e rs u b s c r i b e r s t o S y s t e m A a n d B , r e s u l t i n g i n t h ecable system paying for the right to secondarilytransmit the same independent station signals atdifferent royalty rates.

The two independent signals are permitted signalsin the communities served by System B, but not in thecommunities served by System A. Consequently, the 3.75percent rate should be applied for each of the se signalsagainst the gross receipts of System A, and the relevantstatutory (non-3.75 percent) rates should be applied foreach of these signals against the gross receipts ofSystem H.

3 . If allocation between two different royalty ratesf o r t h e s a m e tw o i n d e p e n d e n t s t a t i o n s i g n a l s i sd e s i r a b l e , o n w h a t b a s i s s h o u l d i t b e a l l o w e d?Should the former boundaries separat ing System A & Hbe followed for purposes of determining theallocation? What happens if the system expands andadds new subscribers? How should they be treatedfor purposes of allocating the rate among the sametwo signals?

The critical question is whether the subscriberresides in a community where the signal could have beencarried prior to FCC deregulation. If so, the relevant


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statutory rate should be applied against the grossreceipts from that subscriber; if not, the 3.75 percentrate should be applied.

4. Inthe hypothetical case, System B also carrie d asuperstation signal at ills 3.75% rate. At the timeof the acquisition, the superstation signals wouldstill only be received by the former subscribers ofSystem B. How should this signal be paid for by thenew system? (a) Should the superstation signal beattributed to thee n t i r e s u b s c r i b e r b a s e , e v e nthough many subscribers do not actually receive thesignal (a so- called "phantom" signal)? or (b) Ifallocation of the signal is desirable, on what basisshould it be allowed? Should the sums paid by. onlythose subscribers who actually receive the signal beincluded in the gross receipts for that signal? .

The merged system is retransmitting a total of threeDSE's. The cable operator may choose to provide allthree distant signals to all of its subscribers;alternatively, it may continue to provide System A'ssubscribers with two of those signals and System B'ssubscribers with the three signals. In either case,however, it must apply the DSE value of that thirddistant signal against the tota l gross receipts ofSystems A and B; no reduction in gross receipts of DSEvalues is permissible simply because the cable operatordecides not to extend carriage of the signal to all itssubscribers.


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5. Inconsidering the impact of mergers and .acquisitions of the computation of the royalty fees,should the method by which the combined system wasdeveloped affect the policies relatingocomputation of royalties? (That is, should it makeany difference whether the ne w system comes aboutthrough merger of two systems to form a third newone, or if one system acquires another and thesecond system disappears, or if both systems remainlargely intact from an operati onal viewpoint but arenow under common ownership?)There is nothing in the language, history or

policies of the Copyright Act which suggests thatSection 111 royalty calculations should be affected bythe method in which the combined system was developed.To rule otherwise would be to invite manipulation ofroyalty payments by emphasizing form over substance inacquisitions.

6 . If the systems were franchised by different localauthorities, may the new system allocate the grossreceipts to account for disparate local franchisingc o n d i t i o n s t h a t r e q u i r e m a i n t e n a n c e o f c e r t a i nsecondary transmission s ervice, which will not besystem wide in the new cable system?

There is nothing in the language, history orpolicies of the Copyright Act which suggests thatSection 111 royalty calculations should be affected bylocal franchising requirements; indeed, no aspect of t heSection 111 compulsory license is tied to local law.Furthermore, cable operators have generally construed


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the Cable Communications Policy Act of 1984, 47 U.S.C.11, 521 at leg., as prohibiting local requirements forthe retransmission of specific distant signals orspecific numbers of distant signals -- particularlywhere such retransmission would result in increases in

10copyrightees.nder the cable operators'construction of the Cable Act, the re are no "localconditions that require maintenance of certain secondarytransmission service."

7. The preliminary assessment of the Copyright Officeis that, except for the definition of cable systemin section 111(f) of the Copyright Act, the issuesp o s e d b y m e r g e r a n d a c q u i s i t i o n o f s y s t e m s a r eprimarily matters of administrative and regulatorypolicy. To the extent that neither the statute n orthe legislative histor y of the Act give guidance,the Copyright Office could probably provide guidancebased on its responsibility for the fair andeffective administration of the compulsory license.We request comment, however, whether the CopyrightOffice should attempt to provide guidance on thesematters, which were largely uncontemplated by theCongress in establishing the compulsory license.

10 Section 625(b) of the Cable Act, 47 U.S.C. 0 544(b),prohibits franchising authorities from "establishing" inpost-Cable Act franchises "requirements for videoprogramming." Franchising authorities may enforce post-Act franchise provisions requiring "broad categories ofvideo programming", and they may enforce "service"provisions in post-Act franchises -- subject to Section625, 47 U.S.C. f 545, which allows modification offranchises under certain circumstances. Among otherthings, Section 625 allows cable operators "torearrange, replace, or remove a particular cable servicerequired by the franchise" if such ser vice is subject tothe 3.75 or syndex rates and if certain o ther conditionsare satisfied.


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The Copyright Office should provide guidance ont h e i s s u e s r a i s e d by t h e N o t i c e; a s n o t e d a b o v e , i talready has done so. As the Court of Appeals recognizedin Cablevision, well-reasoned guidance from theC o p y r i g h t O f f i c e i s u s e f u l i n t h a t i t h e l p s e n s u r ecompliance with the Copyright Act, thus avoiding theneed for multiple copyright infringement lawsuits. 836F.2d at 608. See also i d . at 610 ("We think Congresssaw a need for continuing interpretation of section 111and thereby gave the Copyright Office statutoryauthority to fi ll that role"); Reply Brief for Copyrigh tOffice in Cablevision at 13 (file d August 31, 1987) ("Ift h e C o p y r i g h t O f f i c e c o u l d n o t m a k e s u c h s t a t u t o r yinterpretations, it could not fulfill its obligationunder Section 111(d) of the statute to provide statementof account forms, and both cable operators a nd copyrightowners would have no governmental authority to turn tofor assistance in interpreting the filing, reporting,and accounting provisions of Section 111.")

By the same token, the Copyright Office does nothave unfettered discretion to provide guidance basedsolely on what it considers to be the "fair andeffective administration of the compulsory license."N o t i c e , 5 4 Fed. Reg. at 38392. While Congress did notspecifically address certain of the issues raised by the


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C o p y r i g h t O f f i c e i n i t s N o t i c e , C o n g r e s s d i d a d o p tc e r t a i n s t a t u t o r y l a n g u a g e , l e g i s l a t i v e h i s t o r y a n dpolicies which evince its general intent. The guidanceproffered by the Copyright Office must be consistentwith, and help effectuate, such intent.

Respectfully submitted,JOINT SPORTS CLAIMANTS

BYoblan Garrett1200 New Hampshire Avenue, N.W.Washington, D.C. 20036(202) 872-6700Attorney for Major LeagueBaseballOf Counsel:Thomas J. OstertagOffice of the Commissionerof Baseball350 Park Avenue17th FloorNew York, New York 10022

Philip R. Hochberg2033 M Street, N.W.Suite 700Washington, D.C. 20036Attorney for National Basketball Associatiand National Hockey LeagueJudith Jurin SemoSquire, Sanders & Dempsey1201 Pennsylvania Avenue, N.W.Washington, D.C. 20Q04Attorney for National CollegiateAthletic Association

December 1, 1989


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COMM ENT 2Before the. ..COPYRIGH T OFFICE

R A R Y N G R EWashington,

In the Matter ofCable Compulsory License:Definition of A Netwo rk Station

Docket No. RM 2000-2

ACOMMENTS OFTHE JOINT SPORTS CLAIMANTSThe Office of the Commissioner of Baseball, the National Basketball

Association, the National Football League, the National Hockey League and TheNational Collegiate Athletic Association (collectively the "Joints SportsClaimants" or "JSC") submit the following comments in response to theCopyright Office "Notice of Inquiry," published at 65 Fed. Reg. 6946 (Feb. ii,2000) ("Notice").

The purpose of this proceeding is to determine the "scope and applicationof the definition of a network station under the cable statutory license of theCopyright Act." Notice, 65 Fed. Reg. at 9646. The resolution of that issue haspotentially significant consequences for the amount of royalties that individualcable systems must pay to carry different stations under the Section incompulsory license. JSC agree with the Program Suppliers that the only stationsthat may qualify as "network stations," within the meaning of 17 U.S.C. iii(f),are those that are owned and operated by, or affiliated with, ABC, CBS or NBC.Stations that broadcast programming provided by Fox, Pax TV, UPN and WB are


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not "network stations" and, therefore, must be classified as "independentstations" for purposes of calculating Section in royalties.

JSC strongly believe that Congress, and not the Copyright Office, shouldresolve any issue as to whether any of the new program distribution services(such as Fox, PaxTV, WB or UPN) is a "network" for purposes of the cablecompulsory license. That is precisely the approach that was taken in 1994 whenan issue arose concerning the status of Fox stations under the Section 119 satellitecompulsory license. Referring to the definition of "network stations" in Section119, which at the time was identical to the Section 111(f) definition, the SenateJudiciary Committee recognized that:

The two essential elements of the definition nationwidetransmissions and network programm ing broadcast for asubstantial portion of the broadcast day has limited thedefinition to the three major com mercial televisionnetworks: CB S, ABC , and NBC . . . . [and has] eliminate[d]the newer ne tworks, such as Fox . . . .S. Rep. 103-407, at 13 (1994). Congress determined that policy considerationswarranted treating Fox stations as network stations for purposes of Section 119.Thus, it broadened the definition of "network station" in Section 119 toencompass Fox stations.

The fact that Congress found it necessary in Section 119 to change the verysame language that is in Section 111(f) to encompass Fox is itself persuasiveevidence that Section 111(f) does not encompass Fox and the other new programdistribution services. Likewise, the fact that Congress changed the definition ofnetwork station in Section 119 without changing the same definition in Section111(f) is persuasive evidence that Congre ss did not intend to classify Fox and the

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other new program distribution services as networks for purposes of Section 111.If any party believes that these services should be treated as "networks" underSection 111, they should follow the same approach that was followed in 1994 andmake their case to Congress.

The Librarian's decision in the 1990-92 cable royalty distributionproceeding further underscores the propriety of referring to Congress any issueas to whether the new program distribution services should qualify as networksunder Section 111. In that proceeding, the Librarian affirmed the CARP's rulingthat Fox programming is compensable "nonnetwork programming" on theground that Fox stations do not qualify as network stations under Section 111(f).Distribution of 199 0, 1991 and 1992 C able R oyalties, 61 Fed. Reg. 55653, 55660(1996). If the Copyright Office were now to reach a contrary conclusion on thestatus of Fox stations, a contrary conclusion also would follow on whether Foxprogramming (and indeed other programming) may continue to receive a shareof the cable royalties. That, in turn, would have significant and unsettlingimplications for future cable royalty distribution proceedings. It also wouldgenerate further controversy over the circumstances in which cable operatorsmust pay 3.75 royalties for new network stations that were never permitted to becarried under prior FCC rules.

When Congress adopted its definition of "network stations" in theCopyright Act of 1976, it established a test that could be satisfied by only ABC,CBS and NBC stations. At the time, each of these three networks suppliedbetween 85 and 97 hours of programming per week (of the approximately 140hours broadcast by most stations); and each reached virtually every television

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Philip R. HochbergVERNER, LIIPFERT, BERNHARD,McPHERSON & HAND901 Fifteenth Street, N.W.Washington, D.C. 20005(202) 371-6000Ritchie ThomasJudith Jurin Sem oSQUIRE, SANDERS & DEMPSEY L.L.P.1201 Pennsylvania Avenue, N.W.Washington, D.C. 20004(2o2) 626-6600April 11, 2000

us copyright office: joint-sports-reply

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