United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 24, 2009 Decided July 7, 2009

No. 08-1078

SOUNDEXCHANGE, INC.,
APPELLANT

v.

LIBRARIAN OF CONGRESS,
APPELLEE

SIRIUS XM RADIO INC.,

INTERVENOR

On Appeal of an Order
of the Copyright Royalty Judges

David A. Handzo argued the cause for appellant. With

him on briefs were Mark D. Schneider and Michael B.
DeSanctis.

Sarang Vijay Damle, Attorney, U.S. Department of

Justice, argued the cause for appellee. With him on the brief
were Michael F. Hertz, Acting Assistant Attorney General,
and Scott R. McIntosh and Mark R. Freeman, Attorneys.
 2
R. Bruce Rich argued the cause and filed the brief for
intervenor. Karyn K. Ablin, Bruce G. Joseph, and Michael L.
Sturm entered appearances.

Before: GINSBURG, HENDERSON and KAVANAUGH,

Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

Concurring opinion filed by Circuit Judge KAVANAUGH.

GINSBURG, Circuit Judge: In 2008 the Copyright Royalty

Judges (CRJ) set the royalty rate that satellite radio services
must pay to copyright owners for the use of sound recordings
during the years 2007-2012. SoundExchange, an
organization established to collect and distribute royalties to
the copyright owners, appeals the CRJ’s determination,
arguing it is arbitrary, capricious, and not supported by
substantial evidence. We affirm the CRJ’s determination
with respect to the royalty rate for the use of sound recordings
but reverse with respect to the CRJ’s failure to set a royalty
rate for “ephemeral copies” of sound recordings.

I. Background

The Congress has created two types of copyrights in a

musical recording. One is for the underlying “musical work,”
that is, the written music; a copyright in the musical work
affords the owner the exclusive right to perform the work in
public. 17 U.S.C. § 106(4). The broadcast of a song
(whether recorded or performed live) over terrestrial or
satellite radio is a performance of the musical work and
therefore requires a license from the copyright owner. A
“sound recording” is a performance of a musical work that is
affixed to a recording medium; until 1995 the owner of the
 3
copyright to a sound recording did not enjoy an exclusive
performance right. In that year the Congress afforded the
owner of the copyright to a sound recording the narrow but
exclusive right “to perform the copyrighted work publicly by
means of a digital audio transmission,” id. §§ 106(6), 114(d);
in effect, this assured the copyright owner the ability to
charge a royalty for a license to play its work on a satellite
radio service (SRS). If a mutually agreeable royalty cannot
be negotiated between an SRS company and a copyright
owner, then the Copyright Royalty Judges — an agency
comprising three members appointed by the Librarian of
Congress — is to set “reasonable rates and terms of royalty
payments,” id. § 114(f)(1)(A), “calculated to achieve the
following [four] objectives”:

(A) To maximize the availability of creative

works to the public.
(B) To afford the copyright owner a fair return
for his or her creative work and the copyright
user a fair income under existing economic
conditions.
(C) To reflect the relative roles of the
copyright owner and the copyright user in the
product made available to the public with
respect to relative creative contribution,
technological contribution, capital investment,
cost, risk, and contribution to the opening of
new markets for creative expression and media
for their communication.
(D) To minimize any disruptive impact on the
structure of the industries involved and on
generally prevailing industry practices.
 4
Id. § 801(b)(1).

The SRS Companies — Sirius Radio and XM Radio —

and a predecessor to SoundExchange agreed upon a rate in
2003 that would remain in effect until the end of 2006. In
2004 the Congress provided that, if SoundExchange and the
Companies had not already agreed upon the royalty to be paid
thereafter, then in January 2006 the CRJ would begin
ratemaking proceedings for the six-year period 2007-2012.
Id. § 804(b)(3)(B). The three principals did not agree upon a
rate and the proceeding here under review duly followed.

For a starting point from which to consider the four

objectives, the CRJ looked to “comparable marketplace
royalty rates as ‘benchmarks,’ indicative of the prices that
prevail for [other, e.g., online] services purchasing similar
music inputs for use in digital programming.” Determination
of Rates and Terms for Preexisting Subscription Services and
Satellite Digital Audio Radio Services, 73 Fed. Reg. 4080,
4088/2 (Jan. 24, 2008) (Determination of Rates). The agency
considered the record evidence reflecting various experts’
opinions and concluded that a rate equal to 13% of SRS gross
revenue, as proposed by SoundExchange, “marks the upper
boundary for a zone of reasonableness for potential
marketplace benchmarks from which to identify a rate that
satisfies” the objectives in § 801. Id. at 4094/1. The agency
set the lower bound at the 2.35% of gross revenue the
Companies were then paying for the right to use musical
works, but found “a rate close to the upper boundary is more
strongly supported than one close to the lower boundary.” Id.
at 4094/1-2.

The CRJ then turned to the four statutory objectives in

order to locate a specific rate within the zone of
reasonableness. With respect to the first two objectives —
 5
maximizing the availability of creative works to the public
and ensuring copyright owners and users a fair rate of return
— the agency found the record did not support a thumb on the
scale in favor of either SoundExchange or the SRS
Companies. The CRJ then determined the third and fourth
objectives — reflecting the relative roles of the owner and the
user in making the product available and minimizing the
disruptive impact upon the industries involved — each
warranted a royalty rate somewhat lower than 13%:

[G]iven that the current rates paid by the [SRS

Companies] for these [licenses] are in the
range of 2.0 to 2.5% of revenues, an
immediate increase to the upper boundary of
the zone of reasonableness (i.e., 13%) would
be disruptive inasmuch as the [Companies]
have not yet attained a sufficient subscriber
base nor generated sufficient revenues to reach
consistent Earnings Before Interest, Taxes,
Depreciation and Amortization (“EBITDA”)
profitability or positive free cash flow.

Id. at 4097/2. The agency also found the 13% rate would
endanger the SRS Companies’ planned investment in new
satellites. Weighing the conflicting evidence in the record,
the CRJ chose an initial rate equal to 6.0% of revenue,
increasing to 8.0% over the six-year term of the license.

After setting a royalty rate for the Companies’

transmission of musical works, the CRJ considered what
portion of that rate should be attributed to their right to make
“ephemeral copies” of musical works. An ephemeral copy is
a digital copy of a sound recording stored on a computer; an
SRS creates an ephemeral copy as an intermediate step
toward satellite transmission of the sound recording.
 6

Under 17 U.S.C. § 112, the CRJ is to set the royalty rate

for an ephemeral copy at the level “most clearly
represent[ing] the fees that would have been negotiated in the
marketplace between a willing buyer and a willing seller.” Id.
§ 112(e)(4). Finding them to be of little value, however, the
CRJ decided not to set a separate royalty rate for ephemeral
copies, but rather deemed the § 112 rate for an ephemeral
copy “embodied” in the rate set for the § 114 license.

II. Analysis

We may set aside the CRJ’s decision only if it is

“arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law,” 5 U.S.C. § 706(2)(A); see 17 U.S.C.
§ 803(d)(3) (“Section 706 of title 5 shall apply with respect to
review by the court of appeals under this subsection”), or if
the facts relied upon by the agency have no basis in the
record, Recording Indus. Ass’n of Am. v. Copyright Royalty
Tribunal, 662 F.2d 1, 8 (D.C. Cir. 1981). Although we have
not yet issued a decision in a case involving the CRJ, we have
reviewed a decision of its predecessor applying the four
objectives in § 801(b)(1). In RIAA v. Copyright Royalty
Tribunal we held “three distinct aspects of [§ 801] increase
the deference” we owe the agency. Id. First, the agency is
required “to estimate the effect of the royalty rate on the
future of the music industry,” which requires a “forecast of
the direction in which the future public interest lies ... based
on the expert knowledge of the agency.” Id. Second, the
agency has “legislative discretion in determining copyright
policy in order to achieve an equitable division of music
industry profits between the copyright owners and users.” Id.
Finally, “the statutory factors pull in opposing directions, and
reconciliation of these objectives is committed to the [agency]
as part of its mandate to determine ‘reasonable’ royalty rates.”
 7
Id. at 9; see Fresno Mobile Radio, Inc. v. FCC, 165 F.3d 965,
971 (D.C. Cir. 1999) (“When an agency must balance a
number of potentially conflicting objectives ... judicial review
is limited to determining whether the agency's decision
reasonably advances at least one of those objectives and its
decisionmaking process was regular”).

SoundExchange argues the CRJ’s decision was arbitrary

and capricious because the agency misapplied the four
objectives in § 801 and because the decision was internally
inconsistent. The Librarian of Congress, in turn, argues the
CRJ’s decision is supported by substantial evidence and that
SoundExchange has failed to point to any convincing
evidence showing the decision was inconsistent.
SoundExchange, the Librarian, and Intervenor Sirius-XM
agree the CRJ erred by failing to set a rate for the § 112
license, although each advocates a different remedy.

A. The § 114 Rate

SoundExchange first argues the CRJ erred by using the

third and fourth objectives as “trump cards” to reduce the
market-based rate of 13%, which it had proposed and which,
it asserts, the agency had found was a reasonable rate
supported by the first two objectives. This argument need not
occupy us long as it both mischaracterizes the agency’s
decision and ignores relevant precedent. The CRJ never held
a 13% rate best satisfied the first two statutory objectives;
rather it identified 13% as “the upper boundary for a zone of
reasonableness ... [within] which to identify a rate that
satisfies” the objectives set out in § 801. Determination of
Rates, 73 Fed. Reg. at 4094/1. Even if the CRJ had held 13%
a reasonable rate, the agency was under no obligation to
choose a rate derived from a market-based approach. In
Recording Industry Association of America v. Librarian of
 8
Congress, 176 F.3d 528, 533 (1999), we held in no uncertain
terms the “claim that [§ 801] clearly requires the use of
‘market rates’ is simply wrong.”

SoundExchange next argues the CRJ’s decision is

internally inconsistent because the agency relied upon
testimony that a rate in excess of 6-8% of total revenue would
threaten the viability of the SRS Companies but then made
those rates applicable to less than total revenue. The CRJ did
indeed exclude from the calculation of royalties revenues
from (1) subscriptions to and the sale of advertising on
channels that make only incidental use of sound recordings;
(2) the sale or license of equipment; and (3) miscellaneous
other sources. Determination of Rates, 73 Fed. Reg. at
4102/2-3. SoundExchange focuses upon the exclusion of
advertising revenue and asserts that, if such revenue were
included in the measure of “gross revenue,” then the royalties
payable in 2007 and 2012 would be greater by $4.4 million
and $38 million respectively.

SoundExchange again mischaracterizes the CRJ’s

decision; the evidence regarding the future earnings prospects
and viability of the SRS Companies was not based upon their
“total revenue.” Each of the sundry experts who testified
concerning future revenues included and excluded divers
sources of revenue, presumably because some revenues are
not predicated upon the use of copyrighted music. Indeed,
SoundExchange’s own expert proposed a royalty rate to be
applied to less than all revenues. See id. at 4087/2 n.21
(quoting SoundExchange’s expert as having testified “rates
should reflect purchasers’ willingness to pay for music
content”).

Moreover, in rejecting the argument SoundExchange

made in its petition for rehearing that the decision was
 9
inconsistent, the CRJ noted “[t]here was no credible evidence
... that any of the types of revenue excluded from gross
revenues in the Initial Determination currently constitute or
are projected to account for an amount of gross revenues that
would significantly impact the calculation.” On appeal,
SoundExchange still points to “no credible evidence” in the
record.

The $4.4 and $38 million figures cited by

SoundExchange are unreliable for two reasons. First, they
were calculated by applying the royalty rates to all projected
advertising revenues from 2007-2012, including advertising
revenues from sources that use music incidentally if at all,
e.g., talk radio channels. SoundExchange never contended
and the CRJ never opined that revenue from such non-music
sources should be included in calculating the royalty
payments. Second, the measure of gross revenues adopted by
the CRJ includes advertising revenue earned by channels that
do use musical recordings. Yet SoundExchange included
those revenues in calculating the alleged $4.4 and $38 million
“underpayments.”

SoundExchange makes two further arguments. First, it

argues the CRJ’s decision to set the royalty rate below 13%
out of concern for the SRS Companies’ future earnings and
need to make planned investments in new satellites was not
supported by substantial evidence. Second, SoundExchange
argues it was arbitrary and capricious for the CRJ not to have
considered cost-savings from the then-pending merger
between Sirius and XM. We think the CRJ’s consideration of
both issues was reasonable and supported by the record.

As we observed in RIAA v. Copyright Royalty Tribunal,

we owe substantial deference to the agency’s decisions under
§ 801 because the four objectives it must pursue point in
 10
different directions, requiring the agency first to predict the
future course of the music industry and then to work an
equitable division of projected music industry profits. 662
F.2d at 8-9. Our review of the record and of the CRJ’s well-
reasoned decision demonstrate both that the former provides
substantial evidence in support of the latter and that the
agency has not exercised its broad discretion in an arbitrary or
capricious manner.

B. The § 112 Rate

After the CRJ released its decision, the Register of

Copyrights rendered her opinion that the CRJ erred in failing
to set a separate rate for the § 112 license to make ephemeral
copies:
The section 112 statutory license applies to
reproductions, while the section 114 statutory
license applies to public performances.
Moreover, the beneficiaries of the section 114
license are not identical to the beneficiaries of
the section 112 license. Royalties collected
under section 114 are paid to the performers
and the copyright owners of the sound
recordings ... whereas, the royalties collected
pursuant to the section 112 license are not paid
to performers. Without separate rates for both
the section 114 and 112 licenses,
SoundExchange is unable to allocate properly
the funds it collects as the Designated Agent
and fulfill ... its responsibility to distribute
receipts to stakeholders.

Review of Copyright Royalty Judges Determination, 73 Fed.

Reg. 9143, 9146 (Feb. 19, 2008). As a result, the Librarian
 11
concedes the CRJ erred and asks us to remand the matter to
the agency to set an appropriate rate.

Pointing out that “the court may enter its own

determination with respect to the amount or distribution of
royalty fees,” 17 U.S.C. § 803(d)(3), both SoundExchange
and Sirius-XM suggest the court set the § 112 rate.
SoundExchange argues, as it did before the agency, the rate
should be set at “8.8% of the total royalty,” i.e., 8.8% of the
royalty paid for the § 114 license would be attributed to the §
112 license and paid to the beneficiaries thereof. The CRJ
held that, because SoundExchange failed to present any
evidence on behalf of copyright owners about the value of the
§ 112 license, “the paucity of the record” prevented it from
adopting that proposal. Determination of Rates, 73 Fed. Reg.
at 4098/3. For its part, Sirius-XM asks us to set the § 112 rate
at zero because SoundExchange has failed to demonstrate the
license has any value at all.

The paucity of evidence identified by the CRJ counsels

against our setting any rate. The only sensible choice,
therefore, is to remand the matter to the agency to set an
appropriate rate.

III. Conclusion
For the reasons set out above, the determination of the
CRJ is affirmed with respect to the § 114 royalty rate for the
use of sound recordings. The CRJ has substantial discretion
to balance the four objectives in 17 U.S.C. § 801(b)(1) and
SoundExchange gives us no reason to think the agency’s
decision was arbitrary, capricious, or not supported by
substantial evidence; the CRJ was under no obligation to
 12
choose a market-based rate and there is no convincing
evidence the CRJ was inconsistent in its use of revenue
measures. The determination of the CRJ is reversed with
respect to the § 112 royalty rate for ephemeral copies and the
matter is remanded the CRJ to set the royalty rate in the first
instance.

So ordered.
 KAVANAUGH, Circuit Judge, concurring: As this case
demonstrates, billions of dollars and the fates of entire
industries can ride on the Copyright Royalty Board’s
decisions. The Board thus exercises expansive executive
authority analogous to that of, for example, FERC, the FCC,
the NLRB, and the SEC. But unlike the members of those
similarly powerful agencies, since 2004 Copyright Royalty
Board members have not been nominated by the President
and confirmed by the Senate. Instead, as a result of a 2004
statute, Board members are appointed by the Librarian of
Congress alone. Board members are removable by the
Librarian, but only for cause. Moreover, in exercising
important duties, Board members are apparently unsupervised
by the Librarian of Congress or by any other Executive
Branch official.

The new statutory structure raises a serious constitutional

issue. Under the Appointments Clause, principal officers of
the United States must be nominated by the President and
confirmed by the Senate. U.S. CONST. art. II, § 2, cl. 2.
Copyright Royalty Board members plainly are officers of the
United States. And they appear to be principal officers – not
inferior officers – because they are not removable at will and
their decisions regarding royalty rates apparently are not
reversible by the Librarian of Congress or any other
Executive Branch official. See Edmond v. United States, 520
U.S. 651, 662-66 (1997); see also 17 U.S.C. §§ 701, 801-03;
Tr. of Oral Arg. at 24 (Government counsel agreeing that
Librarian of Congress and Register of Copyrights cannot
change copyright royalty rates set by the Board).

If the members of the Board are in fact principal officers,

then the present means of appointing Board members is
unconstitutional. But no party here has timely raised a
constitutional objection. We therefore may resolve the case
without deciding whether the Board is constitutionally
structured, and so I join the opinion of the Court.