Thursday, May 26, 2005

Why there is no Copyright Royalty Tribunal

After the Grokster debate in Palm Springs (see earlier posting), Judge Kozinski asked me what happened to the Copyright Royalty Tribunal (b1976, d1993). Here's the story.

Compulsory licenses aren't really licenses in the sense that copyright owners are compelled to "give" them to those wishing to use a copyrighted work. "Statutory" license is a better (although still not ideal) term: the statute places a limitation on copyright owners' rights in the form of terms and payments that a qualifying entity must meet and make. If the appropriate documents and money are timely deposited with the Copyright Office, as far as the user is concerned, that's it. The user doesn't have to negotiate with the copyright owner. (Voluntary licensing is though the norm in the music industry).

What happens to the money deposited with the Copyright Office? It is sent to the U.S. Treasury for later distribution. How the money flows back to copyright owners and how royalty rates were adjusted was the job of the CRT. But the CRT wasn't necessary until the 1976. Until the 1976 Act, there was only one statutory license, to make mechanical reproductions of non-dramatic musical works. The rate was set in the statute at 2 cents (and it stayed there for 69 years). Since the license was work-specific, there was no problem tracing payment to the correct copyright owner.

This changed in the 1976 Act, when three new non-work specific statutory licenses were added: Section 111 for cable retransmissions, Section 116 for jukeboxes, and Section 118 for public broadcasting. Because these licenses covered all works within the defined class, one couldn't trace a particular "license" to a particular work as under the 1909 Act. At the same time, Congress decided that adjusting rates in the statute was not the way to go: too much time would go by, there had to be bills introduced, hearings, haggling, the whole political thing. Better to fob the job off to someone else (and then Congress could come in as the white knight and save the day if the decision was too favorable to one side: bad agency, bad agency!). From 1976 until 1993, that someone else was the Copyright Royalty Tribunal. The CRT was given the responsibility both to periodically adjust rates according to loose statutory factors, and to decide who should get how much (if the parties couldn't agree among themselves).

The CRT was originally a five member tribunal, in the legislative branch, with members appointed by the President. Other than the very first chair, Tom Brennan, the former chief counsel of the Senate IP Subcommittee, who helped write the legislation that created his chairmanship, no subsequent permanent CRT member had any real experience with copyright law; some had none; some weren't even lawyers (there were former boxers, for example, and I don't mean Barbara or the dog). As one Senator described the situation, the CRT was a dumping ground for unqualified people to whom the President owed a small favor.

The first years of the CRT were marked by incessant appeals of its decisions. It was only the deep compassion of the DC Circuit in affirming decision after decision that kept the CRT afloat. Eventually, with the initial rate setting and challenges out of the way, the CRT was reduced to three members, but even three was too many; even one full-time member was too many. In data I compiled for its abolition, I discovered that on average, the CRT had only two weeks of hearings a year. This cried out for ad hoc adjudication. That opportunity came in 1993.

In 1993, as a result, in my opinion, of the appointment as chair of the then-wife of a former Congressman from Nebraska, the CRT simply imploded. It was a soap opera worthy of prime-time television, but for the substantial amounts of money that were involved. We didn't set out to abolish the CRT, the CRT invited it. I was minding my own business in the subcommittee's offices in the Cannon House Office Building. We began to get visits from different CRT members and the General Counsel, complaining about the fights that were destroying the place. For example, two members (a majority) would vote to change a regulation and send it to the Federal Register. The Federal Register would send it back because the change had not been transmitted by the chair; the chair, who was on the losing side of the vote, refused to transmit it. Moreover, we were told by the private sector that members were lobbying the private sector ex parte. No agency can function like that; the CRT was dangerously out of control.

We told the CRT to clean up itself up, or we would. They didn't, and we did. We did it by abolishing the tribunal and replacing it with ad hoc arbitration panels called "copyright arbitration panels" or "carps" (originally it was "copyright royalty arbitration panels," but the acronym didn't seem right). In addition to fitting the staffing to the workload, we also had the idea that if we required the parties to pay the arbitrators' fees (which would be high), we would encourage settlement and maybe even approximate market rates, which we thought was desirable; after all a "compulsory" license need not be a subsidized license, it could be a license that merely eliminates transaction costs. There is no reason, for example, why copyright owners should subsidize cable operators.

We were wrong the carps would encourage settlement, and for a few reasons. First, we should have tightened up standing issues and the process to ensure that small holdouts could not cause the whole carp mechanism to be invoked. In our defense, I observe that we had zero assistance or input from the private sector, despite requesting it. (There was an ongoing CRT proceeding). A second flaw is that we bought into the belief that companies will act in an economically rational way: if litigating is much more expensive than settling, companies will settle. This didn't happen, in part because of the process flaw, but also for other reasons.

At the end of last session, the carps were replaced with full-time government "Copyright Royalty Judges" appointed eventually to six-year terms (the initial appointments are staggered). The process was also improved. The new regime certainly saves the private sector a lot of money by putting the decisionmakers on the government payroll at government salaries. Whether it results in fewer or shorter disputes, and whether it results in better decisionmaking cannot be known by anyone. But as the number of compulsory licenses increase (and calls for more are a constant drumbeat), a properly functioning royalty setting and distribution mechanism is in everyone's interest and worthy of our attention.

1 comment:

Mickey said...

This history of copyright royalty mechanisms has important lessons for Internet royalty proposals.