Intercollegiate Broadcast System, Inc. v. Copyright Royalty Board
387 U.S. App. D.C. 69, 571 F.3d 69, 91 U.S.P.Q. 2d (BNA) 1449 (2009)
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Rule of Law:
Under the Administrative Procedure Act, an agency's ratemaking determination will be set aside as arbitrary and capricious if a key component, such as a minimum fee, is not supported by substantial evidence in the administrative record.
Facts:
- Webcasting, the transmission of sound recordings over the Internet, requires licenses for which copyright owners must be paid royalties.
- Congress created a statutory license scheme and delegated the authority to set 'reasonable rates and terms' to a panel of three Copyright Royalty Judges (Judges).
- The governing statute requires the Judges to set rates that would reflect a negotiation between a 'willing buyer and a willing seller' and to establish a 'minimum fee' for each type of service.
- Various groups of webcasters, including large commercial, small commercial, and noncommercial entities, participated in the ratemaking proceeding.
- SoundExchange, Inc. was the established entity for collecting and distributing royalties, a role that Royalty Logic, Inc. also sought.
- During the proceeding, evidence was presented regarding appropriate royalty rates, fee structures (per-play vs. percentage-of-revenue), and administrative costs.
- One voluntary agreement discussed during the proceeding, the '2003 Voluntary Agreement,' had included a cap on minimum fees, limiting them to $2,500 per licensee.
- Another past agreement, the NPR Agreement, involved a flat-fee lump sum payment for noncommercial stations, but the parties disputed its relevance to current market conditions.
Procedural Posture:
- The Copyright Royalty Judges conducted a complex, adversarial ratemaking proceeding involving multiple parties, including webcaster groups and SoundExchange.
- The Judges issued a final determination setting royalty rates and terms, which included a $500 minimum annual fee per channel or station.
- Multiple participants, including the Digital Media Association (DiMA), small webcasters, noncommercial broadcasters, and Royalty Logic, filed motions for rehearing, which the Judges denied.
- The aggrieved parties (appellants) filed five separate appeals from the Judges' final determination to the U.S. Court of Appeals for the D.C. Circuit, which were consolidated into this case.
- Months after filing its opening brief, appellant Royalty Logic moved to file a supplemental brief arguing for the first time that the appointment of the Judges violated the Appointments Clause of the U.S. Constitution.
- A motions panel of the court of appeals granted Royalty Logic's motion to file the supplemental brief without prejudice to the merits panel deciding whether to consider the issue.
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Issue:
Is the Copyright Royalty Judges' determination setting a $500 minimum annual fee per channel or station for all webcasters arbitrary and capricious because it is unsupported by substantial evidence and fails to provide a cap on the total fees a single licensee might owe?
Opinions:
Majority - Per Curiam
Yes, the $500 minimum fee is arbitrary and capricious. While most of the Judges' determination is affirmed under the deferential standard of review for agency ratemaking, the minimum fee provision for both commercial and noncommercial webcasters is not supported by substantial evidence and is therefore vacated and remanded. The court declined to hear a separate constitutional challenge to the Judges' appointments because the appellant forfeited the issue by raising it too late in the appeal process. The court affirmed the per-play royalty rates for commercial webcasters, finding the Judges reasonably relied on their expert's economic model and were not required to adopt a 'perfectly competitive' market standard. However, the minimum fee was flawed; for commercial webcasters, the 'per channel or station' language without a cap created an arbitrary and potentially enormous liability. For noncommercial webcasters, the $500 amount was based on an unsupported assumption about administrative costs, with no actual evidence in the record to justify it. All other challenges to the Judges' determination, including the late fee policy and the designation of SoundExchange as the sole collective, were rejected as the Judges' decisions were found to be reasonable and within their statutory authority.
Analysis:
This decision reaffirms the highly deferential standard of review for technical agency ratemaking under the Administrative Procedure Act, but clarifies its limits. It establishes that even under deferential review, an agency's findings must be grounded in substantial evidence from the record; an agency cannot rely on unsubstantiated assumptions or create potentially unbounded financial obligations without a clear basis. The case also provides a strong procedural lesson on the doctrine of forfeiture, showing that federal appellate courts are loath to decide significant, untimely constitutional challenges, particularly when doing so could destabilize an entire administrative scheme without the benefit of full and adequate briefing from all affected parties.
