Music Choice v. CRB ( 2020 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 20, 2020 Decided August 18, 2020
No. 19-1011
MUSIC CHOICE,
APPELLANT
v.
COPYRIGHT ROYALTY BOARD, ET AL.,
APPELLEES
SOUNDEXCHANGE, INC.,
INTERVENOR
On Appeal from a Final Determination of the Copyright
Royalty Board and a Memorandum Opinion of the Register of
Copyrights
Paul M. Fakler argued the cause for appellant. With
him on the briefs was Kelsi Brown Corkran. Margaret
Wheeler-Frothingham entered an appearance.
Jennifer L. Utrecht, Attorney, U.S. Department of
Justice, argued the cause for appellees. With her on the brief
was Daniel Tenny, Attorney. Mark R. Freeman, Attorney,
entered an appearance.
2
Matthew S. Hellman argued the cause for intervenor.
With him on the brief were David A. Handzo, Emily L.
Chapuis, and Devi M. Rao.
Before: SRINIVASAN, Chief Judge, RAO, Circuit Judge,
and SILBERMAN, Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge RAO.
RAO, Circuit Judge: The case raises the question of what
copyright royalty rate must be paid by Music Choice for
transmissions of digital music over the internet. Pursuant to the
Digital Millennium Copyright Act (“DMCA”), a lower
grandfathered royalty rate is paid by some music services that
were early providers of digital music transmissions. Music
Choice challenges a Final Determination of the Copyright
Royalty Board (“the Board”), which excludes Music Choice’s
internet transmissions from the grandfathered rate and also
adopts more stringent audit requirements.
We hold that the Board’s categorical exclusion of Music
Choice’s internet transmissions from the grandfathered rate
conflicts with the unambiguous language of the DMCA. Under
the DMCA, Music Choice’s internet transmissions are eligible
for the grandfathered rate to the extent they were part of its
service offering on July 31, 1998. The Board, however, retains
discretion to determine whether parts of Music Choice’s
current service offering, which includes mobile applications
and internet-exclusive channels, should be excluded from the
grandfathered rate. The Board also acted arbitrarily and
capriciously in altering the audit standards applicable to Music
Choice. Accordingly, we vacate the relevant parts of the Final
Determination and remand for the Board to determine if Music
Choice’s internet transmissions qualify for the grandfathered
rate and to reconsider the amended audit procedure.
3
I.
Started in the late 1980s, Music Choice is a digital
broadcast music service that consists of several cable television
channels. These channels are often included with digital cable
television packages and now are also available to cable
subscribers over the internet. Prior to 1995, subscription music
services such as Music Choice did not have to “obtain a license
to publicly perform sound recordings because copyright
owners did not have an exclusive right to publicly perform their
work.” See SoundExchange, Inc. v. Muzak LLC, 854 F.3d 713,
714 (D.C. Cir. 2017). Amidst the growth of digital music
transmissions, Congress enacted the Digital Performance Right
in Sound Recordings Act of 1995 to grant copyright protections
to the digital transmissions of music and other recordings
protected by copyright. Pub. L. No. 104-39, 109 Stat. 336. This
copyright protection was subject to a compulsory licensing
regime, set out in Section 114 of the Copyright Act, in which
existing subscription music services, including Music Choice,
would be entitled to continue transmitting copyrighted works
in exchange for a royalty payment. Muzak, 854 F.3d at 714–15
& n.2. The amount and terms of such royalty payments were
determined by the Copyright Arbitration Royalty Panel
(“CARP”) based on a reasonable rate standard. See id.
Congress modified this regime in the Digital Millennium
Copyright Act, which requires certain digital music services to
pay royalty rates at a market-based standard.1 Pub. L. No. 105-
304, § 415(a), 112 Stat. 2860, 2896 (1998) (codified at 17
U.S.C. § 114(f)(2)(B)). The market-based standard generally
results in higher royalty rates for copyright holders. The
1
Rather than letting the market decide what a market-based rate
would be, the DMCA charged CARP with predicting what the
market-based rate would be.
4
DMCA, however, includes a grandfathering provision that
makes preexisting subscription-based services, such as Music
Choice, eligible to pay only “reasonable rates,” which
generally allow the service providers to pay lower royalty rates.
Muzak, 854 F.3d at 714–15. To be eligible for the
grandfathered rate, a service must qualify as a “preexisting
subscription service,” (hereinafter “preexisting service”)
defined as “a service that performs sound recordings by means
of noninteractive audio-only subscription digital audio
transmissions, which was in existence and was making such
transmissions to the public for a fee on or before July 31,
1998.” 17 U.S.C. § 114(j)(11). If a preexisting service’s
“subscription transmission” is made “in the same transmission
medium used by such service on July 31, 1998,” it is entitled
to the grandfathered royalty rate. 17 U.S.C. § 114(d)(2)(B)
(hereinafter the “unconditional grandfathered rate”). A
transmission made by a preexisting service in a different
transmission medium, or by a “new subscription service,” may
also be eligible for the grandfathered rate if it meets several
additional conditions and requirements. 17 U.S.C.
§ 114(d)(2)(C) (hereinafter the “conditional grandfathered
rate”).
To determine the royalty rate to be paid by a preexisting
service, the Copyright Royalty Board2 holds adversarial rule-
making proceedings every five years. Muzak, 854 F.3d at 715.
The copyright holders are represented in these proceedings by
SoundExchange, a nonprofit entity designated by regulation to
“obtain the royalties owed under the statutory licenses and to
2
The Copyright Royalty Board was created by the Copyright
Royalty and Distribution Reform Act of 2004 to conduct royalty
proceedings, thus replacing the Copyright Arbitration Royalty Panel.
Pub. L. No. 108-419, § 5, 118 Stat. 2341, 2363.
5
distribute them to performing artists and copyright holders.”3
Id.
In 2016, the Board commenced the proceeding under
review to establish preexisting service royalty rates for the
years 2018 to 2022. As relevant here, the proceeding concerned
the royalty rates Music Choice, the only remaining preexisting
service participating, must pay to copyright holders by way of
SoundExchange. Over the course of the proceeding, the Board
referred to the Register of Copyrights the legal question of
whether Music Choice’s internet transmissions qualify as a
preexisting service. 83 Fed. Reg. 65,210, 65,225–226 (Dec. 19,
2018) (citing 17 U.S.C. § 802(f)(1)(B)). The Register
determined that, as a matter of law, internet transmissions are
categorically excluded from the unconditional grandfathered
rate because the DMCA’s “legislative history makes clear that
Congress … intended to limit” the grandfathered rate to Music
Choice’s “offerings in the specific transmission media
affirmatively identified in the DMCA Conference Report:
‘cable’ or ‘satellite.’” 82 Fed. Reg. 59,652, 59,657 (Dec. 15,
2017) (citing H.R. Rep. No. 105-796, at 89 (1998)). The
Register went on to set out a non-exhaustive six-factor test to
guide the Board’s determination of whether Music Choice’s
internet transmissions qualify for the conditional grandfathered
rate. Id. at 59,658–659.
In the Final Determination setting rates for the 2018 to
2022 period, the Board applied the Register’s legal opinion and
3
The Digital Millennium Copyright Act instructs the Board to
designate a “nonprofit collective” to receive royalty payments from
music services and distribute them to copyright holders and artists.
17 U.S.C. § 114(g)(2), (3). The Board has designated
SoundExchange as the exclusive entity to collect and distribute
copyright royalties. See 37 C.F.R. § 382.5(d).
6
excluded Music Choice’s internet transmissions from the
unconditional grandfathered rate. 83 Fed. Reg. at 65,227. The
Board went on to apply the Register’s six-factor test to
determine that Music Choice’s internet transmissions are also
excluded from the conditional grandfathered rate “to the extent
they are available outside a subscriber’s residence,” such as
through mobile applications. Id. Because Music Choice’s
internet transmissions did not qualify for either grandfathered
rate, they would be subject to the higher market-based royalty
rate. Id.
In the Final Determination, the Board also amended the
audit procedures applicable to preexisting services such as
Music Choice. The longstanding regulatory standard allowed
preexisting services to satisfy in full any audit obligations by
employing independent auditors in accordance with “generally
accepted auditing standards.” Id. at 65,262, 65,268. The Board
amended this standard so that the independent audit would
provide a safe harbor only for claims “within the scope of the
audit,” which meant that SoundExchange would be “permitted
to round out the findings [of Music Choice’s independent
audit] with its own audit, limited to the points omitted from the
scope of the defensive audit.” Id. at 65,262. This auditing
change was long sought after by SoundExchange and
consistently opposed by Music Choice.
Music Choice appeals the Final Determination. This court
has exclusive jurisdiction over Copyright Royalty Board
determinations and any legal determinations the Register made
as part of the proceeding. See Muzak, 854 F.3d at 717–18; 17
U.S.C. § 803(d)(1). Such determinations may be appealed by
“any aggrieved participant in the proceeding … who fully
participated in the proceeding and who would be bound by the
determination.” 17 U.S.C. § 803(d)(1). Music Choice meets
7
these criteria. SoundExchange intervened to defend the
Board’s actions.
II.
Music Choice challenges three separate aspects of the
Board’s Final Determination. First, it argues that the Board
should not have referred to the Register the legal question
regarding whether internet transmissions could be included in
the grandfathered rate provision. Second, it challenges the
Board’s conclusion that Music Choice’s internet transmissions,
to the extent they are available outside a subscriber’s home, are
categorically excluded from the grandfathered rate. Third, it
challenges the Board’s alteration of the audit provision. We
review Copyright Royalty Board rate determinations under the
Administrative Procedure Act and must “uphold a ratemaking
determination unless it is arbitrary, capricious, contrary to law,
or not supported by substantial evidence.” Intercollegiate
Broad. Sys., Inc. v. CRB, 796 F.3d 111, 127 (D.C. Cir. 2015)
(quotation marks omitted); see also 5 U.S.C. § 706(2)(A).
A.
Music Choice first contends that the Board erred by
referring the internet transmission issue to the Register for a
binding legal opinion. The Copyright Act requires the Board to
refer a “novel material question of substantive law” that “is
presented” in a royalty proceeding to the Register for a binding
opinion. 17 U.S.C. § 802(f)(1)(B)(i).4 Music Choice maintains
4
17 U.S.C. § 802(f)(1)(B)(i) states:
In any case in which a novel material question of
substantive law concerning an interpretation of
those provisions of this title that are the subject of
the proceeding is presented, the Copyright Royalty
Judges shall request a decision of the Register of
8
that a party must “present” a legal issue before the Board can
refer it to the Register and no party raised the legal issue in this
case. The government responds that the Board must, or at least
may, refer to the Register novel and material legal issues that
arise in a proceeding. Alternatively, the government argues that
the referral was proper even under Music Choice’s
interpretation because SoundExchange raised the internet
transmission issue during the proceeding.
Assuming arguendo that Music Choice’s interpretation of
the statute is correct, the Board’s referral to the Register was
proper because SoundExchange “presented” the internet
transmission issue in the royalty proceeding. Before the rate
proceeding concluded, SoundExchange argued that Music
Choice’s internet transmissions should be subjected to the
higher royalty rates applicable to new services rather than the
lower grandfathered rates accorded to Music Choice’s “core
PSS television-based service.” Music Choice specifically
responded to this argument in its reply to SoundExchange’s
filing and did not move to reopen the evidentiary record. Thus,
we have no occasion to resolve whether the Board may refer
novel legal questions on its own motion, because the issue in
this case was “presented” by a party, rather than the Board. Cf.
Copyrights, in writing, to resolve such novel
question. Reasonable provision shall be made for
comment on such request by the participants in the
proceeding, in such a way as to minimize
duplication and delay. … If such a decision is timely
delivered to the Copyright Royalty Judges, the
Copyright Royalty Judges shall apply the legal
determinations embodied in the decision of the
Register of Copyrights in resolving material
questions of substantive law.
9
Settling Devotional Claimants v. CRB, 797 F.3d 1106, 1121
(D.C. Cir. 2015).
To counter this straightforward conclusion, Music Choice
takes out of context SoundExchange’s statement that it “does
not believe it is necessary to decide in this proceeding whether
or not Music Choice’s webcasts qualify as part of its
[preexisting service].” J.A. 127. Read within the context of
SoundExchange’s proposed conclusions of law, it is clear that
SoundExchange was advocating for Music Choice’s internet
transmissions to be treated differently from its television-based
service. By arguing that Music Choice should pay a higher rate
for its internet transmissions than its television transmissions,
SoundExchange fairly presented the issue the Board ultimately
referred to the Register.5 Moreover, contemporaneous
statements from the Board, the Register, SoundExchange, and
even Music Choice demonstrate that all parties understood the
Board referred the issue in response to SoundExchange’s
argument regarding different rates for internet transmissions.
See J.A. 143 (Board referral noting that “SoundExchange seeks
5
SoundExchange further argued: “Here, an Internet-based PSS
distributed to mobile apps over the internet is sufficiently different
from the core PSS television-based service that the Judges must
consider whether the value of the sound recording usage involved is
sufficiently reflected in a rate set with a television-based service in
mind.” J.A. 130–31. SoundExchange also noted that an expert
witness “found that the most reasonable way to value webcasting”
by Music Choice is to apply “the same statutory rates that would
apply to ancillary Internet streaming.” Id. at 131; see also id. at 130
(“Music Choice Should Pay Webcasting Rates For Its Webcasting.”).
Thus, SoundExchange proposed that the applicable webcasting rates
should apply to “any ancillary webcasting” that was part of a
preexisting service, rather than the lower rates that apply to
television-based transmissions of a preexisting service. Id. at 130–
31.
10
two separate royalty payments”); 82 Fed. Reg. at 59,654
(Register decision noting that the “referred questions arose in
this proceeding because SoundExchange, Inc., for the first
time, is seeking two separate royalty payments”); J.A. 117
(Music Choice’s reply to SoundExchange’s proposed findings
and conclusions noting that “[i]t is crucial to determine whether
Music Choice’s internet transmissions are part of its
[preexisting service]”).
Because SoundExchange raised the question of whether
internet transmissions should be included in the grandfathered
rate, that question was clearly “presented” in the royalty rate
proceeding. Accordingly, we hold the Board appropriately
referred this issue to the Register for a binding legal opinion.
B.
We next examine Music Choice’s challenge to the
Register’s legal opinion, which determined that internet
transmissions are categorically excluded from the
unconditional grandfathered rate. 82 Fed. Reg. at 59,657–660.
Music Choice questions this categorical exclusion and
maintains that its internet transmissions qualify for the
grandfathered rate under the plain meaning of the statute.
Because the text and structure of the DMCA directly contradict
the Register’s interpretation, we vacate the Register’s legal
opinion and the part of the Board’s Final Determination that
relies upon it.
Under the DMCA, a “subscription digital audio
transmission” “shall be subject” to the unconditional
grandfathered rate if it is (1) “made by a preexisting
subscription service,” and (2) offered “in the same transmission
medium used by such service on July 31, 1998.” 17 U.S.C.
§ 114(d)(2)(B). If a transmission meets both statutory elements,
the Board must determine the royalty in accordance with the
11
unconditional grandfathered rate. Contrary to the Register’s
conclusion, neither element categorically excludes internet
transmissions.
First, the DMCA’s definition of a preexisting subscription
service is broad enough to include internet transmissions that
were in fact occurring as of July 31, 1998, because it includes
any “service that performs sound recordings by means of
noninteractive audio-only subscription digital audio
transmissions, which was in existence and was making such
transmissions to the public for a fee on or before July 31,
1998.” 17 U.S.C. § 114(j)(11). We have held that the term
“service” in “preexisting subscription service” refers to both
the business entity making the transmissions (i.e., Music
Choice) and to the “program offering” the entity provides (i.e.,
the Music Choice digital audio service). Muzak, 854 F.3d at
715. Therefore, for a digital audio transmission to qualify as a
“preexisting subscription service,” first, it must be made by a
business entity that was in existence on or before July 31, 1998,
and second, the relevant “program offering” must have been in
existence on July 31, 1998.
Here, all agree that Music Choice fulfills the first prong.
The question is whether the word “service” in the DMCA
covers Music Choice’s program offerings transmitted via the
internet. The Register, relying on the legislative history of the
DMCA, concluded that it does not. But the plain language of
the DMCA grandfathers a covered entity’s program offerings
that were “in existence … on or before July 31, 1998.” 17
U.S.C. § 114(j)(11). It is undisputed that Music Choice had
been providing some digital audio transmissions over the
internet since 1996 and was still doing so on July 31, 1998.
Those internet transmissions that are part of the same “service”
fall within the scope of the DMCA’s preexisting service
definition. Therefore, the text of the DMCA precludes the
12
Register’s conclusion that the term “preexisting subscription
service” categorically excludes Music Choice’s internet
transmissions. Cf. Muzak, 854 F.3d at 716 (declining to impose
extra-textual conditions on the plain meaning of the DMCA’s
preexisting subscription service definition).6 As discussed
below, however, the Board retains discretion in determining the
extent to which Music Choice’s current internet offerings can
fairly be characterized as included in the service offering Music
Choice provided on July 31, 1998.
Second, the DMCA applies the unconditional
grandfathered rate to transmissions made “in the same
transmission medium.” 17 U.S.C. § 114(d)(2)(B). This
provision does not distinguish between different transmission
media, and there is no suggestion in the text that a
“transmission medium” excludes internet transmissions. The
“transmission medium” clause, like the preexisting service
definition, focuses on the actual preexisting entity and program
offering, not the manner of transmission. Thus, internet
transmissions “shall be subject” to the grandfathered rate if
they were “made by” a preexisting service on July 31, 1998. Id.
The structure of the DMCA’s grandfathered rate
provisions also bolsters this conclusion. In contrast to the
unconditional grandfathered rate provision, the conditional
grandfathered rate provision explicitly distinguishes between
6
In Muzak, we noted the term “preexisting subscription service” was
“dreadfully ambiguous” regarding the particular question under
review—“[d]oes ‘service’ refer only to the business entity, or does it
also include the original program offerings?” 854 F.3d at 714. As
discussed above, the statute is unambiguous regarding the precise
question under review in this case—do the terms “preexisting
subscription service” and “same transmission medium” preclude
internet transmissions even if they were offered by Music Choice on
July 31, 1998?
13
internet and other transmission media. Some of the conditions
to qualify for this rate apply to, or specifically exempt,
“satellite digital audio service,” 17 U.S.C. § 114(d)(2)(C)(v),
and “broadcast transmissions,” 17 U.S.C. § 114(d)(2)(C)(i),
(iii)(IV)(bb), (vii), others apply equally to cable or internet
transmissions, 17 U.S.C. § 114(d)(2)(C)(iv) (applying to a
“transmitting entity” that “offers transmissions of visual
images contemporaneously with transmissions of sound
recordings” as in a cable or internet transmission).7 By
specifying categories of transmission media, and including
internet alongside cable and satellite, the conditional
grandfathered rate provision demonstrates the general terms
“subscription service” and “transmission medium,” standing
alone, do not exclude internet transmissions.
Thus, within the DMCA, Congress knew how to
distinguish between types of transmission media and did so
explicitly in the conditional grandfathered rate provision. See
Allina Health Servs. v. Price, 863 F.3d 937, 944 (D.C. Cir.
2017) (“A material variation in terms suggests a variation in
meaning.”) (quotation marks and brackets omitted). By
contrast, the unconditional grandfathered rate provision does
7
The Register refers to this subsection to argue that the DMCA treats
issues regarding internet transmissions exclusively under the
conditional grandfathered rate provision. The Register’s conclusion,
however, turns not on the text of the statute, but instead on its
legislative history: “The rationale behind ... the new requirements in
[the conditional grandfathered rate provision], was to ‘address[]
unique programming and other issues raised by Internet
transmissions.’” 82 Fed. Reg. at 59,658 (quoting Staff of H. Comm.
on the Judiciary, 105th Cong., Section-By-Section Analysis of H.R.
2281, at 50). The legislative history, however, runs contrary to the
plain meaning of the conditional grandfathered rate provision, which
does not distinguish between cable, satellite, and internet
transmissions that were actually offered on July 31, 1998.
14
not distinguish between transmission media and therefore
cannot be read to exclude internet transmissions. Reading the
statute as a whole, the unconditional grandfathered rate
provision does not categorically exclude Music Choice’s
internet service offering to the extent it was available on July
31, 1998.
The Register reached a contrary conclusion only by
ignoring the text of the DMCA and focusing on its legislative
history. The Register emphasized that the legislative history
referred only to cable and satellite transmissions and thus
Congress did not intend to include internet transmissions in the
unconditional grandfathered rate. According to the Register,
“as a matter of law, it is irrelevant whether or not Music Choice
or another [preexisting service] entity, to some limited degree,
was making transmissions via a different medium than those
specified in the legislative history on July 31, 1998, such as the
internet.” 82 Fed. Reg. at 59,658 (emphasis added). Without
regard to the text of the statute, which makes no distinction
between transmission media, the Register determined that only
those transmission media identified in the DMCA Conference
Report would be entitled to the grandfathered rate.8 Id. at
8
In Muzak, we looked to legislative history to resolve an ambiguity
in the meaning of “service” as applied to the question presented in
that case, but ultimately noted that the DMCA Conference Report
was a particularly unreliable guide in interpreting Section 114’s
grandfathered rate provisions: “[F]or each point in the conference
report supporting SoundExchange, there can be found a
countervailing one in support of Muzak.” 854 F.3d at 717 n.11. So
too here. Compare H.R. Rept. No. 105-796, at 89 (identifying
“cable” and “satellite” as the protected transmission media), with id.
(“[I]f a cable subscription music service making transmissions on
July 31, 1998, were to offer the same music service through the
Internet, then such Internet service would be considered part of a
preexisting subscription service.”).
15
59,657 (requiring a subscription transmission to be made in
“the specific transmission media identified” in the DMCA
Conference Report to be eligible for the unconditional
grandfathered rate) (citing H.R. Rep. No. 105-796, at 89
(1998)). The statute, however, speaks to this precise issue and
precludes the Register’s interpretation. As we have explained,
the “preexisting subscription service” definition and the
unconditional grandfathered rate provision distinguish between
transmission media that were employed before July 31, 1998,
and those offered after that date. The text does not single out
internet transmissions for categorical exclusion from the
grandfathered rate. “By introducing a limitation not found in
the statute,” the Register “alter[ed], rather than …
interpret[ed]” the DMCA. Little Sisters of the Poor Saints Peter
& Paul Home v. Pennsylvania, 140 S. Ct. 2367, 2381 (2020).
Therefore, we vacate the Register’s legal opinion and the
part of the Board’s Final Determination applying this opinion
and remand to the Board to determine under the correct legal
standard whether Music Choice’s current service offering,
including its internet transmissions, qualifies for the
unconditional or conditional grandfathered rates. Because the
Final Determination categorically excluded internet
transmissions from the unconditional grandfathered rate, the
Board had no occasion to assess whether Music Choice’s
current internet service offerings, including its mobile
application and internet-exclusive channels, are a part of the
service offering Music Choice provided on July 31, 1998. The
Board cannot exclude from the unconditional grandfathered
rate internet transmissions that were actually part of Music
Choice’s service offering on July 31, 1998.9 On remand, the
9
For any internet transmissions that do not qualify for the
unconditional grandfathered rate, the Board retains discretion to
determine if they qualify for the conditional grandfathered rate or if
they should be excluded from both grandfathered rates. As noted
16
Board must determine the precise scope of Music Choice’s
service offering as it actually existed on July 31, 1998. While
on the record below it is undisputed that Music Choice was
making some internet transmissions at that date, there is a
question about whether those transmissions were available
outside the home. See 82 Fed. Reg. 59,660. Similarly, it has
been suggested that Music Choice’s internet-exclusive
above, the Board also held, based on the Register’s legal opinion,
that Music Choice’s internet transmissions do not qualify for the
conditional grandfathered rate “to the extent they are available
outside a subscriber’s residence.” 83 Fed. Reg. at 65,227. Because
we conclude that internet transmissions are not categorically
excluded from the unconditional grandfathered rate, we need not
consider Music Choice’s challenge to the Board’s application of the
Register’s “non-exhaustive” six-factor test under the conditional
grandfathered rate. Id. at 65,226–227.
On remand, if the Board concludes that a part of Music Choice’s
internet offering does not qualify for the unconditional grandfathered
rate, it must reconsider whether such transmissions qualify for the
conditional grandfathered rate. This analysis must focus on whether
the transmissions fit within the statute’s definition of “preexisting
subscription service,” 17 U.S.C. § 114(j)(11), and the criteria
enumerated in 17 U.S.C. § 114(d)(2)(C). Although we decline to
review the six-factor test the Register set out to assess whether a
transmission qualifies for the conditional grandfathered rate, we
emphasize that factfinding, to the extent it is needed, must be
conducted by the Board, and not the Register. See 17 U.S.C.
§ 802(f)(1)(A) (the Board “may consult with the Register of
Copyrights on any matter other than a question of fact”); 17 U.S.C.
§ 802(f)(1)(B)(i) (confining the Register to legal determinations).
We further emphasize that we do not seek to limit the Register’s
discretion in defining the legal parameters of a “preexisting
subscription service,” beyond what we have held above: the Register
may not exclude internet transmissions from the definition if such
internet transmissions were actually part of the preexisting service
offering on July 31, 1998.
17
channels and smartphone applications are not part of the
service offering Music Choice provided on the relevant date.
See CRB Br. 37–38. The Board must sort through these issues
on remand to determine which parts of Music Choice’s current
service offering are eligible for the grandfathered rate because
they were a part of Music Choice’s service on July 31, 1998.
C.
Finally, we consider Music Choice’s challenge to the
Board’s amendment of royalty audit procedures. Pursuant to its
general authority to set royalty terms, 17 U.S.C. § 114(f)(1)(A),
the Board and its predecessor agency have promulgated royalty
audit procedures. Prior to the amendments at issue here, a
preexisting service like Music Choice could secure an
independent audit that would be treated as comprehensive and
dispositive as to all parties during the Board’s rate
determination proceedings. 37 C.F.R. § 382.7(e) (2013)
(establishing that an audit “performed in the ordinary course of
business according to generally accepted auditing standards by
an independent and Qualified Auditor, shall serve as an
acceptable verification procedure for all interested parties”).
The Final Determination amends this regulation to provide that
an independent audit will be determinative only as to the issues
within the scope of the audit, thus potentially allowing other
parties to conduct additional audits. 83 Fed. Reg. at 65,262,
65,268 (amending the provision so that independent audits
“shall serve as an acceptable verification procedure for all
parties with respect to the information that is within the scope
of the audit”) (emphasis added). The government and
SoundExchange argue that the Board’s amendment is not a
substantive change. We disagree.
The Board’s amendment makes a consequential revision
to the audit procedure. Prior to the revision, Music Choice’s
18
audit was treated as sufficient if conducted by an independent
auditor pursuant to generally accepted auditing standards.
Under the revision, SoundExchange is given permission to
conduct audits of any matter outside the “scope of the audit.”
Id. at 65,262. This alteration imposes a new condition on Music
Choice, by allowing additional audits beyond the independent
audit that was previously deemed an “acceptable verification
procedure.” 37 C.F.R. § 382.7(e) (2013). Although the
government and SoundExchange argue this is a clarification
rather than a change, the agency has long understood the audit
as a kind of safe harbor for preexisting services like Music
Choice. For instance, in 1997, when CARP and the Librarian
of Congress, the Board and Register’s predecessors, created the
defensive audit procedures, CARP stated that allowing the
preexisting services to conduct their own audits rather than
being subject to outside copyright owner audits would balance
the “fair opportunity to audit for copyright owners” against
“the burden and expense of auditing upon the Services.”
Copyright Arbitration Panel, Report No. 95-5 ¶ 194 (Nov. 12,
1997) (adopted 63 Fed. Reg. 25,394 (May 8, 1998)); see also
78 Fed. Reg. 23,054, 23,074 (Apr. 17, 2013). The Final
Determination alters this calculus by explicitly giving
SoundExchange the green light to “round out the findings with
its own audit, limited to the points omitted from the scope of
the defensive audit.” 83 Fed. Reg. at 65,262. Further supporting
the substantive nature of this change is Music Choice’s record
testimony—unacknowledged by the Board—that this change
would upset its reliance on the previous audit procedure. See
J.A. 80 (“Music Choice has availed itself of [the external
independent audit], and has expended significant resources in
doing so.”).
Having found that the Final Determination’s amendment
of the audit provision is a substantive change, we must
determine whether the Board “display[ed] awareness that it is
19
changing position” and demonstrated “good reasons for the
new policy.” FCC v. Fox Television Stations Inc., 556 U.S.
502, 515 (2009). The Board failed on both counts. The Final
Determination does not acknowledge the Board’s rejection of
a substantially identical proposal in its 2013 proceeding. There,
the parties presented similar arguments for the same change
and the Board rejected SoundExchange’s position because it
did not “adequately address[]” flaws pointed out by Music
Choice. 78 Fed. Reg. at 23,074. Specifically, the Board noted
that SoundExchange failed to rebut Music Choice’s argument
that the change would “permit SoundExchange to use auditors
that are employees or officers of a sound recording owner or
performing artists, the objectivity of which might be suspect.”
Id. The Board does not acknowledge this prior position, does
not point to any evidence that these concerns have been
ameliorated, and does not present any new reasons for adopting
the amended audit procedure that it previously rejected.
Moreover, the Board failed to address CARP’s initial reasoning
for instituting the defensive audit procedure, which sought to
balance the preexisting services’ burden and expense against
copyright holders’ audit rights. In the Final Determination, the
Board struck a different balance in favor of SoundExchange
without acknowledging or addressing the reasons for the policy
shift.
Moreover, the Board did not give reasons for amending the
audit provision, stating only that it can “see no reason not to”
make the change. 83 Fed. Reg. at 65,262. Yet an agency’s ipse
dixit cannot substitute for reasoned decisionmaking. This court
has rejected precisely this type of justification from the Board
in the past: “[R]ational decisionmaking … requires more than
an absence of contrary evidence; it requires substantial
evidence to support a decision.” Intercollegiate Broad. Sys. v.
CRB, 574 F.3d 748, 767 (D.C. Cir. 2009). The Board also failed
to respond to Music Choice’s reliance interests arising from the
20
previous audit standard—a matter Music Choice specifically
raised on the record during the proceeding. Cf. Encino
Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016) (“A
summary discussion may suffice in other circumstances, but
here—in particular because of decades of industry reliance on
the Department’s prior policy—the explanation fell short of the
agency’s duty to explain why it deemed it necessary to overrule
its previous position.”).
Perhaps the agency can justify its change in position, but
its scant explanation and casual disregard for its former
position do not satisfy the APA’s requirements for rational
decisionmaking. See Ramaprakash v. FAA, 346 F.3d 1121,
1124 (D.C. Cir. 2003) (“Agencies … must provide a reasoned
analysis indicating that prior policies and standards are being
deliberately changed, not casually ignored.”) (quotation marks
omitted). Accordingly, we vacate the revised audit provision as
arbitrary and capricious.
***
We vacate Part IV(D) and Part XI(A)(3)(g) of the Final
Determination and the Register of Copyright’s underlying legal
opinion. We remand for the Board to determine, in accordance
with this opinion, whether Music Choice’s internet
transmissions qualify for the grandfathered rate and to
reconsider the audit definition and provide a reasoned
explanation if the Board determines the revised definition is
justified.
So ordered.