Recording Industry Ass'n v. Copyright Royalty Tribunal (662 F.2d 1, 1981)

MIKVA, Circuit Judge:

These consolidated cases present various challenges to a rulemaking proceeding of the Copyright Royalty Tribunal (“Tribunal”), in which the Tribunal increased the royalty payable under the compulsory license for making and distributing pho-norecords of copyrighted musical works. Our consideration of these petitions was expedited because the new rates were scheduled to become effective on July 1, 1981. Oral argument was heard on June 18, 1981, and on June 23 a judgment was entered, upholding the Tribunal in part, and reversing and remanding in part.

We held that the Tribunal acted within its authority in adjusting the royalty rate and in assigning the increase an effective date of July 1, 1981, but that the Tribunal had exceeded its authority in adopting a procedure for interim rate adjustments that would require the Tribunal to convene annual proceedings for the exercise of discretion. The case was remanded to permit the Tribunal to adopt, if it so desired, an alternative scheme of interim rate adjustment. This opinion explains more fully the basis of that judgment.

I. THE COMPULSORY LICENSE AND THE COPYRIGHT ROYALTY TRIBUNAL

The royalty determinations challenged in this proceeding concern the compulsory license for phonorecords under the Copyright Act, 17 U.S.C. §§ 101-810 (1976). Once the creator of a nondramatic musical work has allowed phonorecords of that work to be produced and distributed, the statute requires him to grant a license upon request to any other person who proposes to make and distribute phonorecords of the work, at a royalty rate set by law. Id. § 115. This compulsory licensing scheme is one of several established by the Copyright Act, and determination of the appropriate royalty rates is one of the principal functions Congress has assigned to the Copyright Royalty Tribunal.

The phonorecord compulsory licensing system dates back to 1909, when Congress first extended a composer’s copyright protection to include the right to control manufacture of “parts of instruments serving to reproduce mechanically the musical work.” Industry representatives expressed a fear that this protection ran the risk of “establishing a great music monopoly” because the Aeolian Company, a manufacturer of player-piano rolls, was acquiring exclusive contract rights from composers and publishers. See H.R. Rep. No. 2222, 60th Cong., 2d Sess. 7 (1909). The music industry has undergone major transformations in the intervening years, but record producers have continued to argue that a danger of monopolization and discriminatory practices exists, and Congress has concluded that a compulsory licensing system is still warranted. See H.R. Rep. No. 1476, 94th Cong., 2d Sess. 107 (1976) U.S.Code Cong. & Admin.News, p. 5659 [hereinafter cited as 1976 House Report]-, H.R. Rep. No. 83, 90th Cong., 1st Sess. 66-67 (1967).

Although the availability of the compulsory license under the 1909 Act has been very important to the structure of the recording industry, the statutory procedures for invoking the license have rarely been used. The usual effect of the system is to make the statutory royalty rate a ceiling on the price copyright owners can charge for use of their songs under negotiated contracts: if the owner demands a higher price in voluntary negotiations, the manufacturer can turn to the statutory scheme, but if the owner is willing to accept less than the statutory rate, he is free to do so. Today, the vast majority of contracts for use of copyrighted musical works involve voluntary payment at precisely the statutory rate. See Adjustment of Royalty Payable Under Compulsory License for Making and Distributing Phonorecords, 46 Fed.Reg. 10,-466, 10,479-80 (1981); S.Rep. No. 473, 94th Cong., 1st Sess. 93-94 (1975) [hereinafter cited as 1975 Senate Report], This was not the case earlier in the century, because the statutory rate was then high enough in terms of purchasing power to allow a greater range for individual bargaining. The 1909 Act had set the royalty rate at two cents for each “part” (e. g., disc) manufactured, and this rate remained unchanged until the passage of the 1976 Copyright Act, which increased the statutory rate to 2% cents per copy and provided for further adjustments by the Copyright Royalty Tribunal.

The inadequacy of the two-cent rate after half a century of economic change had long been recognized. See, e. g., H.R. Rep. No. 83, 90th Cong., 1st Sess. 67 (1967). Nonetheless, the rate increase was continually delayed by the battle over comprehensive copyright law revision and as the years passed, spokesmen for the opposing interests returned to argue over further incremental adjustments. Ultimately Congress found it “neither feasible nor desirable that these rates should be adjusted exclusively by the normal legislative process.” 1975 Senate Report at 155. Congress chose instead to make a first, approximate modification of the royalty rate, and to delegate the authority to make future adjustments to an independent tribunal. 17 U.S.C. § 801(b) (1976).

The Senate and the House proposed entirely different structures for the independent body that would determine rates. The Senate version provided an ad hoc tribunal convened by the Register of Copyrights whenever a rate proceeding was necessary; the American Arbitration Association was to name three of its members to form the panel, and this choice would be binding unless parties made well-founded objections. S. 22, 94th Cong., 1st Sess. § 803 (1975) [hereinafter cited as Senate Bill], see 1975 Senate Report at 36,157. Rate adjustments could be vetoed by resolution of either house of Congress, and judicial review was provided only when a party charged that a proceeding for distribution of collected royalty fees was tainted by partiality, corruption, fraud, or other misconduct. Senate Bill §§ 807, 809; see 1975 Senate Report at 37, 158.

The House, in contrast, proposed a permanent body, the Copyright Royalty Commission. The Commission would function like a traditional administrative agency. Its three members would be appointed by the President for five-year terms, and its proceedings would be subject to the Administrative Procedure Act, including the normal scope of judicial review. See 1976 House Report at 41-44,174,179. The legislative veto was eliminated. Id. at 179.

As the conference report stated, the structure finally chosen for the Tribunal “conforms in general to the House bill, but with several changes.” H.R. Rep. No. 1733, 94th Cong., 2d Sess. 82 (1976) U.S.Code Cong. & Admin.News, p. 5823 [hereinafter cited as Conference Report]. The Act establishes “an independent Copyright Royalty Tribunal in the legislative branch.” 17 U.S.C. § 801(a) (1976). The Tribunal is composed of five commissioners appointed by the President with the advice and consent of the Senate for seven-year terms. Id. § 802. The Tribunal is subject to the APA, and is directed to adopt regulations “governing its procedure and methods of operation” arid to accompany its final decisions by a statement of “the criteria that [it] determined to be applicable to the particular proceeding, the various facts that it found relevant to its determination in that proceeding, and the specific reasons for its determination.” Id. § 803. The APA also governs judicial review of the Tribunal’s actions, and there is no legislative veto provision. Id. § 810.

Replacement of the legislative veto by the normal process of judicial review was intended to “permit more detailed, thoughtful, and careful review of possibly arbitrary or capricious determinations” of the Tribunal. 1976 House Report at 179, U.S.Code Cong. & Admin.News at p. 5795. Congress also enhanced the protection against arbitrary action by reconstituting the Tribunal as a permanent body. The Register of Copyrights, testifying before a House subcommittee, expressed her belief that the Senate proposal was constitutional, but urged the House to strengthen the Tribunal, emphasizing “that it should have continuity and not be as ad hoc as is laid out in the bill at the moment.” 1975 Hearings at 1914-15 (testimony of Ms. Ringer). Assimilation of the Tribunal to the usual agency model provides greater practical and procedural assurances of a coherent royalty system.

The present case involves petitions for review of the Tribunal’s first redetermination of the royalty rate for the phonorecord compulsory license. The statute requires the Tribunal to institute proceedings for a royalty adjustment on January 1,1980, and, upon petition, “in 1987 and in each subsequent tenth calendar year.” 17 U.S.C. § 804(a)(1), (2)(B) (1976). The rate applicable to the phonorecord license is to be calculated to achieve the following objectives: Id. § 801(b)(1). Until that redetermination has been made, the royalty rate is “either two and three-fourths cents, or one-half of one cent per minute of playing time or fraction thereof, whichever amount is larger.” Id. § 115(c)(2).

(A) To maximize the availability of creative works to the public;

(B) To afford the copyright owner a fair return for his 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.

II. THE NEW ROYALTY RATE

The Copyright Royalty Tribunal published notice of its first proceeding to determine the royalty rate for the phonorecord compulsory license on January 2, 1980. 45 Fed.Reg. 63 (1980). In the spring of that year, the Tribunal accepted submissions of economic studies and legal motions, and then commenced evidentiary hearings that lasted forty-six days and involved thirty-five witnesses. See Adjustment of Royalty Payable Under Compulsory License for Making and Distributing Phonorecords, 46 Fed.Reg. 10,466, 10,466-67 (1981). Closing arguments followed in November, and the Tribunal published the new rate in the Federal Register on January 5, 1981. 46 Fed. Reg. 891 (1981). The royalty rate was increased to “four cents, or three-quarters of one cent per minute of playing time or fraction thereof, whichever amount is larger.” Id. at 892 (to be codified at 37 C.F.R. § 307.2). The Tribunal also set out a complex system for future interim adjustments in the rate to reflect increases in the average list price of albums. Id. (to be codified at 37 C.F.R. § 307.3-.4). On February 3, the Tribunal published its findings in a detailed statement of the reasons for the adjustment it made in the rate. 46 Fed.Reg. 10,466-87 (1981).

Various parties petitioned for review of the Tribunal’s action. Parties on the receiving end argued that the royalty was too low, and that the effective date of the increase had been improperly postponed; parties who would be paying the royalty argued that the rate was too high and that the procedures for making interim adjustments were unlawful. We turn first to the contentions concerning the Tribunal’s determination of the four-cent royalty rate itself.

A. The Adequacy of the Tribunal’s Explanation

The Copyright Act, as we have noted, requires the Tribunal to “state in detail the criteria that the Tribunal determined to be applicable to the particular proceeding, the various facts that it found relevant to its determination in that proceeding, and the specific reasons for its determination.” 17 U.S.C. § 803(b) (1976). On the basis of this detailed statement and the record before the Tribunal, judicial review is available in accordance with the provisions of the Administrative Procedure Act. Id. § 810; see Amusement and Music Operators Ass’n v. Copyright Royalty Tribunal, 636 F.2d 531 (D.C.Cir.1980).

The copyright users insist that the incorporation of the usual APA review provisions in the statutory scheme demonstrates a congressional desire for “searching judicial scrutiny.” Responsive Brief for Petitioners RIAA and CBS Inc. at 13 n.32. They stress the reference in the House report to “the full scope of judicial review provided by Chapter 7 of the Administrative Procedure Act.” 1976 House Report at 179, U.S.Code Cong. & Admin.News at p. 5795. The context of this reference makes clear, however, that the House committee did not contemplate intrusive judicial review beyond that ordinarily available under the APA, but- rather contrasted the normal APA process of reviewing both the substantive and procedural aspects of all final decisions with the Senate’s proposal to limit judicial review to gross procedural irregularities in the royalty distribution proceedings.

The Copyright Act permits the Tribunal to conduct its royalty determination as an informal rulemaking. In such proceedings, the APA requires a court to “hold unlawful and set aside agency action, findings and conclusions” if they are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A) (1976). Our responsibilities under this “arbitrary and capricious” standard include ascertaining the facts on which the Tribunal relied in making its decision, determining whether those facts have some basis in the record, and judging whether a reasonable decisionmaker could respond to those facts as the Tribunal did. See, e. g., Weyerhaeuser Co. v. Costle, 590 F.2d 1011, 1027 (D.C.Cir.1978).

When applying the “arbitrary and capricious” standard to the Tribunal’s determinations, we must bear in mind that the thoroughness of the factual support an agency can supply for its decision will vary with the nature of the decision being made. See, e. g., FCC v. National Citizens Comm. for Broadcasting, 436 U.S. 775, 813, 98 S.Ct. 2096, 2121, 56 L.Ed.2d 697 (1978); Industrial Union Dep’t v. Hodgson, 499 F.2d 467, 474-75 (D.C.Cir.1974). The setting of the royalty rate is not a routine exercise in historical cost of service ratemaking for a public utility. At least three distinct aspects of the royalty rate scheme increase the deference that this court owes to the Tribunal’s conclusions.

First, some of the statutory factors require the Tribunal to estimate the effect of the royalty rate on the future of the music industry. The rate should be calculated to “maximize the availability of creative works to the public,” but to “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.” 17 U.S.C. §§ 801(b)(1)(A), (D) (1976). These criteria require determinations “of a judgmental or predictive nature,” and the court must be aware that “ ‘a forecast of the direction in which the future public interest lies necessarily involves deductions based on the expert knowledge of the agency,’ ” FCC v. National Citizens Comm. for Broadcasting, 436 U.S. at 813-14, 98 S.Ct. at 2121 (quoting FPC v. Transcontinental Gas Pipe Line Corp., 365 U.S. 1, 29, 81 S.Ct. 435, 450, 5 L.Ed.2d 377 (1961)). In establishing a permanent Tribunal, Congress expressed its expectation that members would be appointed “from among persons who have demonstrated professional competence in the field of copyright policy,” 1976 House Report at 174-75, U.S.Code Cong. & Admin. News at p. 5791, and a court must recognize the contributions of this expertise.

Second, other statutory criteria invite the Tribunal to exercise a legislative discretion in determining copyright policy in order to achieve an equitable division of music industry profits between the copyright owners and users. Section 801(b)(1)(C) provides that the royalty rate should “reflect the relative roles of the copyright owner and the copyright user in the product ...” (emphasis added). Similarly, section 801(b)(1)(B) states a congressional purpose to “afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions.” It is evident that the “fairness” of the return to a songwriter for his creative effort cannot be defined by the traditional methods of cost of service ratemak-ing; a broader inquiry is called for. Under these circumstances, a court owes considerable deference to the Tribunal’s ultimate policy choices. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971); Action for Children’s Television v. FCC, 564 F.2d 458, 479 (D.C.Cir.1977); Federation of Homemakers v. Schmidt, 539 F.2d 740, 743 (D.C.Cir.1976).

Finally, the statutory factors pull in opposing directions, and reconciliation of these objectives is committed to the Tribunal as part of its mandate to determine “reasonable” royalty rates. Both the House and the Senate had originally passed bills whose only instruction to the Tribunal was to assure that the royalty rate was reasonable, although the House report had stated objectives that it “anticipated that the Commission will consider.” As part of the compromise that produced the final structure of the Tribunal, most of those objectives were written into the statute, see Conference Report at 82, but the Tribunal was not'told which factors should receive higher priorities. To the extent that the statutory objectives determine a range of reasonable royalty rates that would serve all these objectives adequately but to differing degrees, the Tribunal is free to choose among those rates, and courts are without authority to set aside the particular rate chosen by the Tribunal if it lies within a “zone of reasonableness.” Permian Basin Area Rate Cases, 390 U.S. 747, 767, 88 S.Ct. 1344, 1360, 20 L.Ed.2d 312 (1968); FPC v. Natural Gas Pipeline Co., 315 U.S. 575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037 (1942); Hercules, Inc. v. EPA, 598 F.2d 91, 107 (D.C.Cir.1978).

The copyright users attack the Tribunal’s explanation of its reasons for choosing the four-cent royalty rate. They insist that the Tribunal has failed to give a sufficient derivation of the four-cent figure, that the Tribunal did not give adequate consideration to certain relevant factors, and that the Tribunal improperly gave weight to other, irrelevant factors. None of these objections require extended discussion, but there may be some value for future Tribunal decisions in a brief treatment of a few of them.

The copyright users make a fundamental argument that the Tribunal’s decision provides no explanation for the selection of the four-cent figure. We recognize that the character of the Tribunal’s explanation leaves room for improvement, but the industry’s objection is greatly overstated. Stylistically, the Tribunal’s opinion is structured more as a demonstration that- the four-cent royalty rate is calculated to achieve the statutory objectives than as a derivation of a 4.00