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July 7, 2010 / screwvala

Dead Ringer

The United States Court of Appeals for the DC Circuit has turned back a challenge by the RIAA to the ringtone royalty structure established by the Copyright Royalty Board, which has the statutory mandate to set the rates for compulsory licenses.

The compulsory license provision of the Copyright Act permits anyone to create a new recording of copyrighted musical works for public distribution without the consent of the copyright owner. So, suppose you wanted to cover Lady Gaga’s Bad Romance, Section 115 of the Copyright Act permits it, provided that no part of the original sound recording is used.

In a compulsory license under Section 115, there is no agreement with the owner of the composition regarding royalties. Instead, the Copyright Act empowers a three-member panel called the Copyright Royalty Board to set reasonable royalties rates by  balancing four factors:  (1) maximizing the availability of works to the public; (2) providing a fair return of copyright owners; (3) balancing the relative roles of copyright owners and licensees; and (4) minimizing the disruption on involved industries.

In 2009, the Copyright Royalty Board established a royalty rate for ringtones at the rate of 24 cents per ringtone sold. The RIAA challenged the decision of the Copyright Royalty Board, arguing instead for a percentage based royalty. The RIAA raised two separate arguments.

First, the RIAA challenged the use of a penny rate rather than a percentage rate. The RIAA contended that a penny rate deviated from market contracts, which typically used a percentage rate to establish royalties. The Copyright Royalty Board typically favors the use of a penny rate as opposed to a percentage of revenue. Here, the DC Circuit agreed with the Copyright Royalty Board that the use of a penny rate more closely tied royalties to the nature of the right being licensed. Additionally, percentage rates are typically used where it is difficult to ascertain how much of a work is used, such as in the context of satellite digital radio. Ringtones, by contrast, can be easily measured on a per unit basis. By contrast, the RIAA’s percentage based model was substantially more complicated. Finally, using the penny rate for ringtones would be consistent with the manner of calculating royalties for phonorecords, which are also calculated on a penny rate.

Second, the RIAA argued that the penny rate is unreasonable in light of the falling prices for ringtones. Although finding the RIAA’s contentions to be shrill and unsupported by any evidence, it took those concerns into consideration when it declined to agree to a request by copyright owners to adjust the royalty rate annually for inflation.


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