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These phrases, concerning allowable purposes of fair use, are "(.... multiple copies for classroom use)" and "for nonprofit educational purposes.'

The exemption of royalty payments for worthy uses has been criticized by economists on principles of economic efficiency. The argument is that if a use is genuinely worthy, it is a public good whose cost ought to be spread over all the population and paid for through taxes. Otherwise, allowing an exemption for some uses and not for others has the effect of imposing the costs of worthy use exemptions on the "lessworthy users" as a specific class. This argument was similarly expressed by Professor Paul Goldstein in a criticism of the full Court of Claims decision in the Williams & Wilkins case 32. In that case, the worthy use of medical research was given as a reason for rejecting the plaintiff's claim of infringement in a wholesale copying situation.

4.6 PRICE SETTING FOR COMPULSORY LICENSES

Compulsory licenses have been established in statute by Congress for certain categories of intellectual property; and in one case, a compulsory license is being enforced by Court order. In general, royalty prices in these situations have been (or will be) established by adversary proceedings involving producers and users and their supporters testifying before some institutional group empowered to set the figures.

4.6.1

The Phonorecord Manufacturing License, 1976 Act

An example of the procedure is the establishment of the compulsory license royalty fee for phonorecord manufacturing as a statutory matter in the 1976 General Revision. A summary of the testimony on this subject and the conclusion of the Senate Committee on the Judiciary is given on pages 91 through 94 of Senate Report No. 94-473.

Among the subjects of the testimony were (1) the need for an increase in the fee by copyright holders, (2) the potential impact of an increase on the record industry, and (3) the potential impact of an increase on the consuming public. Songwriters and publishers testified in favor of an increase over the 2¢ per each recording manufactured that was provided for in the 1909 Statute. They were supported by music consumers represented by the National Federation of Music Clubs who preferred a higher (royalty) ceiling "as a means of encouraging the writing of more and better music." The record companies testified in opposition to any increase in the 2¢ figure. They were supported by the Consumer Federation of America who wrote to the Committee agreeing that if the statutory fee were raised, record manufacturers would have to avoid risks on new and unusual compositions, reduce the number and length of selections, record fewer serious works and rely more on the public domain for popular material.

Some of the factors discussed in testimony included the royalty as a percent of list price per song; the royalty as a percent of manufacturer's wholesale selling price; record company sales and profits; organization of the record industry; changes in income of copyright owners as a function of time, inflation rate, and royalty fee; and the effect of royalty fee on incentives for quality and quantity of products.

The Senate Committee concluded that the royalty fee per work embodied in each phonorecord manufactured and distributed should be 2 1/2 cents or one-half cent per minute of playing time, whichever is greater.

The House Committee on the Judiciary, on the basis of essentially the same testimony, concluded that the royalty fee per each work embodied in a phonorecord that is made and distributed should be "2 3/4 cents or 0.6 of one cent per minute of playing time or fraction thereof whichever amount is larger." (See House Report No. 94-1476 at pages 16 and 111).

The Conference Report (House Report No. 94-1733 at page 77) adopted the House fixed rate and the Senate per minute rate. This was ultimately enacted. Therefore the royalty is "either two and three-fourths cents or one-half of one cent per minute of playing time or fraction thereof, whichever is larger." (Section 115(c)(2), P.L. 94-553).

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Under the 1909 statute, renditions of musical compositions through recordings in coin-operated machines (jukeboxes) were not classified as public performances for profit unless an admission fee to the location of the performance was also charged. Thus, most jukebox renditions were exempted from royalty payments. As both the Senate and House Reports on the 1976 Copyright Law Revision state, efforts to remove this exemption have persisted for 40 years. It is believed by some observers that in 1909, the extent of the jukebox industry could not be forecast and that this exemption was an historical accident. Testimony by copyright owners in congressional hearings on copyright revision strongly urged the imposition of a royalty fee on jukebox renditions of copyrighted works. Testimony by jukebox operators and manufacturers supported the retention of the present exemption. (See House Report No. 94-1476 at pages 111 to 115, and Senate Report No. 94-473 at pages 95 to 99.)

In the 1976 General Revision, Congress ended the exemption and imposed a yearly compulsory blanket license of $8 per jukebox (Section 116(b)(1), P.L. 94-553). In general the reasons given for ending the exemption were that the exemption was unfair to music producers; and also unfair to those other users who paid royalties and therefore were also paying the jukebox operators' share.

4.6.3 New Statutory Compulsory Licenses

The 1976 General Revision established two other compulsory licenses in addition to the jukebox performance license, all three of which joined

the previously-established phonorecord manufacturing license. The new licenses are for cable-assisted television (CATV) retransmission of broadcasted programs (Section 111(c) and 111(d), and for the use of certain copyrighted works in non-commercial broadcasting (Section 118).

As stated in Appendix A, Section A.4.6.3 "the purpose of the compulsory license in these three instances...is to avoid the difficulties that the user groups would encounter if they had to obtain licenses from and pay fees to the individual copyright holders." In other words, transaction costs are lessened under the compulsory license system.

4.6.4 The Copyright Royalty Tribunal

The 1976 Act establishes a Copyright Royalty Tribunal as an independent agency in the legislative branch (See Chapter 8 of the Act). The Tribunal's function is to periodically and equitably adjust the statutory blanket license fees for jukebox operation, to distribute equitably to copyright holders the statutory royalty proceeds collected from CATV operators, and to determine the terms and conditions of the compulsory license for non-commercial broadcasting of certain copyrighted works, but in the latter case, only if the interested parties fail to negotiate their own arrangements. The Tribunal determines, also, the royalty rates for CATV retransmissions under certain conditions.

4.7 COPYRIGHT AND MONOPOLY

It is common understanding that copyright is a monopoly, although limited to some degree. Walter Pforzheimer has quoted Judge Learned Hand on this point:

"Copyright in any form, whether statutory or at common law, is
à monopoly;... Congress has created the monopoly in exchange for
a dedication, and when the monopoly expires the dedication must
be complete."33

Similarly, the House Committee on Patents in their report accompanying the bill that became the 1909 Copyright Act stated:

"The granting of such exclusive rights, under the proper terms
and conditions, confers a benefit upon the public that out-
weighs the evils of the temporary monopoly."34

The appellation of "monopoly" can have several implications. A question that can be asked is: to what extent does the exclusive right granted to an author and his assignees constitute an exercisable economic monopoly in a market sense, thereby requiring Government regulation or other collective action as an antidote? The answer to this question may also provide an answer to an issue raised by Hurt and Schuchman which is: whether "copyright protection artificially enhances the private returns on , some ventures and leads to the distortions of monopoly pricing."35

The answer depends, to some extent, on the nature of the copyrighted work

and whether other works can be considered substitutable and therefore competing.

If the copyrighted work is a book, musical performance or film produced for a general audience, there may very well be high substitutability among individual works as far as the ultimate consumer is concerned. In this situation, one author's exclusive right must compete with other exclusive rights in the marketplace to be selected or rejected by a typical consumer. However, since the competing works have a certain individuality about them, by the fact of their having the requisite originality for copyright protection, pure competition in a classical sense cannot exist. Nevertheless, the "monopolistic competition" which exists among the works may be very close to pure competition in the absence of externalities, collusion or restraints of trade by competitors. As Professor Mansfield states about competition in general, "...most firms face relatively close substitutes and most commodities are not completely homogeneous from one producer to another.... In other words, there is no single homogeneous commodity called an automobile; instead, each producer differentiates its product from that of the next producer. This, of course, is a prevalent case in the modern economy. "36

Thus, among certain classes of copyrighted works, there may be as much or more competition for consumer interest as exists among competitive hard goods or other "non-intellectual" properties. Competition among copyrighted works is assisted by the fact that although protection covers the author's specific expression, it does not extend "to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied...,"37 Although a copyrighted work must be "original," it need not be novel or non-obvious, which are requirements for patent protection.

4.7.1 Government Remedies for Market Monopoly

The problem of monopoly has arisen in the music and motion picture industries on several occasions but not in the context of control exercised by virtue of an exclusive right in a single property. The problem in these industries has invariably related to attempted control over a market due to exclusive rights in at least several properties, and in some cases, exclusive rights in very many properties. The example of the potential monopoly over phonorecord recording which resulted in the compulsory license provision of the 1909 Act has been mentioned previously and is also described in Appendix A, Section A.4.6.3.

A number of monopoly-related cases in the performing rights area are mentioned by Taubman. 38 ASCAP consented to an anti-trust decree of the U.S. Dept. of Justice in 1941 and the decree was further modified in 1950.39 In the 1948 decision, (Alden-Rochelle v. ASCAP) "ASCAP was declared to have achieved monopolistic domination of the music integrated in sound films, in violation of Section 2 of the Sherman Act."40 As a result, ASCAP "must license all qualified applicants, all licensees of the same class are charged the same fees, and any licensee or applicant

may request the Court / the U.S. District Court for the Southern District of New York_] to review the fees charged." (See Appendix A, Section A.4.6.2.1.)

In general, the result of a threat of market monopoly is additional Government intervention and regulation. Both the phonorecord manufacturing and ASCAP situations have resulted in compulsory licensing requirements. In one case, the royalty fee was fixed in law by Congress and in the other case, the Federal Judiciary, although not fixing the royalty payment, required that ASCAP must license all qualified applicants and must provide equitable treatment to all licensees, with Court jurisdiction retained as a place of recourse.

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Problems in the development and maintenance of an efficient market for copyrighted works have been considered and some remedies have been discussed. Problems considered have included exclusion costs, the costs of information and communication, trade-offs in the design of royalty collection systems, royalty pricing schemes, economic implications in the "fair use" doctrine, price setting for compulsory licenses, and economic monopoly.

The presence of transaction costs is not necessarily a reason for abolishing copyright, despite the cost of Government regulation. There are transaction costs in any market. Without copyright, it is postulated that there would be cut-throat competition, increased secrecy and a reduced flow of information. A society must select which set of dissatisfactions it finds less onerous or more contributing to its overall goals.

Clearinghouses are one method of reducing the costs of communication and information. Blanket licenses assist similarly, but there are costs to the use of these systems as well. That payment mechanism that is least costly in time and effort to users, all other things being equal, will probably generate the least amount of deliberate evasions.

There are efficient royalty pricing schemes that distinguish different classes of users and which account for both fixed and marginal costs. Pricing may usefully distinguish institutions from individuals and may usefully offer a choice of schedules to suit both the heavy user and the casual user.

Fair use may be treated as a mechanism for the reduction of certain transaction costs. However, the doctrine of permitting an exemption from royalty fees for "worthy" uses that do not come under First Amendment or "lack of market impact" considerations can be criticized on efficiency criteria.

Compulsory licenses have been established in three new areas under the 1976 Act. Price-setting of royalty fees for compulsory licenses is

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