courts started holding that a compulsory license under section 1(e) of the 1909 copyright law gives the compulsory licensee only the right to make similar use of a copyright work and that similar use does not include the duplication of someone else's recording.

Now, at pages 22 to 24 I review these decisions and I do not want to go into a lot of detail over them. There are four circuit courts of appeals that with split decisions, and in many cases reversing lower courts, have held as the Aeolian case did. One of these cases-well, all of them went to the Supreme Court on petitions for writs of certiorari. On one of them the Supreme Court asked the Justice Department to make comments, and the comments were, essentially, "do not grant certiorari; in effect, the 1972 amendment has taken care of this, and four circuit Courts of Appeals have held all along the way." So the Supreme Court denied certiorari in this case. And this issue seems about as settled as these things ever are without a definitive Supreme Court decision.

And as a result, whether you agree with this or not-and I am inclined to, more or less-I think that it is certainly debatable. It does not shake me up as a matter of principle. I am inclined to think that this should be written into the statute.

Now, the Senate did, but it was before the Supreme Court action in denying certiorari in this one case and before it was really quite as settled as it is now, and I have some qualifications about the language that the Senate has used in two shots at this problem, in trying to express this principle, and what I am really concluding-and I will read this conclusion, which I think is on page 37-is, essentially, that the Senate approach of trying to write this into the statute is a good one but we should take another look at the language.

The Copyright Office agrees that Section 115 should deal with the question of whether a person who duplicates a particular sound recording of a copyrighted musical work without a negotiated license from anyone should be able to rely on a compulsory license as far as the music is concerned. In view of the solid authority provided by these four cases, we also agree that the compulsory license should be precluded where the sound recording reproducing musical composition is an unauthorized duplication of a recording already in existence. However, we believe that the language of the last sentence of Section 115(a) (1), both in its original form and as amended by the Senate Judiciary Committee needs some substantial redrafting to express its purpose.

If I may go on to the third question, which is the basis of the royalty and the procedures for working the compulsory license, let me read the questions from page 1. This is question 2, parts B and C.

Assuming that you have a compulsory license, should the basis of the royalty be the number of phonorecords made or the number manufactured and distributed; and, second, what formality should be required for obtaining a compulsory license and for making payments and accounting under it?

The fundamental question here-it is still a very lively one-is whether or not the amount to be paid on records under a compulsory license should deal in the number that the compulsory licensee makes at the outset or the number that he is able to sell finally. The background of this issue is laid out in part in the first part of the chapter, in the legislative history part, and is discussed specifically at pages 27 to 30, and I will try to make a long story short on this. It has been up and down and sideways several times.

The present law requires the 2 cents to be paid on every record manufactured, but practically all of the licenses are negotiated, and one of the main provisions of the standard license form for a negotiated license is that you pay on the records sold, not on the records manufactured. But this is under a negotiated license where there is a contractual relationship.

An early generation of negotiators, the ones that were operating when the subcommittee of the ABA was considering the problem in the early 1960's, early on had agreed to keep the 1909 approach; in other words, to have the royalty applicable under the compulsory license to records manufactured whether they were sold or not, but agreed to ease up on the procedural obligations of a compulsory licensee, which were very onerous, and which were also excused or liberalized in the negotiated licenses under the 1909 act, as I show here on this table on page 27. You had to have monthly reporting, and the report had to be under oath, if required by the copyright owner, and in the various versions of the bill that have emerged since 1963, the approach up to the Senate consideration of this in recent

years

Mr. KASTENMEIER. How does this accord with other practices, as far as rate relationship between those who manufacture-whether they are books or otherwise-and pay royalties on, whether the number of books published or the number of books distributed and sold, or any other forms of mass produced, copyrighted material for which there is a license, either compulsory or otherwise? How does this accord with that, as to whether it is manufactured or manufactured and distributed?

MS. RINGER. This is the only compulsory license that involves the unit sale of a chattel or whatever you want to call it, so there is nothing to compare it with in the copyright law. Under negotiated license, it is normally the number sold, but it is a negotiated thing, and obviously, many, many contracts contain provisions dealing with returns. In other words, if there is a danger-and this is one of the points I am coming to-if there is a danger that the returns will get back into the channels of commerce, then you should have some handle on getting paid for it, and this is what this hassle is all about right now.

I think you heard testimony on something called cutouts, which is a phenomenon of the moment, and I think this is what we are really arguing about on this issue.

Mr. KASTEN MEIER. Does the word distributed-that does not mean sold?

Ms. RINGER. Yes, but of course, you can distribute a lot of records without selling them, and a lot are what are the so-called freebies, and maybe there is another term for it in this decade-I do not know. In any case, the House did accept the compromise that did involve requiring a compulsory licensee who has no permission from anyone and just goes ahead and records under a statutory scheme, to pay for everything he makes at the outset. And this was justified in your report.

In the Senate later, an issue was made, because I think there is a very large practice in the record industry of manufacturing a good deal more than you expect to sell and then taking them back as what they call cutouts. And the music publishers were very concerned about the

danger, which was real, of the cutouts getting back into the channels of commerce, either in this country or abroad. And there was an issue drawn about this in the Senate, and Senator McClellan did ask the respective protagonists on this issue to try to get together and work out a compromise, and the compromise is embodied in the revision bill, as it-I think as it now exists. Yes, that is in here.

The new compromise is just the reverse. The 2 cents or 212 cents or 3 cents, or whatever, is paid only on records manufactured and distributed. But the reporting procedures, the accounting procedures are substantially increased, the idea being that, all right, we will only require you to pay on records that you manage to sell, but we will insist on very heavy reporting and accounting procedures to make sure that you are not selling these cutouts on the side. And this is a matter of some concern to me. I will try to explain why by reading from pages 37 to 38.

Mr. WIGGINS. Mr. Chairman, may I interrupt?

Mr. KASTEN MEIER. Yes; of course.

Mr. WIGGINS. I do not know whether to share your concern or not, because it is my impression that whatever the law may be, it is subject to negotiation. It is within the power of the parties, at least, to negotiate different terms and the conditions agreeable to them. And I am under the impression that the negotiation is always down from the statutory language and never up.

Ms. RINGER. Right.

Mr. WIGGINS. If Congress really means to reflect sound public policy that certain things occur, we ought to be talking about minimum mandatory conditions and let the parties negotiate up if they wish, but not below that, which is understood to be good policy. And at some point, I hope you will talk about this question which troubles me. And I view it as whether we should establish floors or ceilings, and I hope at some point you will address this.

Ms. RINGER. I agree with you, Mr. Wiggins. Actually, in this context, you base the payment on records made, because you have always got to make something before you can sell it, so that the copyright owner is going to get more from the compulsory licensee if the payment is based on the records made and not just sold. And it seems to me that that is consistent with your position. I will get to this question of the ceiling.

In trying to express my concerns here, I do not want to lead you to think that this is an irreconcilable difference. I think that there is a way out of this, which I will try to explain.

The Copyright Office has considerable misgivings about the changes with respect to the basis of royalty and the accounting procedures in section 116, since passage of the 1967 bill. I make the point of the substitution of the word "manufacture." but I do not think that is very important. More important, we remain convinced that, as stated in the House reports of 1966 and 1967, a recordmaker should not be free to reproduce as many phonorecords as he wishes without any permission from or obligation to the copyright owner, and then to pay a royalty only with respect to the phonorecords he eventually distributes to the public.

Moreover, as I have been trying to say, although the testimony before the committee on the question of cutouts was put forward by

tape duplicators rather than copyright owners, we believe that the problem is a real one and should not be ignored. It is unclear whether the royalty to be paid on final records distributed includes payments for phonorecords that have entered the stream of commerce, have been returned or cut out, supposedly to be destroyed, but which are known on occasion to reenter the stream of commerce. These records and tapes certainly should be paid for before they leave the compulsory licensee's hands.

The tradeoff for basing royalties on records distributed is the imposition of unrealistic accounting and certification requirements which a large record company might be able to observe, but which would be extraordinarily onerous and expensive for small record producers. I tried to lay some basis for this conclusion earlier in the paper.

The Copyright Office believes that section 115 of the 1967 House bill represented a reasonable procedural reform of the 1909 compulsory license, and we prefer its approach.

Now, if I may, this was distributed several weeks ago, and after it was distributed, I was taken to task in a friendly way by one of the protagonists of the compromise, because they had been asked to make a compromise, by Senator McClellan, and they had made a compromise, and here I was knocking it. I will stick with what I said, but I will throw out another possibility which it seems to me maybe would solve the problem. You could base the royalty on records made and distributed, but refer specifically to the problem of returns, as the negotiated licenses do in other fields. I am talking about the cutouts now. And require accounting as to three things, the records manufactured, the records sold, and a clear-cut accounting for the disposition of the difference.

I think that is what they were searching for when they put in these rather Draconian procedural requirements, and I do not really think it is practical to require a small record company to make monthly accountings and hire a CPA to certify each one. This seems a little unrealistic. I think most record producers would agree with this, and you have testimony to that effect, with which I agree.

If I may go on the fourth question, I can dispose of that rather quickly. This is the basis for the royalty rate and the question which is item 2D at the top of page 2, "Should the amount of the royalty be based on a fixed monetary amount per phonorecord, or should it be a fixed percentage of the price of the phonorecord?" And there is a good deal in the earlier part of this chapter about the history of this issue in the Senate. It was considered here, but not in any great detail, because at that point, it was not being urged by anyone. Later on, it was put forward as an alternative to the 21/2-cent rate that you came forth with in 1967. And Senator Hart actually did introduce a formal amendment setting up an 8-percent royalty, 8 percent on the retail selling price. This did not go, and I think we have gotten past this in the discussions.

But let me read what I say here on pages 39 and 40. A royalty rate basis involving a percentage of selling price is, at least on its face, a fairer and more flexible approach than a flat rate per record. It is the approach followed in other countries that have adopted compulsory licensing systems, but it really should be recognized that

they work differently there, because there, almost all of the—well, not almost all, a great many records are produced under the compulsory license. This is not the case here. The compulsory license sets the parameters, but almost all records are produced under negotiated license. Elsewhere, their compulsory license is vigorously used, and there are bodies, Government bodies, that regulate them. And in that type of situation, I think it is easier to have a percentage that would be fairly administered.

Moreover, I think that the pricing of records is more orderly in other countries than it is here.

The time may come when patterns in the music industry and the legal and administrative framework in which they operate make it advisable to shift from a flat rate per record to a percentage of price, but it does seem clear that this time has not yet arrived.

So, if I may, I would like to come to the final and most difficult question of what the rate per record should be, assuming all of these other givens. The 1909 law provides for 2 cents; the 1965 bill, which was supposed to be a compromise, provided for 3; the House bill, which is the bill reported by your committee, Mr. Chairman, in both 1966 and 1967 and also the bill that passed the House in 1967 compromised at 212 cents. The Senate brought it back up to 3 cents in 1974, and that is what is the fee in the bill you have before you.

However, this year, the Senate Judiciary committee on October 7 last month knocked it back to 212 cents. So our conclusions on this delightful question are stated on pages 40 to 46. It is a rather long conclusion, but it is a very difficult question.

Let me read our basic position, and then try to endorse pretty much the principles that your subcommittee adopted in 1967 as a way of approaching this. Our basic position is that the royalty rate should be a statutory rate, at the high end of a range within which the parties can negotiate now and in the future for actual payment of a rate that reflects market values at that time. It should not be so high, however, as to make it economically impractical for record producers to invoke the compulsory license if negotiations fail. This was our position in 1965, and I think it still remains our position.

You, in your reports in 1966 and 1967 also said something with which we agree. In the significant debate over whether the statutory fee is a ceiling or a rate, there appears to be some validity to the arguments on both sides. The fee is certainly a ceiling, in the sense that no higher amounts are ever paid, but the record producers may well be right in asserting that the statutory fee establishes a base with stereotyped variations downward that for practical business reasons is used as the rate in most written agreements. In this sense, there may be relatively few negotiated agreements in the real sense of the term, but this does not necessarily mean that if the statutory maximum were increased somewhat, the prevailing rate structure would immediately be increased the maximum without negotiations.

Obviously, if you peg the fee higher, there will be negotiations, because everything is at 2 cents or below, and as far as existing negotiated licenses are concerned, it will remain at 2 cents. This point has been made, but I think it needs to be made again.