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what would happen to it-I am talking now about authors and publishers and performing rights organizations. Publicly, obviously, they were in favor of repeal, but I think that I can say without any fear of contradiction that privately they were concerned about what it would do to them. It was obviously going to lead to restructuring. This was laid so firmly at the basis of the music industry that I feel, as we said in the 1965 report, they would rather bear what ills they had than fly to others that they know not of. And that was really the prevailing sentiment.
In any case, it became apparent that some sort of compromise was going to be necessary, and these things do become apparent to you along the way, and we put forward various alternatives. Up through 1964 we stuck with an outright repeal, and our preliminary draft had an alternative that was an outright repeal with some softening aspects to it. The other alternative was a compulsory license.
Now, at this point a very major role in the compromise procedure was played by a subcommittee of the American Bar Association. I think there are a few people that remember this or know this. But it is true that there was a subcommittee made up of representatives of the record industry, the music publishers, and others in the field, who did try to take what we were doing and produce a compromise. It was tripartite, or perhaps even multipartite, and they did produce a compromise which involved, among other things, 3 cents or 1 cent per minute of playing time. And for purposes of this discussion this morning, Mr. Chairman, I am going to not worry about the minute playing time; I will just talk about cents per song:
This subcommittee and there were many discussions going on around this at the time—did agree upon a formula for section 115 as a whole, and it also agreed upon this 3 cents flat rate type of approach. By 1965 the question was not whether, but how much.
The revised language and structure of section 115 was accepted by both sides, but having gotten that far, the record industry then mounted a major campaign to bring the rate down. They went forward with economic studies in a major effort to try to prove that a 2-cent rate was satisfactory and that any raise would not be justified or fair. As you well know, Mr. Chairman, the House subcommittee in 1965 and the Senate subcommittee later in 1967 had literally an avalanche of statistical material presented to it, together with data and arguments and even audiovisual performances, and the basic result was that the concentration of the subcommittee was on the fee.
But I think, going back to your initial question, Mr. Chairman, it is fair to say that the House Judiciary Subcommittee in 1966 and 1967 did make a very thorough review of the basic question of whether or not the compulsory license should be retained. And if I may turn to page 11, these are the conclusions that it reached then. The arguments pro and con are laid out in the preceding pages. From these arguments, after reviewing them, and from the array of economic data presented to it in connection with the rate, the committee concluded that a compulsory licensing system is still warranted as a condition for the rights of reproducing and distributing phonorecords of copyrighted music. The committee also concluded, however, that the present system is unfair and unnecessarily burdensome on copy, right owners and that the present statutory rate is too low.
A central agreement that we had with that position I think is stated on page 36, and the tone of this statement is admittedly a little rueful. But let me read it in any case,
In view of the failure of the Copyright Office's 1961 proposal to eliminate the compulsory licensing system for recording copyrighted music and the developments since then, one thing seems certain: The compulsory license has taken solid root in U.S. copyright law. We are past the point of talking about free negotiations in this area. However, Congress must consider the extent to which any real negotiations under a rate ceiling would be realistically possible.
Now, this is my conclusion, Mr. Chairman. I do not find it a very happy one, but it is the basic conclusion on the question that you had,
The next, second issue is a somewhat surprising one, and I do not think you have heard any direct testimony on it, although it was certainly referred to several times in the testimony that you had from the tape duplicators.
The basic question—this is discussed on pages 21 to 26, and it is whether under the compusory licensing provisions of section 1(e) of the present law or under 115 of the revised law, can a manufacturer who is duplicating someone else's recording without authorization go through the compulsory licensing mechanism in the statute and secure a compulsory license for the music? He is going ahead and duplicating someone else's record, but can he legalize his use of the music by going through the compulsory licensing procedure? Now, this
is kind of a fascinating case study. There was, by the way, a 1912 direct decision on this in Federal court, and the plaintiff was the Aeolian Co., who had been the big bugaboo in 1909—and I think this is on page 22. It starts on 21. This is pages 21 to 26 that I am now dealing with
The court held in favor of the Aeolian Co., saying that the provision in the present law that the compulsory licensee can only make similar use of the copyrighted musical composition did not mean that they could duplicate somebody else's piano roll or recording—they even said recording—but, to quote the judge
* * * must resort to the copyrighted composition or sheet music and not pirate the work of a competitor who has made an original perforated roll.
Now, this is one of those cases that has sat there for generation after generation, and people knew about it and I think they regarded it as kind of a biological sport. As I said on page 22, although the Aeolian decision seemed to open an inviting door to both copyright owners and record producers for the protection of recorded music, it was 60 years before anyone walked through it. And, one of those unexplained mysteries of U.S. copyright law, the Aeolian case lay dormant, neither cited nor overruled, for generations, during which efforts to obtain legislation against record piracy went for naught, and the result of efforts to obtain judicial relief on other theories were problematical, at best.
Finally, in 1972, at almost the same time Congress recognized sound recordings as copyrightable subject matter and gave performers and record producers protection against unauthorized duplication, the 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 ar 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, whi phenomenon of the moment, and I think this is what we are really arguing about on this issue.
Mr. KASTENMEIER. 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. 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