TO:

MEMORANDUM

Members of the Subcommittee on Courts, Civil Liberties and the
Administration of Justice

This memo consists of separate discussions of the two general subjects dealt with in H.R. 5878: reform of the Copyright Royalty Tribunal and cable television reform.

COPYRIGHT ROYALTY TRIBUNAL

On March 3, 1983, the Subcommittee held an oversight hearing on the Copyright Royalty Tribunal. See Hearing on Copyright Office/ Copyright Royalty Tribunal Before the House Judiciary Subcommittee on Courts, Civil Liberties and the Administration of Justice, 98th Cong., 1st Sess. (1983) (Serial No. 6). During that hearing, testimony was received by then-Chairman of the CRT, Edward W. Ray. other Commissioners also appeared: Thomas C. Brennan, Mary Lou Burg, Douglas E. Coulter, and Katherine D. Ortega.

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Questions and answers that occurred during the hearing covered such issues as proposed structural reforms for the Tribunal, the need for staff and the size of the Tribunal, as well as the possibility of drafting statutory guidelines to structure the Tribunal's discretion in setting or adjusting copyright fees for cable television. In short, a solid hearing record was created for legislative action relating to CRT reform.

Parenthetically, it should be noted that the fiscal 1984 appropriations bill that was enacted into law provided funds to the Tribunal to hire a legal counsel. These funds, also included in the fiscal 1985 budget request, were never expended. The House Appropriations Committee recently noted: "such counsel is absolutely essential to reaching sound and defensible findings on rate and distribution matters". The Appropriations Committee directed the CRT to fill the position.

The finding of the House Appropriations Committee comports with a GAO study of several years ago and is in accord with the provisions of H.R. 3419 (Hall). As relates to the latter bill, the subcommittee held three days of hearings.

Based on this extensive hearing record, the draft bill reduces the membership of the Tribunal from five commissioners to three. See section 101. Since the amendment is made effective on a date when two vacancies occur, no present commissioners will lose their jobs. The draft bill also authorizes the Tribunal to hire and pay a general counsel and a chief economist to carry out appropriate functions assigned by the Tribunal. See section 102.

Last, the draft bill modifies the existing statutory section relating to judicial review of final decisions of the Tribunal by providing that review shall be had on the same standards and bases as any executive branch or independent regulatory agency. See section 103. In other words, placement in the legislative branch has no legal effect on the judicial review to be imposed by a circuit court of appeals. This latter amendment cures an unfortunate ambiguity in the decision of the D.C. Circuit in NCTA v. CRT, 689 F.2d 1077 (1983). The amendment is in perfect conformity with provisions of the Administrative Procedure Act as well as cases construing the Act.

At present, no opposition has been expressed to any of the three elements discussed above. The only criticism to be levelled is that possibly the CRT needs an even bigger staff, not to mention a hearing room. To date, there has been little discussion of the idea proposed several years ago that the Tribunal needs subpoena power.

Finally, section 104 of the bill provides guidelines for the Copyright Royalty Tribunal to consider in adjusting or setting copyright royalty rates for the retransmission of distant signals.

The Court of Appeals for the District of Columbia held that the Copyright Royalty Tribunal has broad discretionary authority to set or adjust copyright royalty rates for cable television. See NCTA v. CRT. The Court stated that the Tribunal "was called upon to make essentially legislative judgments 'with very little substantive guidance from Congress." The Court concluded that "Congress vested in the Tribuinal legislative discretion greater than that committed to regulatory agencies engaged in cost of service rate making." One way to limit the Tribunal's broad discretion is to give it substantive guidance through legislative guidelines.

The draft bill, therefore, provides guidance to the Tribunal on what factors should be considered in setting copyright royalty rates for the retransmission of distant signals. The bill provides that the Tribunal shall consider the objectives set forth in 17 U.S.C. § 801(a)(1):

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To maximize the availability of creative works to the public;

To afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions;

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;

To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

Among other factors, the Tribunal shall consider:

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The extent to which (if any) the value to cable systems of additional distant signals declines as such signals are carried;

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The extent to which television broadcast stations compensate copyright owners for the secondary transmission of their signals by cable systems located outside their respective local service areas; and

The impact of the rates on cable subscribers both as to the availability and cost of receiving copyrighted materials.

CABLE TELEVISION IMPROVEMENTS

As stated above, the subcommittee held three days of hearings on the subject of copyright royalty fees for distant signals retransmitted by cable television systems. Two bills were on the table: H.R. 2902 (Synar), a bill to amend title 17 of the United States Code with respect to the copyright royalty fees of cable systems; and H.R. 3419 (Hall), a bill to amend title 17, United States Code, regarding the Copyright Royalty Tribunal.

Testimony was received from Congressmen Synar and Hall; National Cable Television Association (Thomas E. Wheeler); Turner Broadcasting System (Ted Turner); United Video (Roy Bliss); Community Antenna Television Association (Stephen Effros); Motion Picture Association of America (Jack Valenti); the United States Copyright Office (David Ladd); National Association of Broadcasters (David Polinger); Association of Independent Television Stations, Inc. (James Hedlund); and professional sports (Bowie Kuhn).

H.R. 5878 contains two sections that emerged from the hearings: a modified Synar bill and tiering.

Section 201 Synar Proposal

The bill redrafts Congressman Synar's bill (H.R. 2902) in a rational and workable way. The original proposal was premised on a desire to create equality between urban and rural areas. The bill, as introduced, did not meet this policy goal. H.R. 2902 therefore was reworked in the form of section 201.

Section 201(a) modifies the impact of the Copyright Royalty Tribunal's rate hike decision (effective March 15, 1983) by providing that: (a) the first three distant independent television broadcast signals can be retransmitted at the old rates; or (b) the first two distant independent television broadcast signals carried by any cable system which carries any local independent television broadcast signals may be retransmitted at the old rates. Section 201(a) does not contemplate refunds for distant signals transmitted between March 15, 1983 and the date of enactment of this Act.

Section 202 - Tiering

Since the adoption of the Copyright Act of 1976 (see especially title 17, United States Code, section 111), the cable television industry has developed several different "packaging" formats for selling the programming it offers to the public. The most prevalent form is "tiering," that is, offering a "basic" package tier of programs usually including all of the local "must-carry" television broadcast signals and some distant television broadcast signals as well as the

public, educational and governmental access channels if any, and additional non-broadcast programming such as Cable News Network, Christian Broadcast Network (CBN), C-SPAN, etc. Additional "tiers" are then offered to those who wish to view them. A typical first tier of programming might include several other distant television broadcast signals, such as WTBS, or WOR, or WGN combined with nonbroadcast programming such as The Nashville Network, or Music Television (MTV) or even some so-called "pay" services like the Disney Channel or Home Box Office (HBO).

This method of packaging has resulted in a serious debate about interpretation of the copyright law. The Copyright Office has narrowly interpreted the law by making a general finding that allocation of gross receipts is not expressly permitted by the Copyright Act. The only exception occurs in the case of a broadcast signal which is considered "local" in parts of a cable system and "distant" in other parts; this latter situation is specifically covered by present law. The Office has ruled that if ANY broadcast programming is carried on ANY tier offered by the cable operator then the revenue from that tier, in its entirety, must be included in the "gross receipts," and the "distant signal equivalents" (DSE) attributable to the tier must be applied against the entire revenue base. This results in cable operators being required to pay copyright fees for subscribers who are unable to even see the television signal for which payment is made. For further information about the position of the Copyright Office, see 49 Fed. Reg. 13029, et seq. (April 2, 1984).

The Copyright Office readily admits that its ruling is "interpretive" and invites clarification by both the courts and Congress: "The Office recognizes that cable marketing practices have changed drastically since 1976, but the Office cannot provide the flexibility requested by cable systems absent guidance from the Congress or the courts." (49 Fed. Reg. at 13035).

The proposed legislation responds to the Copyright Office's invitation and clarifies the law to make it clear that copyright fees are intended to be assessed only upon the subscriber base which actually receives the signals in question (see Title II, section 203 of the draft bill).

From a policy perspective, Congress has three choices. The first is to accept the interpretation of the Copyright Office. The second choice is urged by some in the cable industry, and in a sense it is just as literal an approach as that taken by the Copyright Office, except that it goes in the opposite direction: that is, the cable operator would only pay for the revenues actually collected off the tier for the particular signal. The third choice is midway between the first two. This "moderate" approach applies the fee computation against the AGGREGATE of the revenues (from both basic and the tier) derived from subscribers receiving those particular distant signals. The draft bill uses the "moderate" approach.

The chart below gives a visual representation of the three different approaches. Other graphic representations could be made, but for the sake of clarity the following example will be used, which does not bring in the complications of "3.75%" signals, or assessments in the fee computations for syndicated exclusivity in the larger markets. All of those computations are easily applied in the "moderate" formula being proposed.