Senate, House Pass Bill
To End Webcasting Crisis

WASHINGTON (Nov. 15) - The Senate and House Thursday night and early Friday passed legislation authored by Sen. Patrick Leahy (D-Vt.) and Sen. Jesse Helms (R-N.C.) that resolves a crisis over royalty payments that has threatened the existence of many fledgling webcasters.  The bill now goes to the desk of President Bush, and Leahy predicted the President will sign it.

Under a process set up by Congress and administered by the Librarian of Congress, webcasters were required to begin paying royalty payments, including retroactive payments from 1998, to artists and music labels on Oct. 20.  The rate, together with the retroactive payments due, threatened the viability of many small webcasters, who have faced the choice of going out of business or moving overseas. 

The Helms-Leahy bill, which modified The Small Webcaster Settlement Act of 2002 (H.R.5469) -- which the House passed in October -- achieves the twin goals of helping small commercial and noncommercial webcasters stay in business and ensuring that artists and record labels are compensated for their music when it is used for Internet radio, said Leahy, who chairs the Senate Judiciary Committee, which has jurisdiction over copyright law.

The original House bill, sponsored by House Judiciary Committee Chairman James Sensenbrenner (R-Wisc.), passed the House in October but was held up in the Senate until concerns of college and university webcasters, hobbyists, and many small commercial webcasters could be addressed more fully.  The Helms-Leahy bill amended the House bill to address those concerns and to ensure its passage.

In a statement released after Senate passage Leahy said, "Webcasting -- streaming music online rather than broadcasting it over the air as traditional radio stations do -- has marked one of the more exciting and quickly growing of the new industries that have sprung up on the Web.  Webcasters can and do serve listeners across the country and around the world with music in specialized niches not available over the air and with new and local artists who do not enjoy the few spots in the Top 40.  We in Congress have worked to encourage this new nascent industry and helped it grow, while protecting the fundamental principle that artists and producers of digital music deserve compensation for the use of their works."

At a Senate Judiciary Committee hearing convened by Leahy on May 15, Congress learned the royalty rates set by a webcaster arbitration panel pleased no one. Webcasters complained that the payments for streaming of music would bankrupt small operations and drain the large ones, while artists and labels complained that the rates were too low.

"I knew that an outcome that shut down webcasters would hurt not only webcasters but also the artists, the labels and the consumers, who all would lose important legitimate channels to connect music and music lovers online,” said Leahy.  “I have urged all sides to find a solution to avoid silencing many webcasting streams."

As passed by the House, H.R. 5469 would have legislated specific royalty rates that would have been available to a class of small webcasters.  Such small webcasters would have had to meet specified criteria, including limits on gross revenues, but they would have been permitted to pay royalties that were discounted from those adopted by the Librarian.  The Helms-Leahy substitute changes the terms of the House bill by granting the royalty collective SoundExchange the right to negotiate an agreement with small webcasters to implement rates and terms that allow for payment of royalites on the basis of a percentage of revenue or expenses, or both, and including a minimum fee.  SoundExchange has already been designated by the Librarian as the entity that will be responsible for collecting and distributing royalties for the overwhelming majority of artists and labels entitled to the royalties paid by webcasters. 

Leahy applauded Sensenbrenner and Rep. John Conyers (D-Mich.), the House Judiciary Committee's ranking Democratic member, for their leadership with the House bill, and he credited Hilary Rosen of the Recording Industry Association of America for RIAA's constructive role in reaching a solution and for offering webcasters discounts during the crisis after Oct. 20.

Leahy said, "I expect that the rates set forth in the original version of H.R. 5469 will be implemented so that small webcasters will be able to calculate their royalty payments as a percentage of revenues or expenses.  Those rates were the product of tough negotiations under congressional guidance and will likely continue to serve as the basis for any agreement negotiated under the amended legislation."

The Helms-Leahy amendment also imposes a six-month moratorium on fee collections from noncommercial entities, including webcasters operating at colleges and universities, to allow for negotiations with such entities.  It also authorizes SoundExchange to postpone retroactive royalty collections from small webcasters with whom it is negotiating deals.  The substitute amendment includes from the original House bill provisions requiring direct payment to artists and deductibility of expenses from the proceeds of the royalties and authorizes a GAO/Copyright Office study on the impact of agreements between third parties and webcasters and the effect that such agreements should have on percentage of expense royalty rates.

Leahy said, "Passage of this legislation does not mean that our work is done.  As this webcasting issue has unfolded I have heard complaints from all sides about the fairness and completeness of procedures employed in the arbitration.  To avoid repeated requests for the Congress or the courts to intercede, we must make sure the procedures and standards used to establish the royalty rates for the webcasting and other compulsory licenses produce fair, workable results.  Next year, we should focus attention on reforming the arbitration process."

Frank R. Schliemann, founder of Onion River Radio of Montpelier, Vt., said, "Today's congressional approval of the Small Webcaster Settlement Act of 2002 ensures that our audience will continue to enjoy Onion River Radio's 'freeform' style of programming."  He thanked Leahy, "whose leadership on behalf of Internet radio catalyzed Congress's attention to our cause."

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STATEMENT OF SENATOR PATRICK LEAHY,
Chairman, Senate Committee On The Judiciary,
On Passage Of Helms-Leahy Substitute To H.R. 5469,
The “Small Webcaster Settlement Act Of 2002"
Nov. 14, 2002

Mr. President.  I am pleased that the Senate is taking the important step of passing the Helms-Leahy substitute amendment to H.R. 5469, the “Small Webcaster Settlement Act of 2002."  This legislation reflects hard choices made in hard negotiations under hard circumstances.  I commend House Judiciary Chairman Sensenbrenner and Representative Conyers for bringing this legislation to a successful conclusion and passage in the House of Representatives in a timely fashion to make a difference in the prospects of many small webcasters.   I also thank Senator Helms and his staff for working constructively in the lame duck session of this Congress to get the bill done.  

The Internet is an American invention that has become the emblem of the Information Age and an engine for bringing American content into homes and businesses around the globe.  I have long been an enthusiast and champion of the Internet and of the creative spirits who are the source of the music, films, books, news, and entertainment content that enrich our lives, energize our economy and influence our culture.  As a citizen, I am impressed by the innovation of new online entrepreneurs, and as a Senator, I want to do everything possible to promote the full realization of the Internet’s potential.  A flourishing Internet with clear, fair and enforceable rules governing how content may be used will benefit all of us, including the entrepreneurs who want us to become new customers and the artists who create the content we value.

The advent of webcasting – streaming music online rather than broadcasting it over the air as traditional radio stations do – has marked one of the more exciting and quickly growing of the new industries that have sprung up on the Web.  Many of the new webcasters, unconstrained by the technological limitations of traditional radio transmission, can and do serve listeners across the country and around the world.  They provide music in specialized niches not available over the air. They feature new and fringe artists who do not enjoy the few spots in the Top 40. And they can bring music of all types to listeners who, for whatever reason, are not being catered to by traditional broadcasters.

We have been mindful on the Judiciary Committee that as the Internet is a boon to consumers, we must not neglect the artists who create and the businesses which produce the digital works that make the online world so fascinating and worth visiting.  With each legislative effort to provide clear, fair and enforceable intellectual property rules for the Internet, a fundamental principle to which we have adhered is that artists and producers of digital works merit compensation for the value derived from the use of their work.

In 1995, we enacted the Digital Performance Right in Sound Recordings Act, which created an intellectual property right in digital sound recordings, giving copyright owners the right to receive royalties when their copyrighted sound recordings were digitally transmitted by others.  Therefore when their copyrighted sound recordings are digitally transmitted, royalties are due.  In the 1998 Digital Millennium Copyright Act (DMCA) we made clear that this law applied to webcasters and that they would have to pay these royalties.  At the same time, we created a compulsory license so that webcasters could be sure of the use of these digital works.  We directed that the appropriate royalty rate could be negotiated by the parties or determined by a Copyright Arbitration Royalty Panel – or CARP – at the Library of Congress.

Despite some privately negotiated agreements, no industry-wide agreement on royalty rates was reached and therefore a CARP proceeding was instituted that concluded on February 20, 2002. The CARP decision set the royalty rate to be paid by commercial webcasters, no matter their size, at .14 cents per song per listener, with royalty payments retroactive to October 1998, when the DMCA was passed.

At a Judiciary Committee hearing I convened on this issue on May 15, 2002, nobody seemed happy with the outcome of the arbitration and, in fact, all the parties appealed.  The recording industry and artist representatives feel that the royalty rate – which was based on the number of performances and listeners, rather than on a percentage-of-revenue model – was too low to adequately compensate the creative efforts of the artists and the financial investments of the labels.  Many webcasters declared that the per-performance approach, and the rate attached to it, would bankrupt small operations and drain the large ones.  I said then that such an outcome would be highly unfortunate not only for the webcasters but also for the artists, the labels and the consumers, who all would lose important legitimate channels to connect music and music lovers online.

On appeal, the Librarian in June, 2002, cut the rate in half, to .07 cents per song per listener for commercial webcasters.  Nevertheless, many webcasters, who had been operating during the four year period between 1998 and 2002, were taken by surprise at the amount of their royalty liability. The retroactive fees were to be paid in full by October 20^th and would have resulted in many small webcasters in particular, going out of business.

In order to avoid many webcasting streams going silent on October 20, when retroactive royalty payments were due, I urged all sides to avoid more expense and time and reach a negotiated outcome more satisfactory to all participants than the Librarian’s decision.  I also monitored closely the progress of negotiations between the RIAA and webcasters.  On July 31, I sent a letter with Senator Hatch to SoundExchange, which was created by the RIAA to act as the agent for copyright holders in negotiating the voluntary licenses with webcasters under the DMCA and to serve as the receiving agent for royalties under the CARP process.  The letter posed questions on the status of the reported ongoing negotiations between RIAA/Sound Exchange and the smaller webcasters, the terms being proposed and considered, and how likely the outcome of those negotiations would be to produce viable deals for smaller webcasters, while still satisfying the copyright community. 

Reports on the progress of these negotiations were disappointing, which makes this legislation all the more important.  As a general principle, marketplace negotiations are the appropriate mechanism for determining the allocation of compensation among interested parties under copyright law.  Yet, we have made exceptions to this general principle, as reflected in this legislation and the very compulsory license provisions it amends. 

The legislation reflects a compromise for all the parties directly affected by this legislation: small webcasters, noncommercial webcasters, and hobbyists that could not survive with the rates set by the Librarian, and copyright owners and performers who under this bill will give certain eligible webcasters an alternative royalty payment scheme.  This legislation does not represent a complete victory for any of these stakeholders.  Artists and music labels may believe that they are forgoing significant royalties under this legislation and I appreciate that there are those in the webcasting business, who are either not covered or not sufficiently helped by the bill, who believe that this legislation should do more.  As one analyst at the Radio and Internet Newsletter stated, in the October 11, 2002 issue, “Clearly, the ‘Small Webcaster Amendments Act of 2002' (a/k/a H.R. 5469) is an imperfect bill that doesn’t fix everything for everybody. . . . Still, overall, does it do more good than harm for more people? My belief is that many are helped one way or the other and virtually no one is assured of being hurt.  Thus, the answer, on the whole, would be yes.”

I know that most webcasters share my belief that artists and labels should be fairly compensated for the use of their creative works.  This legislation provides both compensation to the copyright owners and helps to support the webcasting industry by offering more variable payment options to small webcasters than the one-size-fits-all per performance rate set out in the original CARP and Librarian decisions.  The rates, terms and record-keeping provisions are applicable only to the parties that qualify for and elect to be governed by this alternative royalty structure and no broad principles should be extrapolated from the rates, terms and record-keeping provisions contained in the bill.  The Copyright Office is presently engaged in a rule-making on record-keeping and this bill does not supplant that ongoing process.

After the House passed H.R. 5469 on October 7, 2002, I have worked with Senator Hatch to clear the bill for passage through the Senate and address concerns raised on both sides of the aisle. While the bill was finally cleared for passage by all the Democratic Senators on October 17, passage of the legislation was blocked before the lame-duck session.  I am pleased to have worked with Senator Helms on a substitute that resolves some of the concerns raised about the original House-passed bill. 

The Helms-Leahy substitute makes the following changes in H.R. 5469:

First, it authorizes SoundExchange to enter into agreements with groups representing small webcasters and noncommercial webcasters.  Such agreements will be available generally to any party which qualifies under their terms as an option to the rates adopted by the Copyright Office.  The rates and terms of such agreements will be binding on all copyright holders once the agreement has been published in the Federal Register by the Copyright Office.  Such deals are authorized to cover the retroactive fees, as well as those going forward.

Second, the substitute amendment imposes a six-month moratorium on fee collections from noncommercial entities, to allow for negotiations with such entities.  This provision is particularly important for noncommercial webcasters, such as those operating at colleges and universities.  The Librarian’s decision contained an anomaly under which nonprofit entities that held FCC licenses were given a lower per-performance rate than were commercial entities, but no such provision was made for noncommercial entities that were not FCC licensees.  The bill provides a moratorium on the collection of royalties in order for an alternative agreement to be reached. 

It also authorizes SoundExchange to postpone retroactive royalty collections from small webcasters with whom it is negotiating deals. The original House-passed bill recognized the retroactive burden on many of the small commercial webcasters by allowing them to make their payments based on a percentage of revenue or percentage of expense, but also allows both small commercial and noncommercial webcasters to pay these retroactive fees in three payments over the span of a year.

Third, the substitute amendment adopts language making clear that such deals are not precedent in any judicial proceeding or in future CARPs.

Fourth, the substitute amendment provides for direct payment to artists and deductibility of expenses from the proceeds of the royalties.

Finally, the substitute amendment authorizes a GAO/Copyright Office study on the impact of agreements between third parties and webcasters and the effect that such agreements should have on percentage of expense royalty rates.  This authorization does not contain any preliminary findings or sense of the Congress language as to how such study should be resolved.

The agreement to be negotiated between SoundExchange and small webcasters will likely reflect the rates and terms set forth in the original House-passed bill.  These terms provide an option of paying a percentage of revenue and staying in business.  As one Vermont webcaster told me, “Although the percentage of revenue is too high, at least we have the option.  A percentage of revenue deal will enable [us] to stay in business moving forward, grow our audience, and compete.”

The Librarian of Congress royalty rate is based on a per-performance formula, which has the unfortunate effect of requiring webcasters to pay high fees for their use of music, even before the audience of the webcaster has grown to a sufficient size to attract any appreciable advertising revenues.  Without any percentage of revenue option (as the legislation allows), the webcasting industry would be closed to all but those with the substantial resources necessary to subsidize the business until the advertising revenue caught up to the per-performance royalty rate.

A number of concerns have been raised that the rate and terms of the agreements authorized under the substitute amendment do not constitute evidence of any rates, rate structure, fees, definitions, conditions or terms that would have been negotiated in the marketplace between a willing buyer and willing seller.  This concern stems from the DMCA’s statutory license fee standard directing the CARP to establish rates and terms "that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller," rather than a determination of “reasonable copyright royalty rates” according to a set of balancing factors.  This new webcasting standard may be having the unfortunate and unintended result that webcasters and copyright owners are concerned that the rates and terms of any voluntary licensing agreements will be applied industry-wide.  The new webcasting standard appears to be making all sides cautious and reluctant to enter into, rather than facilitating, voluntary licensing agreements.

Passage of this legislation does not mean that our work is done.  As this webcasting issue has unfolded, I have heard complaints from all sides about the fairness and completeness of procedures employed in the arbitration.  Indeed, the concerns of many small webcasters were never heard, since the cost of participating in the proceedings was prohibitively expensive and their ability to participate for free was barred by procedural rules. 

One thing is clear: Compulsory licenses are no panacea and their implementation may only invite more congressional intervention.  To avoid repeated requests for the Congress or the courts to intercede, we must make sure the procedures and standards used to establish the royalty rates for webcasting and other compulsory licenses produce fair, workable results.  Next year, we should focus attention on reforming the CARP process.             

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