IRFA would remove controversial "willing buyer willing seller" standard in webcast royalty determinations

As expected (see RAIN here), Congressmen Jason Chaffetz (R-UT) (left) and Jared Polis (D-CO) this morning introduced to the House of Representatives a bill they hope will create a more level playing field for Internet radio concerning sound recording royalties. An accompanying bill has been introduced to the Senate by Sen. Ron Wyden (D-OR) (right). 

The Internet Radio Fairness Act would change the legal standard by which judges determine the statutory rate for streaming radio. The royalty rates for most other, related uses of copyright sound recordings use the standards set in section 801(b) of the Copyright Act. The 1998 Digital Millennium Copyright Act made an exception for Internet radio, requiring rates to be set to what the judges felt a hypothetical "willing buyer and willing seller" would agree. The bills would bring Internet radio in line with media like cable- and satellite radio, requiring rates to be set along 801(b) guidelines.

Proponents of the bills argue that the current standards discrepancy creates a competitive environment in which broadcast-, cable-, and satellite radio can flourish, while Internet radio operators are faced with royalty obligations equal to or greater than their annual gross revenue. It's interesting to note that the royalties that record labels (who've already come out in opposition to this bill) pay to publishers and songwriters to record their music are also based on 801(b).

Consider that satellite radio operator SiriusXM pays around 8% of its revenues for the right to use copyright sound recordings in its broadcasts, based on a determination using the 801(b) standard. Pandora, on the other hand, says nearly 70% of its total revenue (based on its Q1 FY 2013) will go to royalty payments (and that's per a deal Pandora struck that actually decreased its obligation (again, here, under "Pureplay Webcasters") from the CRB decision -- a decision based on "willing buyer/willing seller").

The bill does not, as some critics point out, address the fact that AM/FM broadcasters do not pay royalties on the sound recordings they play on the air (which in sense, makes the competitive burden to Internet radio that much heavier). New York Congressman Jerrold Nadler (D) plans to introduce a bill in opposition to the Chaffetz/Wyden bill, the Interim FIRST Act (see RAIN here). That bill would raise the royalties broadcasters pay to stream online to a level that would, in effect, equal what they'd pay for an over-the-air royalty. It would also impose the "willing buyer willing seller" standard to royalty rate settings for media currently using 801(b). 

Currently, under the "willing buyer/willing seller" standard, when CRB judges determine the royalty rate at which webcasters pay copyright owners and performers for the use of sound recordings, they do not (and in fact, are instructed to not) consider the "real world" ramifications of their determination, only the perceived economic value of the right.

"In setting royalties, (801(b)) assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music," explains attorney David Oxenford (here).

The 801(b) standard is a set of four criteria the U.S. Copyright Office has historically used to determine a royalty rate. They are:

• Maximize the availability of creative works to the public;
• Insure a fair return for copyright owners and a fair income for copyright users;
• Reflect relative roles of capital investment, cost, and risk, and;
• Minimize disruptive impact on the industries involved.

Read 801(b) of the Copyright Act here.

More, including commentary, coming soon in RAIN.