[00:00:02] Speaker 00:
and and

[00:01:12] Speaker 08:
All right, everybody's organized.

[00:01:14] Speaker 08:
Mr. Finkus, good morning.

[00:01:15] Speaker 03:
Good morning.

[00:01:16] Speaker 03:
Thank you, Your Honor, and may it please the court.

[00:01:18] Speaker 03:
I'll address the rate structure and rate level issues, and Mr. Onstreich will discuss the bundling and retroactivity issues.

[00:01:26] Speaker 03:
To begin with, the majority's two key decisions regarding rates, setting particular rate levels and adopting the uncapped TCC structure, both are infected by the same error.

[00:01:36] Speaker 03:
reliance upon unsupported assertions that an increase in royalty payments to the publishers would decrease royalty demands by the record labels, what's been termed in this case the seesaw effect.

[00:01:47] Speaker 03:
With respect to rate levels, the model put together by the majority to justify its 44% rate increase

[00:01:54] Speaker 03:
concludes that the labels will accept an approximately one-third cut in what they currently receive, a reduction of more than $500 million per year, notwithstanding the board's recognition that the labels exercise super-competitive oligopolistic power in their market.

[00:02:13] Speaker 03:
The majority relied entirely on that predicted drop in label demands to just to determine that rate levels satisfied two key elements of the statutory Section 801B factors, that rates afford a fair income to the copyright user as well as to the copyright owner, and that they reflect the relative roles of the owner and user, and these are the rate factors relevant to satisfying the Constitution's reasonable rate of return requirement.

[00:02:40] Speaker 03:
It was plainly irrational, the opposite of reasoned decision-making, for the majority to rely on the model's highly counterintuitive conclusion that the labels would give up more than $500 million a year, especially because the majority itself acknowledged at JA 1061 that its model did not reflect reality because it didn't account for the label's oligopolistic market power.

[00:03:04] Speaker 03:
In addition to the lack of reasoned decision-making, no substantial evidence supports the conclusion that the labels would reduce their demands.

[00:03:12] Speaker 03:
The dissent said that at Joint Appendix 1241-42, and the proof is the meager authority cited

[00:03:22] Speaker 03:
by the government and MPA.

[00:03:24] Speaker 03:
Not a single one of the cited experts supports the prediction of the majority's model.

[00:03:29] Speaker 03:
Most just say that the increase in the publisher rates will be taken into account by the labels, but they don't say that there'll be a reduction or how much there will be.

[00:03:39] Speaker 03:
And in fact, the copyright owner's expert, Professor Ganz, said the burden would fall on the services and that the label would keep their demands at the same level.

[00:03:48] Speaker 03:
To the extent the majority relied on Professor Watt

[00:03:52] Speaker 03:
Even he didn't predict the dramatic model level reductions of $500 million a year by the labels, just said that the labels would reduce their demands by most of what the amount of increased rates.

[00:04:08] Speaker 03:
But even those statements.

[00:04:10] Speaker 07:
These, I mean the board's response to the failure of the models to address the oligopoly,

[00:04:19] Speaker 07:
you said it better than me, oligopolistic nature of the sound recording holders interests that what they're going to do is, so what mattered then was the level at which the rates were set.

[00:04:37] Speaker 07:
So it was too high, there wouldn't be enough counterweight on I guess their seesaw.

[00:04:42] Speaker 07:
And the debate just seems to be about some level predictions of economic

[00:04:49] Speaker 07:
And so I'm wondering why when it comes to predicting what an economic consequence will be of a change, that's not the type of thing.

[00:04:59] Speaker 07:
I have two questions.

[00:05:01] Speaker 07:
Why wouldn't it defer to the board?

[00:05:03] Speaker 07:
And secondly, if more evidence was needed, the concern is there wasn't evidence for their prediction.

[00:05:10] Speaker 07:
What more would you have than the expert testimony you had here?

[00:05:15] Speaker 07:
saying that there was a seesaw and that there would be this effect.

[00:05:18] Speaker 07:
It wouldn't be perfect, but there'd be this response.

[00:05:22] Speaker 03:
Well, just to take the last question first, Your Honor.

[00:05:26] Speaker 03:
The evidence is not just not perfect.

[00:05:28] Speaker 03:
The evidence here doesn't come, even Mr. Watts, Professor Watts' statement, which is flawed for a number of reasons.

[00:05:36] Speaker 03:
But even if it were taken at face value, he did not say that the $500 million drop per year would occur.

[00:05:42] Speaker 03:
All he said is for the amount of increase, which is a much lesser amount, the labels would decrease their demand.

[00:05:48] Speaker 03:
But the critical thing here is in order to satisfy the 801B factors,

[00:05:54] Speaker 03:
regarding fairness to the copyright user as well as the copyright owner and appropriate shares of the product, the majority had to look at what the impact of the rates would be.

[00:06:04] Speaker 03:
And it, the section of its decision that addresses that issue, which is at A, Joint Appendix 1076, relies entirely on this model and the conclusion that the services will actually make more

[00:06:21] Speaker 03:
than they were making today, and that's why, based on the model's predictions, and that's why things would be okay in terms of the balance between the services and the copyright owners.

[00:06:31] Speaker 03:
So the problem here is not a dispute about predictions.

[00:06:36] Speaker 03:
It's that their prediction has zero support in the record.

[00:06:39] Speaker 03:
Nobody believes that the labels are going to reduce their demands by $500 million.

[00:06:43] Speaker 03:
Maybe the majority could have justified its rate of increase under those factors by relying on something else, but the only thing it relied on was the predictions of the model, and the predictions of the model are just totally irrational and not supported by the record.

[00:06:59] Speaker 07:
In addition to Professor... To be clear, your point is when they said, look, we can adjust for the model's failure to deal with these oligopolistic tendencies,

[00:07:11] Speaker 07:
by reducing the amount of the rate increase that that was just not a rational way of addressing.

[00:07:22] Speaker 07:
It's mostly like the model and I thought, you know, the seesaw was generally talked about not just by one witness.

[00:07:31] Speaker 07:
And so if there is a seesaw, then it's just a question of how much pressure you need to change it.

[00:07:37] Speaker 03:
Well, two points on that.

[00:07:38] Speaker 03:
The reduction in the rate that the majority talked about only applied to the TCC prong.

[00:07:44] Speaker 03:
It didn't apply to the revenue prong.

[00:07:47] Speaker 03:
So just forgetting about the TCC prong entirely, which could result, as we explained, in dramatically unreasonable rates, just looking at the revenue prong and the predictions that the majority's model makes about the revenue,

[00:08:01] Speaker 03:
not adjusted because there was no adjustment.

[00:08:04] Speaker 03:
The prediction of that model is the services will keep $500 million more a year because the labels will reduce their revenue.

[00:08:12] Speaker 03:
And that was the basis for the majority saying this rate level will fairly treat the copyright users.

[00:08:22] Speaker 03:
So their adjustment doesn't matter.

[00:08:25] Speaker 03:
It's just a question of what they relied on to make that determination just

[00:08:30] Speaker 03:
is incredible and was not supported by Professor Watt.

[00:08:35] Speaker 03:
In addition, Professor Watt, not only did he not support that dramatic drop, he did not take account, as the dissent says, of the fact that rather than sitting by and accepting a reduction

[00:08:46] Speaker 03:
dramatic reduction in their share, the labels might decide to reorient the market.

[00:08:53] Speaker 03:
Insist on getting the money from the services, see what happens, maybe they'll pay it, maybe the services will go broke and the labels will take over.

[00:08:59] Speaker 03:
Professor Watt didn't consider that possibility and the dissenting judge who is the designated economist on the board said the failure to consider that means that it is implausible to rely on Professor Watt's evidence.

[00:09:14] Speaker 06:
Can I ask you about the fair notice question?

[00:09:17] Speaker 06:
I was wondering why you don't lead with that.

[00:09:21] Speaker 03:
Well, we do lead with it in our briefings.

[00:09:23] Speaker 03:
Yes, I noticed that.

[00:09:24] Speaker 03:
And we believe strongly in it, Your Honor.

[00:09:27] Speaker 03:
But I think that the issue that I was talking about goes to both the rate structure, because it justified the uncapped nature of the TCC, and it goes to the rate levels, because of the discussion of the 801b determination.

[00:09:39] Speaker 03:
So it seemed like something that put the whole things together.

[00:09:41] Speaker 03:
I'm happy to talk about the lack of fair notice.

[00:09:43] Speaker 03:
As you know, the dissenting judge, this isn't just not an argument we're making.

[00:09:48] Speaker 03:
The dissenting judge said there was no fair notice.

[00:09:52] Speaker 03:
so that we would have an opportunity to address the impact of the uncapped TCC.

[00:09:58] Speaker 03:
And that is a significant failure.

[00:10:00] Speaker 03:
It's a failure that this Court has relied on before in setting aside agency determinations, as we explained in our brief.

[00:10:08] Speaker 06:
Was there not enough evidence in the material that was already available to consider the uncapped TCC?

[00:10:16] Speaker 03:
Well, we didn't have a chance to put in affirmative evidence about it in the affirmative part of our case because the issue wasn't discussed.

[00:10:24] Speaker 03:
As the case was litigated, the copyright owners wanted a per-play rate.

[00:10:31] Speaker 03:
The services wanted the continuation of the phone 02 rates, the prior rates.

[00:10:35] Speaker 03:
Those prior rates had a cap on the critical premium 9.99 a month

[00:10:44] Speaker 03:
part of the service which supplies the overwhelming majority of revenue.

[00:10:49] Speaker 03:
So nobody had any notice that the uncapped nature of that rate was going to be an issue until the majority adopted that proposal.

[00:11:00] Speaker 03:
What about the Google proposal?

[00:11:02] Speaker 03:
Well, the Google proposal came in after the evidence had closed.

[00:11:07] Speaker 07:
I understand, but then there were filings and the services responded to Google's filing and didn't object.

[00:11:13] Speaker 07:
to the uncapped, right?

[00:11:16] Speaker 03:
Am I accurate in that?

[00:11:17] Speaker 03:
They didn't object to the uncapped nature because Google very carefully couched its filing as tied to the particular levels and those levels.

[00:11:27] Speaker 07:
The board had made clear early on, this is de novo review, everything's on the table, whatever you want, you have to prove it.

[00:11:36] Speaker 07:
Don't assume status quo, whatever you want, you have to prove it.

[00:11:41] Speaker 07:
So maybe that put the burden on you to show the need for caps even at the initial hearing.

[00:11:46] Speaker 07:
But certainly when someone threw on the table, okay, you're right, this is rather messy what we have now, uncap the rates.

[00:11:56] Speaker 07:
But we would like these to be the rates.

[00:11:58] Speaker 07:
If you're going to uncap, I don't understand why you then in filing a response to that very submission wouldn't have addressed

[00:12:08] Speaker 07:
the argument saying, look, we don't think they should be uncapped at all, here's why, and then at least echoed Google and said, but if, you know, I forbid you uncap them, set them at the low level like Google says, but you didn't do anything.

[00:12:22] Speaker 07:
You didn't object to the uncapping at all.

[00:12:24] Speaker 03:
I guess two responses to that, Your Honor.

[00:12:27] Speaker 03:
The Google proposal came after the record closed.

[00:12:39] Speaker 07:
disagrees, we think this is such a dramatic change we didn't have notice of, and you would need to reopen the record.

[00:12:48] Speaker 03:
Perhaps we could have said that, Your Honor, but we didn't.

[00:12:52] Speaker 03:
But the fact is that Google very carefully said, if you raise the rates from what we're suggesting, then this has the possibility of on-away rates.

[00:12:59] Speaker 07:
I thought your whole concern here was we had no notice that the thought

[00:13:05] Speaker 07:
of uncapping rates would even pass for a fleeting moment through the minds of the royalty judges.

[00:13:13] Speaker 07:
And in fact, it was right there on the table.

[00:13:16] Speaker 07:
And I mean, maybe I'll wish you had written it differently now, but the notice argument, I guess I'm having a little trouble.

[00:13:23] Speaker 07:
And these post-hearing filings like this happen.

[00:13:27] Speaker 07:
No one says it's not a legitimate thing to do.

[00:13:29] Speaker 07:
So I don't understand the notice argument.

[00:13:33] Speaker 03:
it's certainly legitimate to have that filing.

[00:13:35] Speaker 03:
That does not answer the question whether we had an opportunity during the hearing, which is the critical time to address that issue.

[00:13:42] Speaker 03:
I think even if Google's proposal had been adopted, it would have been possible to say there's no fair notice here of an uncapped rate.

[00:13:49] Speaker 03:
But the critical thing is Google specifically said in its proposal, our rate is tied to the level that we specify.

[00:13:57] Speaker 03:
And that level was 15% compared to the majority of 26.2%.

[00:14:01] Speaker 03:
So a very, very dramatic difference.

[00:14:04] Speaker 03:
So I think it was reasonable for the services to conclude that since Google had framed it that way, the general issue of uncapped rates was not put on the table.

[00:14:15] Speaker 03:
It wasn't put on the table by anybody.

[00:14:18] Speaker 06:
Can I ask one more question?

[00:14:19] Speaker 06:
The response to your argument of the other side, or maybe it's only in my mind,

[00:14:25] Speaker 06:
on the question of whether it's really reasonable to believe that the record labels won't raise their rates doesn't apply all the time.

[00:14:37] Speaker 06:
If they have all this power, couldn't they drive you out of business today anyway?

[00:14:42] Speaker 06:
And if that's really in their economic benefit as you seem to think it is, why haven't they just done that?

[00:14:50] Speaker 03:
I think, Your Honor, as the dissenting judge said, the record labels are happy with the status quo.

[00:14:55] Speaker 03:
They're getting a large amount of money, and they're happy with the current situation.

[00:15:00] Speaker 06:
That doesn't say... But if your point is they could get another $500 million, then why don't they just take the other... I mean, I don't... The issue is why... How much different is this compared to the bad economic position you're in anyway?

[00:15:16] Speaker 03:
Well, I think it's, I guess there are two points to that, Your Honor.

[00:15:20] Speaker 03:
With respect to the uncapped rate structure, we don't know how bad it's going to be because we don't know what will happen.

[00:15:27] Speaker 03:
And because the consequence of the

[00:15:31] Speaker 03:
with respect to the rate levels because the reasonableness, the determination the rates are reasonable depends on the reduction of $500 million a year for the labels.

[00:15:42] Speaker 03:
This issue doesn't really come into play because it's quite a different world for the labels where instead of making what they're making now, they're being told $500 million less.

[00:15:52] Speaker 03:
That isn't going to happen but that's the entire basis for the majority's determination that the 801B factors were satisfied.

[00:16:03] Speaker 05:
Thank you, Your Honor, and may it please the Court.

[00:16:18] Speaker 05:
The majority made two additional legal errors.

[00:16:21] Speaker 05:
First, it changed the initial determinations rule for bundled services.

[00:16:26] Speaker 05:
Second, it made the new rates in terms of effective retroactive, and this Court should reverse both of those decisions.

[00:16:32] Speaker 05:
Looking at the bundled services question, the judge has recognized that among the copyright owner's requests to change the initial determination were some that were for and I'm quoting from 1251.

[00:16:44] Speaker 05:
Some that were for substantive relief.

[00:16:46] Speaker 05:
And if you look at page 1267 where they actually analyze the copyright owner's proposal, it's clear that they are engaging in substantive review.

[00:16:56] Speaker 05:
They say we are going to pick the copyright owner's proposal based on our evaluation of the section 801B1 factors.

[00:17:03] Speaker 05:
There's not a word in their actual analysis and justification that speaks of fixing a clerical error or making a technical change where those kinds of language appear

[00:17:14] Speaker 05:
elsewhere in the order where that's what they're doing.

[00:17:16] Speaker 05:
So what they did here is rehearing.

[00:17:19] Speaker 05:
And Congress said, board, if you're going to do rehearing and change an initial determination, you can only do it in exceptional cases.

[00:17:26] Speaker 05:
And that's 803C2.

[00:17:28] Speaker 05:
And we know what the judges thought about that.

[00:17:31] Speaker 05:
The copyright owners, and I'm quoting from 1251, did not meet or even make a prima facie case of meeting that exceptional case's standard, which longstanding precedent

[00:17:41] Speaker 05:
repeated here in footnote three on page 1251 and on page 138 of the appendix in the denial of Mr. Johnson's motion, makes clear that exceptional cases is 59-8.

[00:17:52] Speaker 05:
You need a change of controlling law.

[00:17:55] Speaker 05:
You need new evidence unavailable at the time.

[00:17:57] Speaker 05:
You need manifest injustice.

[00:18:00] Speaker 05:
That's when you can make substantive changes to an issue.

[00:18:02] Speaker 07:
How does she know that standard doesn't just apply to parties and that board itself

[00:18:11] Speaker 07:
can, if it looks upon review of its initial determination and receives some filing and finds that there's a glaring error, it can fix it.

[00:18:21] Speaker 05:
Sure, because in 803C2, Congress said that copyright royalty judges may, in exceptional cases, upon motion of a participant, order a rehearing on such matters as deemed appropriate.

[00:18:34] Speaker 05:
So it's tied to, you know, there's no sua sponte authority.

[00:18:37] Speaker 05:
To make changes, you need a motion.

[00:18:39] Speaker 05:
It's limited to exceptional cases.

[00:18:41] Speaker 05:
This is very different language from what we see for the FCC or FTC or FERC.

[00:18:47] Speaker 07:
In B5, they have sui espante authority to make changes based on paper submissions.

[00:18:56] Speaker 05:
I'm sorry, based on what?

[00:18:57] Speaker 07:
They have the authority to make changes based on sui espante to make decisions based on paper submissions.

[00:19:03] Speaker 07:
in B5.

[00:19:04] Speaker 05:
Oh, we're not, just to be clear, we're not complaining that they didn't, that they did this without having a live hearing.

[00:19:11] Speaker 05:
We're not saying that rehearing requires a live hearing.

[00:19:13] Speaker 07:
No, but they have the Suez-Ponte authority to make, I mean, I'm talking about the ability to actually make a change.

[00:19:18] Speaker 05:
Right, but that's the question of where the exceptional cases standard is met.

[00:19:22] Speaker 05:
Does the board have to have a live hearing if you do it on the papers?

[00:19:24] Speaker 07:
We're not... B5 doesn't have an exceptional cases limitation.

[00:19:28] Speaker 05:
Your Honor, I understand B5 to be about

[00:19:31] Speaker 05:
the 803C2 hearing.

[00:19:34] Speaker 07:
It's not, as I understand it... I guess I'm getting the question of whether... It just seems a little odd for Congress to set up this scheme where you have an initial determination, then you take these filings, and then you have a final determination, and to think that the board itself, if after issuing its initial determination, is helped by the submissions of the parties, and in doing so discovers

[00:19:59] Speaker 07:
It's a significant problem that we just missed.

[00:20:03] Speaker 07:
And then it has to go, I'm sorry.

[00:20:05] Speaker 07:
I guess because we just missed it, there's nothing we can do about it before our final determination.

[00:20:10] Speaker 07:
We just have to lock it in.

[00:20:11] Speaker 07:
And that seems to me, it's one thing, again, to limit.

[00:20:14] Speaker 07:
You don't want parties relitigating everything at this stage.

[00:20:18] Speaker 07:
And so we're trying to confine the parties.

[00:20:20] Speaker 07:
But if they discover that something's really haywire, that they can't

[00:20:26] Speaker 07:
themselves, assuming, again, that they allow people to make some paper submissions.

[00:20:30] Speaker 07:
It's all fair to everybody, and everyone's allowed to.

[00:20:33] Speaker 05:
Well, so, Your Honor, again, if Congress wanted to create that scheme, it could have, and it has in all sorts of other administrative proceedings.

[00:20:40] Speaker 05:
Here, Congress carefully articulated down to the month.

[00:20:44] Speaker 05:
They create deadlines for this phase of the proceeding, deadlines for that phase of the proceeding.

[00:20:47] Speaker 05:
Everything is very structured.

[00:20:48] Speaker 07:
But deadlines don't have to do with what they can do as long as they're within that timeframe, whether they can really

[00:20:53] Speaker 07:
fix something that they just discovered.

[00:20:56] Speaker 07:
Why would Congress want to lock in the board itself from fixing a mistake that it recognizes and to do it in a timely manner consistent with Congress's time frame between the initial and final determination?

[00:21:08] Speaker 07:
Why would it want to lock that in?

[00:21:10] Speaker 05:
Your Honor, I'm speculating this was built on another older regime, and there is some mention in the legislative history of concern about people evading that actual hearing process.

[00:21:19] Speaker 07:
Was that the board or the parties?

[00:21:19] Speaker 05:
That's in Congress's legislative history.

[00:21:21] Speaker 07:
No, I'm sorry, but the people that were evading it, were those, was that the board?

[00:21:25] Speaker 05:
I believe the parties.

[00:21:26] Speaker 07:
Exactly.

[00:21:28] Speaker 05:
But so, given that we do have, and this sort of bleeds into the second argument, there are instances where retroactivity is authorized in the law.

[00:21:36] Speaker 05:
And there, you can understand Congress thinking that the initial determination

[00:21:39] Speaker 05:
ought to look a lot like the final determination, except in exceptional cases, so that parties can plan accordingly.

[00:21:48] Speaker 05:
Now, our situation, and I'll get to that in a moment, is not one of those where retroactivity is authorized.

[00:21:53] Speaker 07:
But you could understand... I'm talking about the bundling here.

[00:21:56] Speaker 07:
That's not a retroactivity issue.

[00:21:58] Speaker 05:
No, it's not.

[00:21:58] Speaker 05:
But you're asking, Your Honor, why would Congress have wanted to limit the board in this way?

[00:22:02] Speaker 07:
So there's nothing retroactive between the initial and the final determination.

[00:22:06] Speaker 05:
Well, where the final determination gets to apply retroactively, right, so the parties see the initial determination, they say, okay, so this is the regime I'm going to live under once this takes effect.

[00:22:16] Speaker 07:
You think of a retroactivity argument as this bundling issue, right?

[00:22:19] Speaker 07:
So you might have the argument if it's retroactive that you are making on the date of the race.

[00:22:25] Speaker 05:
I guess all I'm trying to be honest is to suggest why Congress might have wanted

[00:22:29] Speaker 05:
to give this particular set of Article 1 judges less power to do rehearings than it gives the FCC or the FTC or FERC, all of which have much broader authority.

[00:22:41] Speaker 05:
But turning to retroactivity.

[00:22:43] Speaker 05:
This is real retroactivity.

[00:22:44] Speaker 05:
We spent 13 months buying licenses at a price and then the board increased it.

[00:22:49] Speaker 05:
And it was a surprise.

[00:22:51] Speaker 05:
In May 2017, before the board acted, we pointed to 803D2B and told the board that the statute pretty clearly says if it's not published until it's published in the federal register, it doesn't take effect.

[00:23:03] Speaker 05:
And then the decision comes out and they agree with us.

[00:23:06] Speaker 05:
On page 818 of the record, this is from the penultimate paragraph of the decision,

[00:23:11] Speaker 05:
The rates and terms established in this initial determination shall supplant the existing ones at 818.

[00:23:21] Speaker 05:
It's the bottom sentence.

[00:23:27] Speaker 05:
It shall supplant the existing terms at such time as the Register of Copyrights completes her statutory review

[00:23:33] Speaker 05:
And the librarian accepts and publishes the determination.

[00:23:38] Speaker 05:
That's the same thing the board told us on their website at page 75 of the record.

[00:23:42] Speaker 05:
The initial determination comes out and we think the board has agreed with us.

[00:23:47] Speaker 05:
Come November of 2018 we learned, nobody even asked the board to make this change.

[00:23:52] Speaker 05:
Now they're going to make the new rates and terms retroactive to January 1, 2018.

[00:23:57] Speaker 05:
Nothing in section 803D2B authorizes that.

[00:24:00] Speaker 05:
Yes, there's an accept as clause, which the government relies on, but the majority never cited.

[00:24:06] Speaker 05:
But under the Bowen principle, that accept as clause isn't the kind of express authorization needed for retroactive rate setting.

[00:24:14] Speaker 05:
And we know that because we can see in the immediately prior sentence, Congress actually used the phrase shall be retroactive to refer to when they set rates initially.

[00:24:23] Speaker 05:
And in the immediately prior

[00:24:25] Speaker 05:
Paragraph 803D2A, Congress said that where other kinds of rates have a specific end date, the new rates can go into effect on the next day even if the decision is published later.

[00:24:37] Speaker 05:
So given the background here, the right way to read 803D2B is that accept as clause lets the judges pick a different post-publication date than the default, not that they get to pick a pre-publication date.

[00:24:50] Speaker 07:
Can you explain to me how,

[00:24:55] Speaker 07:
How the retroactivity even worked here, because I take it, it went into effect.

[00:25:01] Speaker 07:
There's no stay and so rates had already been paid and then they had to be... Transactions had already occurred under the phone of two... So were they renegotiated or what happened?

[00:25:14] Speaker 05:
As I understand it, everybody had to recalculate 13 months of transactions under the phone of... That had occurred and completed under the phone of two rates in terms.

[00:25:23] Speaker 05:
and recalculate and figure out what the delta was and make additional payments or seek refunds based on the photo three rates and terms.

[00:25:32] Speaker 07:
So it... Is that just to the music publishers or did you go negotiate with these recording folks?

[00:25:42] Speaker 05:
This is specific as to the sound, as to the mechanical oil.

[00:25:45] Speaker 05:
Just as to that one, okay.

[00:25:46] Speaker 07:
This decision doesn't change the negotiated... So for that time period you had no offset from the...

[00:25:51] Speaker 05:
Not that I'm aware of, Your Honor.

[00:25:56] Speaker 05:
I see my time has expired if there are no questions.

[00:25:59] Speaker 08:
Thank you, Your Honor.

[00:26:01] Speaker 08:
Mr. Shane Moogoo.

[00:26:08] Speaker 02:
Thank you, Judge Henderson, and may it please the Court.

[00:26:10] Speaker 02:
I'll be quite brief because I'll be back up here in my capacity as intervener.

[00:26:15] Speaker 02:
While the services

[00:26:16] Speaker 02:
broadly challenge the board's final determination.

[00:26:19] Speaker 02:
My clients, the copyright owners, challenge that determination only in one very narrow and discreet respect and that is with regard to the board's decision to reduce the number of subscribers and therefore the royalties due under the mechanical floor prong of the rate structure and that's the fallback, the third prong of the rate structure where the services offer discounts to students or family members.

[00:26:43] Speaker 02:
On that prong, our submission is a quite simple one.

[00:26:47] Speaker 02:
The board reasoned in its final determination, and this is at pages 1079 to 1080, that the services were offering those discounts to build market share consistent with the broader efforts on the part of the services to engage in revenue deferral.

[00:27:03] Speaker 02:
But the board also reasoned that the services were offering those discounts to reach consumers with a low willingness to pay.

[00:27:10] Speaker 02:
Our submission on our affirmative appeal is simply that there was no evidence in the record to support the proposition that students or family members in fact have a low willingness to pay.

[00:27:20] Speaker 02:
And in light of that, that narrow aspect of the board's final determination should be vacated.

[00:27:26] Speaker 02:
Now on this issue, the government and the services point to three categories of evidence in their briefs to support the board's determination.

[00:27:37] Speaker 02:
But none of those categories, in fact, provides factual support for this key proposition that students or family members have a low willingness to pay.

[00:27:45] Speaker 07:
The first testimony... Wasn't there a lot of testimony that they were difficult to monetize, that students at least, if they had students

[00:27:55] Speaker 07:
are short on funds.

[00:27:57] Speaker 07:
College students in particular don't have funds.

[00:27:59] Speaker 07:
And because of their generation, if they have to pay more, they'll go to YouTube or perhaps some alternative means of acquiring the music.

[00:28:09] Speaker 07:
There was evidence about that.

[00:28:11] Speaker 07:
Maybe you don't think it was enough, but it doesn't seem right to me to say there was nothing

[00:28:15] Speaker 02:
Well, I think what there was, Judge Millett, was that there were statements made by representatives of the services to that effect.

[00:28:24] Speaker 02:
But they were very conclusory statements.

[00:28:26] Speaker 02:
They were not backed by any evidence.

[00:28:27] Speaker 07:
And in fact, with regard to students... Why isn't testimony as to why we are getting less money than we otherwise could?

[00:28:35] Speaker 07:
Pretty relevant.

[00:28:36] Speaker 07:
It's happening pretty much across the industry.

[00:28:37] Speaker 02:
There were really statements, Judge Millett, about the services' motivation in offering the discounts in the first place.

[00:28:44] Speaker 02:
When it came to the question of whether certain students or family members in fact had a low willingness to pay, there was nothing in the record.

[00:28:51] Speaker 02:
In fact, the only study that was in the record, and we point to this, I believe, at page 31 of our brief, was a study showing that students are, if anything, more willing to pay because they are so eager to obtain access to music.

[00:29:04] Speaker 02:
And so beyond that, beyond the bare and frankly somewhat equivocal statements of the service's own representatives, all you had in addition to that was analysis by the experts on price discrimination more generally.

[00:29:20] Speaker 02:
And that is, you know, essentially generic expert testimony that price discrimination can increase revenue really without reference to students or family members other than

[00:29:30] Speaker 02:
a very passing reference by Professor Marks at page 440 where she included students and family members in a laundry list of parties as to whom she essentially assumed the price discrimination would be beneficial.

[00:29:43] Speaker 02:
And the reason why I think this is so critical is because there's a very fine line here between low willingness to pay on the one hand and revenue deferral on the other.

[00:29:54] Speaker 02:
And of course where you have the services competing

[00:29:57] Speaker 02:
for the market and not just in the market as the board said in its final determination, the services have an incentive to attract customers of any variety through a variety of attractive pricing mechanisms.

[00:30:11] Speaker 02:
And for instance, there was testimony from... They sort of universally chosen and they explained why.

[00:30:16] Speaker 07:
They said these folks are difficult to monetize otherwise and it just makes honestly common sense that college students

[00:30:27] Speaker 07:
for the most part won't have much money and they have technical abilities to get music another way and so we get them in, get them in the practice of paying, get them a price point that they're willing to do it and get them in the practice of buying this music legitimately, that's better for everybody across the board.

[00:30:48] Speaker 07:
It helps everybody and then as they mature hopefully they'll be

[00:30:51] Speaker 07:
in the practice of making this payment.

[00:30:53] Speaker 02:
To the extent you have that intuition, Judge Millett, it presumably would have been easy for the services to come forward with studies or other evidence to support.

[00:31:02] Speaker 02:
Why do they study?

[00:31:03] Speaker 07:
They come back and say this is why we do it and it's across the board and it's consistent with common sense.

[00:31:08] Speaker 07:
I guess it's common sense is that not the vast majority of college students like music and are not flush with money.

[00:31:18] Speaker 02:
I mean, you might have that intuition, Judge Mollett, though, again, the evidence that was in the record suggests that if anything, students... But it's not my intuition.

[00:31:25] Speaker 07:
This is clearly the intuition of the people who are losing money by offering cheaper packages, right?

[00:31:30] Speaker 07:
My intuition has nothing to do with it.

[00:31:32] Speaker 02:
But that is also consistent with the notion that what the services were doing was simply competing, trying to get in

[00:31:37] Speaker 02:
customers who might be customers for life.

[00:31:40] Speaker 02:
And the problem, if anything, is magnified with regard to family plans, particularly because there is obviously no one accepted definition of family.

[00:31:50] Speaker 02:
Our submission is simply that if the services could, in fact, point to some factual evidence that these groups had a lower willingness to pay, that might be one thing, but particularly given... Well, they have, again, there they had, there is testimony.

[00:32:04] Speaker 07:
It may not be the fancy expert witnesses that your studies that you want, but there is testimony and it seems perfectly rational for the board to credit that if we have to pay

[00:32:14] Speaker 07:
for our three-year-old and our eight-year-old to have their own accounts.

[00:32:18] Speaker 07:
We have to pay full freight.

[00:32:19] Speaker 07:
You know what?

[00:32:20] Speaker 07:
We're going to get one account, and we're going to share.

[00:32:22] Speaker 02:
And there was testimony that that would be more convenient, but I think... And cheaper.

[00:32:29] Speaker 07:
And families, again, most people aren't looking to maximize the amount of money they give to businesses.

[00:32:34] Speaker 02:
In this colloquy, we're by definition talking about discounts, but I think the reason why the court should be perhaps a little more searching than it might be otherwise is precisely because all of that is also consistent with the broader enterprise of revenue deferral and competing for the market through any means.

[00:32:49] Speaker 07:
And the last thing I would say with regard to the- It's not revenue deferral if you're trying to bring in, again, with the college students, people who otherwise wouldn't pay at all.

[00:32:58] Speaker 02:
But you would also be competing for them regardless and to the extent that discounts for students or family plans work are convenient or otherwise attractive.

[00:33:08] Speaker 02:
That is consistent with that broader motive which of course explains the broader rate structure more generally.

[00:33:13] Speaker 02:
And the last thing I would say on the subject of the testimony of the actual witnesses is I would encourage you to look at the testimony of the services of witnesses.

[00:33:22] Speaker 02:
And I would point the court to Barry McCarthy's testimony, which is under seal, but which is at pages 1327 to 1328 of the appendix.

[00:33:32] Speaker 02:
That testimony, I would respectfully submit, was ambivalent and unsupported.

[00:33:37] Speaker 02:
And I would also point to the testimony of Rishi Merchandani from Amazon at pages 1365 to 15.

[00:33:42] Speaker 07:
So we've already looked at that.

[00:33:45] Speaker 07:
And if you characterize it as ambivalent, but the board found it relevant.

[00:33:51] Speaker 07:
Will we cede that to the board?

[00:33:52] Speaker 02:
I think that the board in its analysis really did not say very much at pages 10, 79 to 10.

[00:34:02] Speaker 02:
I thought this was a substantial evidence argument.

[00:34:06] Speaker 02:
This is the evidence in the record.

[00:34:08] Speaker 02:
This is a substantial evidence.

[00:34:09] Speaker 07:
They don't have to repeat it all themselves for it to count.

[00:34:12] Speaker 02:
That is certainly true.

[00:34:13] Speaker 02:
Again, my submission is that the testimony is ambivalent, or in the case of Rishi Merchandani at 1365 to 1367,

[00:34:19] Speaker 02:
And while there was references to the fact that the services had conducted research on this issue, none of that was presented in the record, and indeed the witnesses were not involved in that research.

[00:34:32] Speaker 02:
Thank you very much.

[00:34:33] Speaker 08:
All right.

[00:34:35] Speaker 08:
Mr. Johnson?

[00:34:43] Speaker 04:
Good morning.

[00:34:44] Speaker 04:
Good morning, Your Honors.

[00:34:46] Speaker 04:
Judge Henderson, and please to the court, my name is George Johnson, and I'm a pro se songwriter, and I thank your honors for letting me speak today and participate.

[00:34:55] Speaker 04:
Since I'm not an attorney, I intentionally didn't argue any constitutional questions in this field because I'd probably lose, so I've kept my issues to a few simple practical requests inside the bounds of the compulsory license and inside the rules of 37 CFR Section 385.

[00:35:10] Speaker 04:
First, asking for a long overdue subpart A inflation adjustment, and second, eliminating the free limited download.

[00:35:19] Speaker 04:
The basic argument in this case is that songwriters used to make 9.1 cents per download, but now they make zero cents per download, and that is not reasonable nor reasonable rate under the Copyright Act.

[00:35:29] Speaker 04:
This lost sale created by the limited download has decimated the American songwriting industry.

[00:35:34] Speaker 04:
Then, under Subpart B, the streaming rate is essentially zero, and that is also not reasonable nor reasonable rate.

[00:35:41] Speaker 04:
For decades, the US government guaranteed American songwriters and independent music publishers 9.1 cents per sale, but now this sale is literally being given away for free as a limited download.

[00:35:51] Speaker 04:
The copyright royalty board is required by law to set reasonable rates.

[00:35:55] Speaker 04:
Zero is not a reasonable rate because it's not a rate at all.

[00:35:59] Speaker 04:
Nor is it an equitable division of music industry profits between copyright owners and users as required since there is no division of profits if one site is getting zero.

[00:36:08] Speaker 04:
By eliminating the free limited download, a term created out of thin air in 2008, the court would only be restoring what was taken away from property owners in phone records one.

[00:36:18] Speaker 04:
This decimation caused by the combination of lost sales and essentially zero streaming rates is evidenced by the loss of music growth songwriters and publishers from 4,000 to less than 400.

[00:36:29] Speaker 04:
Add to that the rate should really be 50 cents instead of 91 cents.

[00:36:33] Speaker 04:
Your Honor's one important point I would like to clarify here is that while 50 cents is a break even point where 110 years of inflation has been properly weighed in subpart A is not an all or nothing request.

[00:36:46] Speaker 04:
And while we pray that Your Honors will determine the full amount of inflation at approximately 50 cents per mechanical for vinyl, CD, or download under 385.3, we would welcome any determination.

[00:36:57] Speaker 04:
of 20, 30, 40 cents per mechanical, or one that gradually increases the rate over a several-year period if a full 50 cents is not possible at this time.

[00:37:07] Speaker 04:
With that said, the full 50 cents per song correction is supported in this appeal with an amicus brief by formal general counsel of the U.S.

[00:37:14] Speaker 04:
Copyright Office, and I hope this carries weight in addition to the public comments supporting the full 50 cents made by Appellant and NPA found in my final opening brief.

[00:37:23] Speaker 06:
Mr. Johnson, could I ask a question?

[00:37:25] Speaker 06:
Yes, sir.

[00:37:25] Speaker 06:
Why is it that the principal songwriter organizations are not appealing these points?

[00:37:33] Speaker 04:
I don't know.

[00:37:34] Speaker 04:
It's a good question.

[00:37:35] Speaker 04:
I think they should.

[00:37:36] Speaker 04:
They brought them up before.

[00:37:39] Speaker 06:
I'm not sure.

[00:37:44] Speaker 04:
Well, it is absolutely counterintuitive, I'm sorry, and I think I put that in one of my briefs why they wouldn't want the extra 9.1 cents.

[00:37:57] Speaker 04:
You know, my guess is that the three major labels that fund NPA and, you know, NSAI, they represent the three major labels.

[00:38:05] Speaker 04:
That for some reason they have said we just want these streaming rates, we get them in a full, you know, billions and billions of performance add up to, you know, enough money for them.

[00:38:15] Speaker 04:
But it's still way below, you know, what the rate was for selling CDs and, you know,

[00:38:22] Speaker 04:
and albums.

[00:38:23] Speaker 04:
So I think that they decided that the three major record labels don't want to, you know, I think the three major labels, you know, when there were still records and CDs you had to manufacture those things.

[00:38:35] Speaker 04:
You had printing costs, plastic.

[00:38:37] Speaker 04:
So they didn't want to do that.

[00:38:38] Speaker 04:
But on the download, you know, the costs are already paid for.

[00:38:42] Speaker 04:
So I don't understand why they wouldn't want to just have a download that the customer could download if they wanted to and pay the 9.1 cents.

[00:38:53] Speaker 04:
Your Honor, as you're aware, on page 539 of the joint appendix or exhibit A of my addendum is my subpart A inflation chart based upon the public record and is one of the most important pieces of evidence because it helps you visualize the 2 cents to 50 cents in the green line.

[00:39:08] Speaker 04:
And the current price fixing and central planning is what we're doing, is the red line.

[00:39:13] Speaker 04:
And we've basically gone from 2 cents to 0 over 110 years.

[00:39:17] Speaker 04:
And while we're referencing the joint appendix, there's a 2016 Billboard magazine article starting at A553, but mainly graphic at A554, which is part of my evidentiary record.

[00:39:29] Speaker 04:
The reports were the artist at Dell's last album sold 3.8 million copies and where 25 songwriters split $13 million.

[00:39:39] Speaker 04:
And that's very significant.

[00:39:41] Speaker 04:
And NNPA said publicly in 2017 that downloads are irrelevant.

[00:39:46] Speaker 04:
And while I would argue that these 25 songwriters would disagree, the album sale evidence here proves that Subparting Download and the sale of 9.1 cents are very relevant.

[00:39:56] Speaker 04:
And Adele herself made $3.8 million.

[00:39:59] Speaker 04:
And so to recap, the subpart A compulsory rate has failed to keep pace with the actual value of MusicWorks.

[00:40:07] Speaker 04:
Combined with the compulsory subpart B streaming rates have been inadequate to support professional songwriters.

[00:40:13] Speaker 04:
And third, the compulsory limited download loophole is a lost sale of a permanent download and must be eliminated.

[00:40:20] Speaker 04:
In preparing for this hearing, I noticed a few sentences in number four of section 385-14 where in 2008, even DEMA and NNPA and RIA contemplated a day with a free noninteractive stream as well as the limited download might need to be eliminated.

[00:40:39] Speaker 04:
And they actually used the term eliminated.

[00:40:41] Speaker 04:
So that is why I use it as well.

[00:40:44] Speaker 04:
And, you know, they also say that the law is based upon the industry practices of the time.

[00:40:50] Speaker 04:
So it may be time for elimination of the limited download.

[00:40:53] Speaker 04:
And, of course, this 385-14 also sets that the rate should be set de novo.

[00:41:00] Speaker 04:
And, you know, the rate's been 9.1 cents since 2006.

[00:41:03] Speaker 04:
So during the final records 1, 2, and 3, the rates weren't set de novo, and they weren't set in this case.

[00:41:10] Speaker 04:
So the limited download is essentially a permanent download.

[00:41:14] Speaker 04:
Even if it's not permanent, it's letting the customer take possession of the musical work for months at a time.

[00:41:19] Speaker 04:
And as 3514 says, this requires payment of the applicable royalties.

[00:41:32] Speaker 04:
Just my other two issues real quick were a voluntary buy button, which I hope the services would consider to replace the limited download, and also, you know, an equitable rate structure.

[00:41:43] Speaker 04:
And I don't think the rate structure is what it should be.

[00:41:46] Speaker 04:
It's just, you know, what they set up in 2008.

[00:41:49] Speaker 04:
So I think my time's out, and I appreciate you taking a look at this case and listening to your comments.

[00:41:56] Speaker 08:
Mr. Johnson, you may be in the wrong business.

[00:41:59] Speaker 08:
You've done a wonderful job presenting.

[00:42:01] Speaker 04:
Well, I certainly appreciate that.

[00:42:02] Speaker 08:
Thank you so much, Your Honor.

[00:42:23] Speaker 01:
Good morning, Your Honor.

[00:42:24] Speaker 01:
Jennifer Utrecht on behalf of the Copyright World Board.

[00:42:26] Speaker 01:
May it please the Court?

[00:42:28] Speaker 01:
It's important to remember here that the Copyright Act has vested the judges with an intensely practical task.

[00:42:33] Speaker 01:
They have to establish reasonable rates that should be paid based on varying policy factors, some of which countervail, have countervailing concerns.

[00:42:41] Speaker 01:
And it's the judge's task to weigh all of the evidence and to determine which way these policy factors best cut.

[00:42:48] Speaker 01:
And here I think we've been presented with parties on all sides saying that the judges have drawn incorrect inferences or that they perhaps should have weighed certain policy concerns more heavily than they did.

[00:42:59] Speaker 01:
But ultimately these concerns are the sorts of things that the copyright asks the judges with doing and that this court owes them deference.

[00:43:09] Speaker 01:
Now I'd like to begin, if I may, by addressing the services arguments regarding the rate structures and the rates.

[00:43:16] Speaker 01:
And I think here the fundamental point of disagreement is extremely narrow and I'd like to explain why.

[00:43:22] Speaker 01:
Everyone agrees here that what the judges are doing is essentially figuring out how much this mechanical royalty is worth so that they can divide the profits from streaming equally.

[00:43:31] Speaker 01:
And as the services proposed in this proceeding, one way of figuring out what a song is worth, and again everyone here agrees, is to look at how much profit the streaming services are making to look at their revenue.

[00:43:43] Speaker 01:
But of course there are

[00:43:44] Speaker 01:
problems with a pure percentage of revenue rate, as was recognized extensively in the judge's decisions and as the services experts acknowledged.

[00:43:53] Speaker 01:
The services are engaged in a competition for the market, which means that they have been consistently driving their own prices down in order to get as many customers as possible.

[00:44:06] Speaker 01:
And while there are certainly competitive advantages and reasonable reasons why they might do this, the judges acknowledge that what happened with the effect of this is that copyright owners, songwriters, will walk away, if it's a pure percentage of revenue rate, will walk away with less money.

[00:44:22] Speaker 01:
And so the way that the services proposed balancing this

[00:44:26] Speaker 01:
was to have an alternative to the revenue rate, which has been referred to as this total content cost rate.

[00:44:34] Speaker 01:
Now the services have proposed here and before the judges below that the total content cost rate should be subject to a series of caps.

[00:44:41] Speaker 01:
And I believe the services have contested and have characterized the judge's decision as

[00:44:50] Speaker 01:
rejecting those caps based on the fact that they believe that record labels will accept less money.

[00:44:56] Speaker 01:
And I don't think that's actually properly the true basis of the judge's decision.

[00:45:00] Speaker 01:
I think what the judge has said here is we're trying to set a fair rate for copyright owners.

[00:45:06] Speaker 01:
We're trying to give songwriters their reasonable share.

[00:45:09] Speaker 01:
And once we do that, the remaining money that's left over is going to be negotiated between record labels

[00:45:16] Speaker 01:
and the services as fair market actors who are going to be acting in their own rational self-interest.

[00:45:24] Speaker 01:
And there are a number of things that could result from this.

[00:45:26] Speaker 01:
The record labels might insist on the same amount of money.

[00:45:29] Speaker 01:
They might accept less because they have to.

[00:45:32] Speaker 01:
There are multiple possibilities, but that's the market acting as it would ordinarily act.

[00:45:37] Speaker 01:
And I would point, Your Honors, to there are several places where the judges explain that what they're doing is setting a fair rate for the copyright orders, even if this means that the services might come away with slightly less money.

[00:45:52] Speaker 01:
So on footnote 107,

[00:45:56] Speaker 01:
which is JA 1045 or the Federal Register version if you prefer, 1944 to 45, the judges discuss the fact that the services proposed a continuation of the present rates even though they all state that they are losing money.

[00:46:12] Speaker 01:
And the judges say the reason for this is they're locked in a bottle for market share unless the losses they're incurring are not a serious competitive detriment.

[00:46:20] Speaker 01:
On footnote 75,

[00:46:23] Speaker 01:
which is Federal Register 1934, the judges say any increase in the mechanical royalty rates, whether or not they are computed with reference to record company royalties, has the potential of leading to a bad outcome for the services.

[00:46:36] Speaker 01:
Even maintaining the status quo could be a bad outcome for the services, as it surely would be for songwriters.

[00:46:41] Speaker 01:
The judges have to trust that reasonable market actors will reach a meeting of the minds regarding the remainder of the profits.

[00:46:49] Speaker 01:
And again, JA 1077, lowering mechanical royalty rates to provide services profitability in the face of the acknowledged problem that a lack of scale, of the lack of scale, this competition for the market that was referring to earlier, would constitute an unwarranted subsidy to these services at the expense of copyright owners.

[00:47:09] Speaker 01:
And that, this principle was what was motivating the judges here, which is that we have to ensure songwriters receive a fair share.

[00:47:16] Speaker 07:
But didn't they also have to ensure that the services

[00:47:19] Speaker 07:
would retain a fair return as well.

[00:47:24] Speaker 07:
Yes, Your Honor, that is.

[00:47:27] Speaker 07:
And they had already recognized that the services were overpaying royalties to the songwriters, or the sound recording.

[00:47:36] Speaker 07:
And then there's a pretty massive increase, 44% in the payments of the mechanical royalty.

[00:47:49] Speaker 07:
And the question is on what possible basis could they think that if the sound recording rights holders don't budge because businesses don't like to surrender hundreds of millions of dollars voluntarily and they now owe a massive increase to the songwriters for reasons the board explained that instead of a seesaw you're going to capture the services and advice that they will not be able

[00:48:19] Speaker 07:
to survive and how would that ensure a fair return to the services?

[00:48:24] Speaker 01:
Well, I think that argument really goes to, I think, both the amount the services receive as well as sort of the disruptive effect, which is the fourth policy factor.

[00:48:33] Speaker 01:
And I think there are really two things that need to be said here.

[00:48:35] Speaker 01:
One, of course, as this court has recognized, the policy factors sometimes are countervailing, right?

[00:48:42] Speaker 01:
Sometimes ensuring a fair rate of return to the copyright owners is going to mean that services receive less money.

[00:48:47] Speaker 07:
But B requires you to look at fairness on both directions.

[00:48:51] Speaker 01:
It does.

[00:48:52] Speaker 07:
It says you have to look at both sides of the coin and so I guess it doesn't work to say we were taking care of one party in the air really well and paying no attention or not addressing the consequences or possible consequences.

[00:49:06] Speaker 01:
And I don't think that, and so the second thing that's important to say is I don't think it's fair to characterize the judge's decision as not accounting for the services here.

[00:49:14] Speaker 01:
The judges at length explained that the services are competing in this race to the bottom, this competitive market where they drive their prices down and that they could in fact decide to raise prices or have a different model and the level of profits they have is not fixed.

[00:49:32] Speaker 07:
But I surely did not read the board decision and tell me if I'm wrong to say that this will all be fine even if the sound recording holders do not

[00:49:43] Speaker 07:
lower their rates at all.

[00:49:44] Speaker 07:
We think there's enough fat in the services operation that they can absorb this and still be viable.

[00:49:51] Speaker 07:
You're not suggesting that.

[00:49:52] Speaker 01:
So I think that the judge's decision, I'm not suggesting that, but I think the judge's decision is fairly read as saying both that currently there is some legal room in the services

[00:50:03] Speaker 01:
and that they can accept some losses.

[00:50:06] Speaker 01:
They say this is not the maximum amount of losses because they're engaged in this race to the bottom.

[00:50:10] Speaker 01:
And they also say, and there is evidence to suggest, that record companies, if necessary, in these negotiations that are going to happen,

[00:50:20] Speaker 01:
The record companies will lower their prices because they will have to.

[00:50:25] Speaker 01:
The record companies make well over... Well, they have to.

[00:50:29] Speaker 01:
This one I don't get.

[00:50:30] Speaker 01:
They have to if they want to continue making well over a billion dollars from the services.

[00:50:35] Speaker 01:
There are options.

[00:50:36] Speaker 01:
If there is really no money left, if we give the songwriters their fair share and the

[00:50:43] Speaker 01:
the amount of money left after that is insufficient to pay both the record companies at their current label and the services to maintain in business.

[00:50:51] Speaker 01:
The record companies in their negotiations have two options.

[00:50:53] Speaker 01:
They either say, okay, we are going to lower our prices because we know you can't pay us more, or they're going to say, well, I guess we're walking away from the table and we're forfeiting well over a billion dollars.

[00:51:06] Speaker 06:
Or we're bringing it in house.

[00:51:09] Speaker 01:
That is, I suppose that's another option, but of course there are transaction costs and startup costs for that as well.

[00:51:14] Speaker 01:
And what the judges said here is that there's no evidence in this proceeding that the record companies, that this level of loss is going to lead the record companies to leave the table entirely.

[00:51:26] Speaker 01:
Where is the evidence that it won't have that consequence?

[00:51:29] Speaker 01:
So I think the strongest evidence that they won't is, remember that the copyright owners here proposed a rate increase that was even more substantial than the ones the judges in fact adopted.

[00:51:42] Speaker 01:
And if it were the case that a substantial increase of that kind,

[00:51:48] Speaker 01:
If it were the case of a substantial increase of this kind, we're going to leave the record companies to walk away.

[00:51:53] Speaker 01:
Surely it would be the case that an increase of the kind the copyright owners proposed would leave the record labels to walk away.

[00:52:00] Speaker 01:
This is a concern about the degree of increase because we're splitting a pot of money.

[00:52:06] Speaker 01:
If we're giving a certain amount to the copyright owners and there's less money to negotiate over, if we give more to them, there's even less to negotiate over.

[00:52:15] Speaker 01:
And so if that evidence was not presented with respect to the copyright owner's proposal, which was even more significant, then of course, you know, the lack of evidence here is, sorry, the lack of evidence here, you know, it should be here.

[00:52:34] Speaker 01:
If there were evidence, it should be here because it would also apply to the copyright owner's proposal.

[00:52:40] Speaker 07:
I guess I just don't know because their whole rationale, the board as I understood it was we can't completely do what these models say because they're not taking account of the oligopolistic nature of the record companies.

[00:52:53] Speaker 07:
Yes.

[00:52:53] Speaker 07:
And so we think that the magic bullet here is to assume the seesaw, take that that's been proposed by these folks but just not use their numbers and use lower rates, somewhat lower rates.

[00:53:09] Speaker 07:
And that's how we will deal with making sure that the industry players stay arranged as they currently are.

[00:53:20] Speaker 07:
But I just don't, I don't, and then somebody pick a number.

[00:53:22] Speaker 07:
And I just don't know where the evidence is that by lowering rates the amount they did, they have somehow found the magic bullet point or the magic point where they can ensure the seesaw will, well they didn't even said how much it was going to balance, but will adjust somewhat

[00:53:39] Speaker 07:
Just enough, I guess, to keep the services breathing.

[00:53:43] Speaker 01:
Well, I think what's important to note here is when the judges set the rates, they first figured out what the appropriate percent of revenue rate was.

[00:53:52] Speaker 01:
And they did so based on predictions that the experts had used.

[00:53:57] Speaker 01:
One expert's prediction about how much the services should be paying to both, and another expert's prediction about how that money should be split between record companies and songwriters.

[00:54:09] Speaker 01:
And from that, they derived their reasonable revenue rate.

[00:54:14] Speaker 01:
And then they had to find a total content cost rate, and they picked a total content cost rate that, as applied to current market conditions, as applied to the amount of money

[00:54:26] Speaker 01:
that one of the services is currently paying to record labels, it would equal the same amount of money as that reasonable revenue rate, right?

[00:54:34] Speaker 01:
Those numbers are designed to produce the same general amount of money.

[00:54:40] Speaker 01:
And so if the question is, you know, how have they determined that, the answer is the two rates are effectively supposed to, at least in current market conditions, produce the same amount of royalties.

[00:54:56] Speaker 06:
Could you explain the meaning of footnote 137, which is where the judges discuss the dissent's concern about the consequence to the streaming services?

[00:55:09] Speaker 01:
Yeah, I absolutely can.

[00:55:11] Speaker 01:
I mean, I think footnote 137 is best understood in light of the discussion on that page in which the judges say there's no evidence in this proceeding that the record companies are going to walk away from the table.

[00:55:24] Speaker 01:
And in footnote 137, they're explaining in response to Judge Strickler's concern that a change in rates is going to change the way the market adjusts, right, that they're just going to change the negotiations.

[00:55:35] Speaker 01:
They say, well, of course, you know,

[00:55:39] Speaker 01:
Whatever we do in this proceeding, it is a static, it's a fixed point that will influence other negotiations in the market.

[00:55:46] Speaker 01:
If we lower the amount, if we raise the round, it's going to affect how much money is left for the services and the record companies to fight over.

[00:55:56] Speaker 01:
That might lead maybe someone to decide that this isn't worth it.

[00:56:00] Speaker 01:
Maybe one service or one record company will decide that this isn't enough money anymore.

[00:56:05] Speaker 06:
I agree.

[00:56:06] Speaker 06:
That's the way I read this.

[00:56:07] Speaker 06:
But what about the consequence that the entire industry will go out?

[00:56:11] Speaker 01:
I don't take... I mean, I think that the judges absolutely did not say that there was a reasonable possibility that the entire industry would go out because... Did they address that question?

[00:56:23] Speaker 01:
I believe on that same page in the text, they say there is no evidence in this proceeding that the record companies will entirely walk away, which will lead the, which will lead to the entire industry going out.

[00:56:38] Speaker 07:
And I. But don't they need evidence the other way to make sure they're accounting for, I don't know if you have questions, but you say there's no evidence that they will, but don't we need no evidence they won't to make sure that we're protecting the services fair return?

[00:56:53] Speaker 01:
Well, so I think the evidence that they won't, the judges relied on, is that these are all reasonable market actors who have the ability after these proceedings to negotiate on their behalf in their own self-interest.

[00:57:04] Speaker 01:
These are major tech conglomerates who will be negotiating with record labels in order to figure out how much money they're going to have to pay in the future, and they can renegotiate these contracts on a continuing basis.

[00:57:16] Speaker 01:
The one party here that does not have the ability to renegotiate is the songwriters.

[00:57:22] Speaker 01:
The songwriters are fixed in this proceeding, and I think that's why the judges determined that it was more important here to...

[00:57:32] Speaker 07:
both the services and the record companies on the assumption that they're making a lot of money.

[00:57:40] Speaker 07:
But my assumption is if they're rational economic actors and decide, when asked to take a hit to that big profits, wouldn't they rationally sit back and go, it's the better decision for us just to take this in house or say no, drive them,

[00:57:59] Speaker 07:
to bankruptcy and buy up the services ourselves rather than just giving up money which is going to make our shareholders.

[00:58:06] Speaker 01:
I suppose that is, I mean, that's a speculative possibility of things that could happen.

[00:58:11] Speaker 07:
But it is all speculative.

[00:58:12] Speaker 07:
It's predicting what was going to happen economically.

[00:58:14] Speaker 07:
So I don't think that label is going to get you out of saying they needed evidence that they were protecting services.

[00:58:20] Speaker 01:
And to be very clear, Your Honor, these are all things that could happen regardless of what happens in this proceeding.

[00:58:26] Speaker 01:
And so the nature... No, no, because my assumption is that

[00:58:29] Speaker 07:
The current, or the previous program status quo was that not just that the record companies are making lots of money hand over fist, but that money, they make more money that way, having their services pay these high rates to them than they would if they took the product in house.

[00:58:55] Speaker 07:
bought up some of the service companies.

[00:58:57] Speaker 07:
But that all changes if they are suddenly, instead of a seesaw, have, they're smacking the services in between high rates to the record companies and high rates to, well, justify it, but higher rates to the songwriters, they squeeze them in there.

[00:59:13] Speaker 07:
And one of the options then is they go bankrupt.

[00:59:19] Speaker 07:
They're already living on the edge.

[00:59:20] Speaker 07:
They go bankrupt and they'll be cheap to buy or we just take it in-house on our own.

[00:59:23] Speaker 07:
that reduction, you have to address whether the reduction, the assumed reduction in the amount of return to the record companies would make economic, would at that point make it more economically beneficial to them to do one of these other courses of action rather than just following the losses.

[00:59:41] Speaker 01:
And I, again, Your Honor, I would repeat the point that I made earlier which is that the copyright owners proposed a very substantial rate increase and that these concerns that Your Honor is identifying that the services have identified here in their,

[00:59:53] Speaker 01:
you know, in their briefing and in this argument would all apply with respect to any rate increase of any kind.

[01:00:01] Speaker 07:
And if they did not produce evidence of that type of disruption... Well, I think their point is that if we had the cap, we could have a cap that would then ensure that we don't get to this point where we're totally squeezed.

[01:00:14] Speaker 07:
Or they propose, you know, different ways altogether to compute these rates.

[01:00:18] Speaker 01:
Well, so I think that is certainly what they say, but I think the judges explained that the cap is sort of irrelevant to these concerns, right?

[01:00:24] Speaker 01:
The actual concern here is that we are splitting a pot of money up, and if we give so much money to one side, it means that one of the other two participants is going to have to walk away with less.

[01:00:37] Speaker 01:
Because there is this fixed pot of money.

[01:00:40] Speaker 01:
And the judges say that these concerns about the record companies walking away or the services losing money and maybe having to go bankrupt or services leaving entirely by going in-house, all of these are concerns with respect to any rate increase.

[01:00:55] Speaker 01:
And it's a question of degree and not of kind.

[01:00:59] Speaker 01:
The judges determined, as the Copyright Act tasks them to do, that the rate increase they picked, the percentage they picked, and the total content cost percentage they picked, which both amount to the same, was not sufficient.

[01:01:14] Speaker 01:
It would not lead to these kinds of results because there was no evidence in this proceeding that even the much higher proposal of the copyright owners

[01:01:21] Speaker 01:
had proposed would lead to these sorts of results.

[01:01:24] Speaker 01:
That whatever they do here, there is going to be some effect on the market.

[01:01:28] Speaker 01:
And that that fear of possible speculation without any concrete evidence to support it, the speculation should not allow paralysis to make the status quo the status quo.

[01:01:42] Speaker 07:
Are both sides speculating what the consequences are going to be?

[01:01:46] Speaker 07:
The speculation label, I'm trying to understand.

[01:01:49] Speaker 07:
why the board is speculating because it wasn't totally accepting the experts.

[01:01:55] Speaker 07:
It sort of took them so far and then just made its own adjustment speculating if we mean predicting in the future what the consequence would be and it seems to me the dissent and the argument from the services is not fair to call it any more or less speculative than what the board did.

[01:02:13] Speaker 07:
They say no.

[01:02:14] Speaker 07:
Here's what we predict.

[01:02:16] Speaker 07:
could happen is just as likely, not more likely to happen, and so you need to address those alternatives.

[01:02:23] Speaker 01:
Well, I think it's important to note that the rates the judges actually picked were within the range of the rates that the experts proposed, right?

[01:02:32] Speaker 01:
They did not go outside of this range at all.

[01:02:35] Speaker 01:
And so to that extent, you know, that is important to note because these concerns about the services not having an opportunity to talk about these particular rates is

[01:02:48] Speaker 01:
is not founded, right?

[01:02:49] Speaker 01:
These rates were well within the range of what the experts predicted.

[01:02:54] Speaker 01:
And the judges also said that the two experts whose assumptions they relied on, Professor Marks and Professor Gans, they said that Professor Gans' prediction was fully consistent with Professor Marks' analysis, and it was very well supported by the evidence.

[01:03:07] Speaker 01:
And I direct your honors to the end discussion in the final determination of the section addressing Professor Gans specifically, because the very last sentence of that section states

[01:03:17] Speaker 01:
that Professor Gallant's analysis is confirmed by Professor Marx's analysis.

[01:03:21] Speaker 06:
Can I ask you to address this fair notice question?

[01:03:24] Speaker 01:
Yeah, which specifically, the fair notice with respect to the rate structure?

[01:03:30] Speaker 06:
With respect to the uncapped TCC prong, which did not occur until after the record closed, which

[01:03:39] Speaker 06:
Well, a few points, Your Honor.

[01:03:56] Speaker 01:
It's a general matter.

[01:03:57] Speaker 01:
It is always the case.

[01:04:00] Speaker 01:
To my knowledge, in every single rate-making proceeding, the judges have made various adjustments to the parties' proposals and have never adopted them wholesale.

[01:04:09] Speaker 06:
And the reason for this... That's not really the question.

[01:04:12] Speaker 06:
My question is...

[01:04:13] Speaker 06:
Maybe there's a distinction between this and our normal logical outcomes analysis with respect to a new rule that is proposed after rulemaking, but it's different than the original rule.

[01:04:25] Speaker 06:
And the question is whether it's a logical outcome of the rulemaking and whether people would have been on fair notice.

[01:04:34] Speaker 06:
And the argument here is that this is not just different than what the parties propose, but this is quantitatively and qualitatively different because it's the difference between capped and uncapped.

[01:04:45] Speaker 01:
That is the argument, and I just don't think it's founded, right?

[01:04:49] Speaker 01:
And I will explain why.

[01:04:50] Speaker 01:
So a few points.

[01:04:52] Speaker 01:
And separate and apart from Google's proposal, what the services proposed here was a rate structure that was segregated from multiple different types.

[01:05:04] Speaker 06:
Yes, but a mainstreaming issue.

[01:05:06] Speaker 01:
Yes.

[01:05:06] Speaker 06:
Their proposal was capped.

[01:05:09] Speaker 01:
I don't know what you mean by mainstreaming because the services had 10 different types of services and uncapped services.

[01:05:18] Speaker 01:
Which one was uncapped?

[01:05:21] Speaker 01:
Non-subscription bundled services like Amazon Prime, who is one of the petitioners here, were uncapped.

[01:05:27] Speaker 01:
Ad-supported services.

[01:05:28] Speaker 01:
What's that?

[01:05:29] Speaker 01:
Sorry, ad-supported services.

[01:05:31] Speaker 06:
What is ad-supported?

[01:05:31] Speaker 01:
Ad-supported, so advertising-supported services, so services where a consumer does not sign up for a subscription, but the revenue that they accumulate is... What was the kind of service that they asked to be kept?

[01:05:45] Speaker 01:
I'm fairly certain all eight of the other ten services.

[01:05:49] Speaker 06:
Right, so that seems like a lot.

[01:05:50] Speaker 06:
And that seems like there's a difference between the ones that they were willing to use as uncapped and the ones that they wanted capped.

[01:05:58] Speaker 06:
So maybe you're right, maybe they're really the same thing, but why not give an opportunity to address that question?

[01:06:03] Speaker 01:
Well, notable, Your Honor, I think it's important to note that one of the primary concerns here was that the previous rates had been set

[01:06:11] Speaker 01:
Because of the past rate structure, one of the primary concerns of the copyright owners, so something that was heavily litigated during the administrative hearing, was whether the previous rate structure in fact was fair.

[01:06:24] Speaker 01:
And the copyright owners identified a number of problems with the revenue and said that the total content cost aspect was not sufficient to balance out these problems in part because the caps were set at such an artificially low rate.

[01:06:37] Speaker 06:
So that goes to how high to set the caps not to uncap them.

[01:06:40] Speaker 01:
Well, not necessarily, your honor, right?

[01:06:42] Speaker 01:
So there are many things that could come from that.

[01:06:45] Speaker 01:
You could pick a rate like the copyright owner's had proposed, which scraps the entire system entirely.

[01:06:52] Speaker 01:
set higher caps, which no one had proposed, and there was really no evidence as to what those caps should be.

[01:06:57] Speaker 01:
And I think more fundamentally, this goes to the reason why the judge's decision here is supported, is that the services had proposed these caps as part of their rate structure in a proceeding that was supposed to be conducted de novo, and they produced no evidence as to why these caps were reasonable.

[01:07:15] Speaker 01:
They didn't explain why certain services were capped and others weren't.

[01:07:20] Speaker 06:
They didn't add any... So you're saying they removed the caps totally because the specific caps weren't reasonable?

[01:07:27] Speaker 06:
Well, no.

[01:07:29] Speaker 01:
They removed the caps totally because the judges determined that the full weight of the evidence did not support a cap at all.

[01:07:37] Speaker 01:
And that is a determination that they're entitled to make.

[01:07:41] Speaker 06:
They're entitled to make, but only if the other side has a chance to put the arguments opposed to it.

[01:07:47] Speaker 06:
I mean, all the arguments that the dissent makes here are ones that could have been supported, or maybe they couldn't have been supported, but it seems like there should be an opportunity to support them.

[01:07:59] Speaker 01:
Well, and I guess that goes to, and I've been setting this aside for a moment, but this goes to the fact that Google proposed an alternative at the close of the hearing as they're entitled to do under the judge's regulations.

[01:08:11] Speaker 01:
And I believe the reason that Google did this is because it saw throughout the course of the proceeding.

[01:08:16] Speaker 06:
They did it, and they were very clear only under the circumstances of particular rates.

[01:08:21] Speaker 06:
They didn't say we're in favor of uncapped regardless of the rates, right?

[01:08:26] Speaker 01:
That's true.

[01:08:27] Speaker 01:
They did not.

[01:08:28] Speaker 01:
But the concerns that the services have raised here are not that they are upset.

[01:08:34] Speaker 01:
I mean, they're concerned about the cap.

[01:08:37] Speaker 01:
It's not that they're concerned about a no cap with the rates.

[01:08:39] Speaker 01:
They have said that a cap is per se unreasonable.

[01:08:42] Speaker 01:
And this court should look

[01:08:43] Speaker 01:
extremely skeptically on those arguments given the fact that they themselves proposed an uncapped rate for several services.

[01:08:51] Speaker 01:
And also given the fact that when Google proposed this and they had an opportunity to reply, not a single service identified in any of these replies, any of these concerns that they are now raising here.

[01:09:04] Speaker 01:
They had that full opportunity to do so and they did not.

[01:09:07] Speaker 06:
Maybe they didn't have the concerns with respect to the rate that Google suggested.

[01:09:12] Speaker 06:
Let me just switch, because we're out of time now, to two other procedural questions.

[01:09:16] Speaker 06:
I also have some difficulty with the

[01:09:20] Speaker 06:
bundling question about the rehearing.

[01:09:25] Speaker 06:
What statutory section are you relying on for that?

[01:09:30] Speaker 01:
I think that the judge's decision could probably be understood under either the rehearing or the C-4 provision.

[01:09:40] Speaker 06:
So the C-4 says technical or clerical errors?

[01:09:43] Speaker 06:
Yes.

[01:09:44] Speaker 01:
And it also says changes to the terms but not the rates in response to unforeseen things that would frustrate the proper implementation of the decision.

[01:09:56] Speaker 06:
It says may issue an amendment to a written determination to correct any technical or clerical errors in the determination or to modify the terms but not the rates in response to unforeseen circumstances that would frustrate the proper implementation.

[01:10:10] Speaker 06:
What were the unforeseen circumstances?

[01:10:13] Speaker 01:
I mean the unforeseen circumstances would be that they carry forward a term that was not supported by the record and that was in fact substantively unreasonable and would frustrate the proper implementation of their... And that was not foreseen?

[01:10:27] Speaker 01:
It was not foreseen until someone had pointed out to them that they had carried forward this term that was inconsistent with the rest of the judge's decisions.

[01:10:37] Speaker 01:
And if I may, I'd like to explain why.

[01:10:39] Speaker 01:
The judges, at length in their final determination,

[01:10:43] Speaker 01:
explained the problems of revenue deferral and displacement, this race to the bottom that the services were engaged in.

[01:10:50] Speaker 01:
And part of this was done through the calculation of bundled service revenues.

[01:10:57] Speaker 01:
And there are sealed examples that are cited in our brief that I would direct your honors to.

[01:11:01] Speaker 01:
And the judges discussed this at length.

[01:11:05] Speaker 01:
At no point in their final determination did they discuss this term other than to just include it in the attachment of the regulations.

[01:11:12] Speaker 01:
And when the copyright owners pointed out to the judges that in fact this term is inconsistent with their decision and is not supported by the record, the judges acknowledged this.

[01:11:23] Speaker 01:
And the circus' procedural arguments here really boil down to an argument that if the judges notice a fundamental error in their decision, that they are incapable really of correcting it unless someone files a motion for rehearing or a petition in this court.

[01:11:40] Speaker 01:
And that can't possibly be the way that we read the Copyright Act.

[01:11:43] Speaker 01:
You know, the judges have recognized in this and other proceedings that they are capable of correcting errors in their initial determination prior to the federal register publication.

[01:11:52] Speaker 01:
even if they don't formally grant a hearing.

[01:12:01] Speaker 01:
I think it's both, right?

[01:12:02] Speaker 01:
Sometimes it will fall under the C4, and sometimes it will fall under the C2, the rehearing power.

[01:12:07] Speaker 01:
And I don't think it's necessary for this court to address which one it is, because I think it could properly be understood as both.

[01:12:13] Speaker 01:
And it's also clear that the judges said, I would direct you to page two of the order on rehearing, the judges said to the extent that this is viewed as a decision on rehearing, then we grant it without argument.

[01:12:25] Speaker 01:
And that really, I think, addresses any concerns.

[01:12:29] Speaker 07:
This may just be my ignorance.

[01:12:30] Speaker 07:
How is this about a term and not a rate?

[01:12:33] Speaker 07:
Because this is how we sort of count heads for the floor, which seems to be computing

[01:12:40] Speaker 07:
the floors, what that rate is.

[01:12:43] Speaker 01:
No, Your Honor, this is about the, what the base of revenue is that the rate applies to.

[01:12:50] Speaker 01:
So remember that the rates are the percentages that have been set by the judge that are set forth on the first page of their determination.

[01:12:56] Speaker 01:
And it's really just a question of, well, a percentage of it.

[01:12:59] Speaker 07:
But doesn't this directly impact the rate?

[01:13:01] Speaker 01:
It might directly impact the amount of money that's paid, but the rate itself, the percentage, does not change.

[01:13:07] Speaker 07:
So rate here just means don't change the percentage.

[01:13:09] Speaker 07:
It doesn't mean

[01:13:10] Speaker 07:
but changing terms allows you to change things that directly impact that percentage?

[01:13:15] Speaker 01:
I think that many of the terms might impact, just as a general matter, many terms might impact the amount of money that's actually paid.

[01:13:21] Speaker 01:
So for example, one of the terms that got changed here that the services suggested was the definition of a fraudulent stream.

[01:13:27] Speaker 01:
And, of course, if something is a fraudulent stream that, you know, it would not fall within the money that they're paying and it would, you know, then lead to other consequences.

[01:13:36] Speaker 01:
And so, of course, changing the term there will impact the amount of money that's paid, but that doesn't mean that fundamentally the rate itself has changed.

[01:13:44] Speaker 01:
Okay.

[01:13:44] Speaker 01:
The rate's very narrow here.

[01:13:45] Speaker 01:
Okay.

[01:13:47] Speaker 01:
Thank you.

[01:13:47] Speaker 06:
And I... This argument about unforeseen circumstances, I didn't see it mentioned either in your brief

[01:13:55] Speaker 06:
the judge's determination.

[01:13:57] Speaker 06:
Am I right about that?

[01:13:58] Speaker 01:
So our brief did in fact say that you could rely on either C2 or C4 in support of the judge's rehearing here.

[01:14:04] Speaker 06:
Yeah, but the C4 was about the technical or clerical.

[01:14:07] Speaker 06:
Was it about the unforeseen circumstances?

[01:14:10] Speaker 01:
We did not specifically focus on unforeseen circumstances because I think our broader point was that the judges have the ability to correct errors in their determination.

[01:14:18] Speaker 01:
and that where you find the source of that authority is a little less important than the overall point that they certainly have this ability.

[01:14:28] Speaker 06:
I didn't see any discussion at all in the judge's determination of the register's statement about not being able to engage in retroactive rate setting.

[01:14:39] Speaker 01:
And I think that's because the judges properly determined that this was not retroactive rate setting.

[01:14:44] Speaker 01:
So the register's decision in the determination that has been cited by the services was addressing a very different circumstance than we have here.

[01:14:53] Speaker 01:
So here we had the judges set

[01:14:56] Speaker 01:
In 2016, say that the effective date would be 2018.

[01:14:59] Speaker 01:
In their initial determination in January 2018, on the very first page of the initial determination, and I believe the services cited... Are you answering by relying on your agreement argument or some other argument?

[01:15:13] Speaker 01:
No, Your Honor.

[01:15:14] Speaker 01:
The judges... I'm saying that the judges had always set the effective date prospectively.

[01:15:21] Speaker 01:
to be January 1st, 2018.

[01:15:23] Speaker 01:
They did so before the final determination.

[01:15:26] Speaker 01:
They did so at the very beginning of this proceeding.

[01:15:28] Speaker 01:
They did so in the initial determination that was announced in January 2018.

[01:15:31] Speaker 01:
I would direct you to JA725, which is the very, very first page of that decision, which says that this proceeding was to set the rates during the rate period beginning January 1st, 2018.

[01:15:42] Speaker 06:
But the statutory, to the extent we couldn't derive from the statute what they mean by retroactive,

[01:15:51] Speaker 06:
for the final certification of the result.

[01:15:54] Speaker 01:
So if there is a circumstance that would be considered retroactive with respect to this statute, I mean, so looking at 115, it says that the effective date can be no earlier than January 1st of the second year following the year in which the petition requesting the proceeding is filed.

[01:16:10] Speaker 01:
And so to that extent, if there were any question of retroactivity, it would have to be because the judges made an effective date before that very first initial date, which is what happened in the register's decision that the services relied on.

[01:16:24] Speaker 01:
The judges set an effective rate that went beyond what the statute would otherwise allow.

[01:16:29] Speaker 01:
And that was the problem the register identified.

[01:16:31] Speaker 01:
That did not happen here because, of course, January 1st, 2018 was the first of January

[01:16:37] Speaker 01:
the second year after the proceedings initiated in 2016.

[01:16:42] Speaker 01:
And so that is fundamentally the difference between these two things.

[01:16:48] Speaker 01:
And the discussion about the agreement I think is properly understood as the judge is saying under 115,

[01:16:57] Speaker 01:
You know, we are, 115, the effective date begins after the successor rates end.

[01:17:03] Speaker 01:
We are allowed to set the effective date.

[01:17:05] Speaker 01:
We did.

[01:17:06] Speaker 01:
And we know under 115 that the parties might agree to a different period.

[01:17:10] Speaker 01:
It says so at the very end of this section.

[01:17:12] Speaker 01:
It says, or such other period as the parties agree.

[01:17:15] Speaker 01:
So the parties had the full ability to sort of supersede the default date that we had set to set an additional or even longer period or perhaps a shorter period, different end date.

[01:17:25] Speaker 01:
They did not do so.

[01:17:26] Speaker 01:
Throughout the course of this proceeding, they operated as if the dates that we set would apply, and that is what that discussion about agreement means.

[01:17:35] Speaker 01:
If there are no further questions about any of the other issues, I would ask that your honors affirm.

[01:17:41] Speaker 01:
Thank you.

[01:18:03] Speaker 02:
Thank you, Judge Henderson.

[01:18:05] Speaker 02:
I intend in my brief time to focus primarily on two issues.

[01:18:09] Speaker 02:
I'm going to start with the issue of fair notice that Judge Garland raised and then turn to the issue of the seesaw and the disruption to the services which Judge Millett raised.

[01:18:18] Speaker 02:
And I might have a brief word in my remaining seconds about retroactivity.

[01:18:22] Speaker 02:
On the issue of fair notice, it is certainly true, as the government points out, that the possibility of an uncapped TCC prong was in play throughout the proceedings.

[01:18:32] Speaker 02:
It was in play because at least three of the services had proposed an uncapped prong with regard to at least certain categories, and it was certainly in play because Google proposed an uncapped prong across the board.

[01:18:44] Speaker 02:
And when Google did so, it was precisely in order to defeat my client's alternative proposed model, the proposed

[01:18:51] Speaker 02:
per play, per subscriber model that the copyright owners had advanced.

[01:18:55] Speaker 02:
And notably when Google proposed an uncapped TCC prong, none of the other services objected.

[01:19:01] Speaker 02:
Not to be sure, as Judge Garland rightly points out, Google made quite clear that its proposal was tied to its proposed rate.

[01:19:09] Speaker 02:
But it is a fundamental principle that the board was not bound to adopt any particular participant's proposal in total, and Google could have been under no illusion that the parties were vigorously disputing what the appropriate rates under the services proposed model should be.

[01:19:27] Speaker 02:
And in particular, what the appropriate TCC rate would be.

[01:19:31] Speaker 02:
And so, again, I think from a fair notice perspective, while Google may have been disappointed that the final rate was higher, Google was certainly aware of the fact that the parties had presented experts who had proposed a range of TCC rates.

[01:19:45] Speaker 02:
And of course, in the end, the court did adopt a somewhat higher rate.

[01:19:49] Speaker 02:
So I think from the point of view of fair notice,

[01:19:51] Speaker 02:
You know, although it is certainly true that the ultimate proposal that the board adopted was not identical in every material respect to the proposal of any of the parties, the parties were on notice of the issues and had ample opportunity to present evidence.

[01:20:05] Speaker 02:
And indeed, Google's own proposal obviously relied on the evidence that had been presented at the hearing.

[01:20:11] Speaker 02:
And so to the extent that the services point to the purported lack of an opportunity to present evidence, no one was coming in and saying that additional evidence was required.

[01:20:21] Speaker 02:
Now turning to the substance of all of this and to Judge Millett's questions about the appropriate rates.

[01:20:27] Speaker 02:
To step back here and look at what the board actually did.

[01:20:30] Speaker 02:
The board appropriately calculated the rates for its final determination and in particular the board I think appropriately took into account the prospect of disruption even as it was setting the rates.

[01:20:46] Speaker 02:
As the court is well aware, the court ultimately adopted the TCC rate

[01:20:51] Speaker 02:
that was proposed by Professor Gans.

[01:20:55] Speaker 02:
But having done that, precisely in order to account for the perceived market power and the complementary oligopoly on the part of the record companies, the board applied a haircut.

[01:21:07] Speaker 02:
And as Ms.

[01:21:07] Speaker 02:
Utrecht rightly pointed out, the way that the board did that was to take into account the existing revenue streams of the services and attempt

[01:21:16] Speaker 02:
to establish a TCC rate going forward, there would be a rough proxy for the revenue rate going forward based on existing data.

[01:21:24] Speaker 02:
And so to the extent that the board did that, it was precisely in order to account for the prospect of disruption.

[01:21:31] Speaker 02:
Now, there was a lot of discussion about this issue of the seesaw.

[01:21:34] Speaker 02:
And I think it's the better reading of the board's decision that the board did not dispositively rely on the existence of the seesaw.

[01:21:42] Speaker 02:
It certainly noted the fact that there was evidence.

[01:21:44] Speaker 02:
And indeed, there was evidence from the experts on both sides that there might be some degree of a seesaw effect, which is to say that once more surplus was allocated to my clients or the copyright owners, that the record companies in the negotiations

[01:22:00] Speaker 02:
could take that into account.

[01:22:02] Speaker 02:
But ultimately, the relevant question for purposes of the 801B1 factors was would there be disruption?

[01:22:10] Speaker 02:
And on that question, the board correctly concluded that the services had failed to present evidence of disruption and evidence of the level of disruption

[01:22:20] Speaker 02:
that you were talking about with Ms.

[01:22:24] Speaker 02:
Utrecht, namely disruption that would drive the services out of business.

[01:22:29] Speaker 02:
The board correctly recognized that of course any rate increase on some level could have

[01:22:35] Speaker 02:
a disruptive effect and a disruptive effect on particular players in the industry.

[01:22:41] Speaker 02:
But I would respectfully submit that it was incumbent on the services to present evidence of disruption.

[01:22:47] Speaker 02:
The services were well aware of the fact that there were proposals on the table both under our proposed rate structure and under their proposed rate structure that would lead to even greater rate increases.

[01:22:58] Speaker 02:
And yet they did not present evidence that that sort of disruption

[01:23:01] Speaker 02:
would in fact take place.

[01:23:03] Speaker 07:
Isn't part of the problem that they seem they wanted to require under D an immediate or imminent impact?

[01:23:12] Speaker 07:
That's how they read impact is immediate impact and maybe that's the problem is they have too narrow a view of how they ought to assess the consequences of the changes they're making.

[01:23:28] Speaker 02:
Well, I think that the board took a sort of common sense view of all of this.

[01:23:33] Speaker 02:
And that view was simply that it was not their role to protect particular market actors.

[01:23:40] Speaker 02:
And of course, you know, to sort of step back here, that the board, you know, has only a certain degree of control here.

[01:23:47] Speaker 02:
Obviously, it is regulating the rates for the mechanical licenses.

[01:23:50] Speaker 02:
It's not regulating the recording companies themselves.

[01:23:56] Speaker 02:
all of the experts acknowledged on the issue of the so-called TCC rate or percentage that under existing market conditions the percentage of the royalties that my clients were getting was too low and I think that the board appropriately accommodated for that and it recognized that of course

[01:24:17] Speaker 02:
any rate increase would have a potentially disruptive effect.

[01:24:20] Speaker 07:
And it took steps to mitigate that, both in lowering the TCC rate, which I can assure you was a... The only disruptive effect they care about is one that's immediate and irreversible in the short run.

[01:24:33] Speaker 07:
It's substantial, immediate and irreversible in the short run.

[01:24:36] Speaker 07:
Then they go, okay, so we'll just phase them in over five years, and that takes care of immediate and irreversible in the short run.

[01:24:47] Speaker 07:
address the reality of the impact over the five-year period and where it can leave things.

[01:24:54] Speaker 02:
Well, I do think that to the extent that the board phased in the rate, obviously that had the effect of essentially lowering the average rate of the increase over the five-year period.

[01:25:06] Speaker 02:
And starting next year, the board will be initiating proceedings to consider the rates for the next five-year period.

[01:25:15] Speaker 02:
And at that point, if in fact there are long-term disruptive effects,

[01:25:18] Speaker 02:
The board will take that into account.

[01:25:21] Speaker 07:
My submission is simply... They also need to accept they thought by increasing these rates we will put pressure on the record companies to lower their demands but isn't the difficulty then with phasing in the rates is that in fact you're not going to have that pressure on the record companies because it's just it's going to be too incremental for them to...

[01:25:43] Speaker 07:
to really be able to insist upon it and each year to be able to say that's your own, take it out of your own profit, take it out of your own profit.

[01:25:49] Speaker 02:
I am happy to acknowledge that the board didn't analyze it at that level of macular detail, but I do think that the board plainly simply acknowledged that there was good reason to believe that the recording labels had every incentive to continue to deal with the services, not to drive them out of business.

[01:26:11] Speaker 07:
In fact, I think... Why is there good reason to believe that?

[01:26:13] Speaker 02:
Well, I think you actually need to go no further than to look at Google's own proposed findings of fact.

[01:26:22] Speaker 02:
I think notably, as we pointed out in our brief, if you take a look at Google's own proposed findings,

[01:26:28] Speaker 02:
Google stated at page 696, quote, an uncapped TCC prong protects copyright owners as it is beyond doubt that the labels will not price their product below what they believe to be reasonable, given the nature of a services product offering, but they will also not price so high as to disrupt the industry.

[01:26:47] Speaker 02:
And I think the board in its analysis, as Ms.

[01:26:50] Speaker 02:
Utrecht rightly pointed out, appropriately took that into account, appropriately

[01:26:55] Speaker 07:
recognized that market participants... Just to be clear, so that you're reading from Google is not part of the evidence in the record, right?

[01:27:02] Speaker 02:
Because that was post... That was their own proposed finding of that.

[01:27:07] Speaker 07:
Right, but I... That was after all the evidence was supposed to be in.

[01:27:12] Speaker 02:
Right, that is true.

[01:27:13] Speaker 02:
But my point is that there simply was not record evidence to support the proposition.

[01:27:18] Speaker 02:
that this rate structure would have a disruptive effect.

[01:27:22] Speaker 02:
And above and beyond that, I think that the board appropriately recognized the reality that the one thing it could not control was these free market transactions between the recording companies and the services.

[01:27:34] Speaker 02:
And yet, the board, I think, appropriately said these market participants are

[01:27:39] Speaker 02:
self-interested.

[01:27:40] Speaker 02:
And of course, to step back a little bit, Judge Millett, from the details of all of this, the very reason why the experts on both sides were using these Shapley analyses was to attempt to model what would be an appropriate allocation of surplus as between all of the relevant market participants, the copyright owners,

[01:28:01] Speaker 02:
the services and the recording labels.

[01:28:04] Speaker 02:
Both sides, of course, presented experts using those models.

[01:28:08] Speaker 02:
And so to the extent that the 801B factors weigh the interests of all of the participants, I think that the very way in which the board went about its enterprise appropriately took that into account.

[01:28:20] Speaker 07:
Can I ask you a fact question?

[01:28:22] Speaker 07:
Do you know if under the PI regime, the phono record settlement,

[01:28:27] Speaker 07:
If the caps that were in there, do we know if they were getting hit?

[01:28:30] Speaker 07:
Were those caps serving an actual function?

[01:28:34] Speaker 02:
I do believe that they were getting hit.

[01:28:37] Speaker 02:
I don't know, you know, exactly to what extent they were getting hit, but I think what's notable about those caps, Judge Millett, is

[01:28:45] Speaker 02:
The very word cap is a little bit misleading.

[01:28:48] Speaker 02:
What they really were was a sort of an alternative per subscriber metric so that if you hit the cap, the number, it would essentially switch to a per subscriber metric.

[01:28:59] Speaker 02:
And that's precisely why I would submit the board ended up deciding to adopt the uncapped TCC model was to ensure that the TCC prong served its intended purpose of addressing the risk of revenue deferral.

[01:29:14] Speaker 02:
And so, you know, as a substantive matter, I don't think that the services really can have a valid objection to that.

[01:29:22] Speaker 02:
Then it really does become just a question about the rates.

[01:29:25] Speaker 02:
And again, I think the way in which the board went about setting the rates reflected reason decision-making and certainly was supported by substantial evidence.

[01:29:33] Speaker 02:
I think the last thing I would say on the issue of retroactivity, I'm happy of course to answer any questions

[01:29:39] Speaker 02:
the service revenue definition, but on the issue of retroactivity, I think the last thing I would say is that I really do think that the parties were consistently operating on the understanding that these rates would take effect on January 1st, 2018.

[01:29:54] Speaker 02:
And I would actually point you to the same document that my friend Mr. Engstreich pointed you to, the initial determination itself.

[01:30:02] Speaker 02:
That initial determination came out, I believe, on January the 26th, 2018.

[01:30:07] Speaker 02:
And now for the first time in oral argument, Mr. Angstreich points to this somewhat critical statement at the end of that initial determination.

[01:30:15] Speaker 02:
But if you look at the first page of the initial determination, it makes clear that the rates were being set for the period 2018 to 2022.

[01:30:23] Speaker 02:
as the final determination did.

[01:30:25] Speaker 02:
And you would think that if the services in fact objected to that, that you would have heard from the services during this time period of recorded retroactivity that they were unhappy with that.

[01:30:36] Speaker 02:
And yet you didn't.

[01:30:37] Speaker 02:
The only thing that the services point to is a single sentence in a brief that was filed in May of 2017 that essentially misread the applicable regulations to suggest that the new rates could become effective only two months after the publication.

[01:30:53] Speaker 02:
And I would submit that that is insufficient to essentially preserve this objection.

[01:30:59] Speaker 02:
And of course, we agree with the government's submission that there really isn't retroactivity here at all in light of the fact that everyone was on notice before the January 1st, 2018 date, that that would be the effective period.

[01:31:11] Speaker 08:
Thank you very much.

[01:31:17] Speaker 03:
Thank you, Judge Henderson.

[01:31:19] Speaker 03:
In this part of the argument, I will return to my friend, Mr. Shamigam's argument about the student and family discounts, which, as the Court noted, is a very, very focused factual argument whether there was substantial evidence to support the factual premise that students and families have a lower willingness to pay.

[01:31:38] Speaker 03:
I think, as Judge Ballett pointed out, the service is all

[01:31:42] Speaker 03:
do that, and they do that because they have determined, and they're experts in the market, that there is a lower willingness to pay.

[01:31:48] Speaker 03:
But the additional highly relevant evidence in the record are the agreements with the record labels who, notwithstanding their great market power, accept

[01:31:58] Speaker 03:
agreements that have lower royalty payments for student and family plans because they too realize that this is a way to maximize revenue that otherwise would not be captured.

[01:32:10] Speaker 03:
So we think those agreements are a very, very powerful factor in support of the board's determination.

[01:32:18] Speaker 03:
My friends on the other side say well there are a lot of other elements of those deals but certainly it was within the board's authority to

[01:32:26] Speaker 03:
conclude that they provide substantial evidence for this determination.

[01:32:29] Speaker 03:
And one last factor is Mr. McCarthy testified with respect to a study that was conducted that found that students have a lower willingness to pay.

[01:32:41] Speaker 03:
It's true, as my friend says, that the study wasn't introduced into the record, but there was no objection to that testimony about what the study found.

[01:32:48] Speaker 03:
So we think all of that provides very significant support.

[01:32:54] Speaker 08:
All right.

[01:32:55] Speaker 03:
I don't know if the court, I know I'm out of time, I would ask for rebuttal, but I don't know if the court wants to hear all the interveners and then have us come back for rebuttal.

[01:33:05] Speaker 08:
The message I got from the clerk is that both you and Mr. Shanmugan had given up your rebuttal time to respond to each other.

[01:33:14] Speaker 03:
No, no, no.

[01:33:16] Speaker 03:
I don't think that's right.

[01:33:17] Speaker 03:
I think the government ceded time these two minutes to us, and then separately, I've reserved two minutes for rebut, although it got used up.

[01:33:26] Speaker 08:
Then why don't you use two minutes now to rebut?

[01:33:30] Speaker 03:
So let me turn to the rate level question.

[01:33:34] Speaker 03:
The critical issue here is 80B, but it's not, as my friend says, the disruption factor, although that's relevant.

[01:33:39] Speaker 03:
It's the fair income factor.

[01:33:42] Speaker 03:
And it's not the TCC prom of the rate.

[01:33:44] Speaker 03:
It's the revenue prom of the rate that doesn't work, the prom that didn't have any adjustment.

[01:33:50] Speaker 03:
When the board analyzed the fair income factor, and again that's on page 81076 of the joint appendix, it didn't say there's fat in the services, we have to give an increase to the copyright owners, but we conclude that sharing the burden between the services and the copyright owners, recognizing we can't do anything about the record labels, the real world additional burden that we're imposing on the copyright users is fair and we'll leave them with a fair income.

[01:34:17] Speaker 03:
What it said is, we have this model that we've constructed, it shows that the copyright owners will retain a dramatically greater portion of the revenue than they're retaining today, and it's based on the model's determination

[01:34:31] Speaker 03:
which would, if it were happening in the real world, result in the $500 million reduction of what the labels paid then, it's based on that determination that they concluded there was a fair income.

[01:34:42] Speaker 03:
So it was a termination that has absolutely nothing to do with the reality of what was going to happen once these rates were put into place.

[01:34:50] Speaker 03:
As I say,

[01:34:51] Speaker 03:
They could have done it another way, but they didn't.

[01:34:54] Speaker 03:
And I think the fair reading of footnote 137 is them saying we don't really care what the impact is on the services.

[01:35:02] Speaker 03:
If the market gets totally reorganized, as Judge Strickler said was a reasonable possibility, that's sort of tough luck.

[01:35:08] Speaker 03:
for the services, and we think therefore it's crystal clear that that fair income determination can't possibly be upheld because it rests on a model that the majority itself at page 1061 said does not comport with the real world because it does not take account of the labels called monopolistic power.

[01:35:30] Speaker 07:
The difficulty with a cap is that they explain that, look, our goal here is there's a huge

[01:35:38] Speaker 07:
distortion between what the record companies are getting and what the songwriters who really are the genesis of all this business are getting.

[01:35:49] Speaker 07:
And we don't have direct authority to regulate, certainly directly, the record holders in this proceeding.

[01:35:58] Speaker 07:
But we do have an obligation to protect the songwriters.

[01:36:06] Speaker 07:
And so we've done what we can.

[01:36:08] Speaker 07:
to protect the songwriters.

[01:36:09] Speaker 07:
We believe for this economic reason, based on this economic analysis, that it will still leave enough for the services to survive.

[01:36:19] Speaker 07:
We're making predictions here, but we've looked at all this testimony.

[01:36:22] Speaker 07:
We're making that reasonable prediction.

[01:36:25] Speaker 07:
And after, there's really not a whole lot more we can do to help you with record companies.

[01:36:31] Speaker 07:
And capping the songwriters seems to just punish them for the overreach of the record companies.

[01:36:38] Speaker 07:
Why isn't that reasonable within the range of reasons?

[01:36:41] Speaker 03:
Well, I want to distinguish between the uncapped TCC structure and the rate levels.

[01:36:46] Speaker 03:
What I was just talking about are the rate levels.

[01:36:48] Speaker 03:
The uncapping of the TCC structure, just to start from the beginning, the theory was this will get more money.

[01:36:58] Speaker 03:
It will prevent revenue deferral.

[01:37:00] Speaker 03:
There certainly would be a way to do that based on percentages without leaving it wide open if that was a goal.

[01:37:06] Speaker 03:
But I think the critical question here is when it came to the rate levels,

[01:37:11] Speaker 03:
The majority didn't say, what are we going to do here?

[01:37:17] Speaker 03:
We have to give more money to the copyright owners, but looking at the real-world implications of what we're doing, it isn't going to drive the services out of business.

[01:37:26] Speaker 03:
It is going to give them a fair income, because after all, driving them out of business is not the test.

[01:37:30] Speaker 03:
Fair income is the test for the factors B and C.

[01:37:34] Speaker 03:
And what they didn't do is look at the reality and say, yes, there will be a fair income for the copyright users.

[01:37:42] Speaker 03:
That's what the statute required.

[01:37:44] Speaker 03:
They said, we're going to base our fair income decision on a model that we know isn't going to produce, isn't going to happen in the real world.

[01:37:53] Speaker 03:
So they could have made

[01:37:55] Speaker 03:
the assessment that Your Honor hypothesized, if they provide an explanation and if there was evidence in the record to say that wouldn't, that would still provide a fair income to the services, but they didn't do that.

[01:38:08] Speaker 03:
They basically said we're just going to rely on this model and we're not going to look at, or they didn't at least look at, what the implications of their decision was going to be in the real world for the services.

[01:38:19] Speaker 03:
we think under those factors, and we think under the disruption factor, as your colloquy with Mr. Shanmugam indicated.

[01:38:30] Speaker 03:
statute the disruption factor by saying, well, if the disruption is that the industry is totally reorganized, that doesn't matter.

[01:38:38] Speaker 03:
That's not something we have to consider.

[01:38:40] Speaker 03:
And there was no evidence that they cited for their conclusion that this wouldn't happen.

[01:38:46] Speaker 03:
And in fact, just to give a real world example, it's not in the record, but Disney

[01:38:51] Speaker 03:
A content creator has created its own streaming service in competition with streaming-only services.

[01:38:56] Speaker 03:
It concluded that that was actually, given the economics of that industry, a logical thing to do.

[01:39:02] Speaker 03:
So the idea that this is impossible to happen in this industry, notwithstanding, even if the record labels were faced with the choice of lose $500 million,

[01:39:15] Speaker 03:
or reorganize this industry, as Your Honor said, the logical thing for them to do would be to say, we still want to be paid what we're paid, maybe the current system will survive and we'll keep making our money, but if it doesn't, we have alternatives.

[01:39:27] Speaker 03:
We have, maybe the services will go bankrupt, maybe we'll be able to start our own competition because they'll be blood dry, but that's not, those are hypotheses that Judge Strickler talked about significantly and there was no evidence

[01:39:40] Speaker 03:
to support the majority's decision that they wouldn't happen and no evidence to support professor's right decision that they wouldn't happen.

[01:39:46] Speaker 07:
And it wasn't clear for me or brief.

[01:39:50] Speaker 07:
I thought at one point you were objecting to the board's definition of disruptive impact as sort of a short-term immediate and irreversible but then it didn't seem to be fleshed out as a statutory construction type issue.

[01:40:05] Speaker 07:
I haven't heard anything about that today, so I take it then that that's just not really what you're pushing.

[01:40:10] Speaker 03:
No, that's the point that I was just making, and I think we did try to make that point maybe more explicitly in our reply brief, that the board's definition, its determination in the footnote 137 that changing the structure of the industry is not disruption that it has to consider, it has to be wrong, just as a matter of the plain language of the statute.

[01:40:33] Speaker 08:
Thank you.

[01:40:43] Speaker 05:
If I can start with retroactivity, the first page of the initial determination, page 725, just repeats what the board's intention was at the outset of the proceeding.

[01:40:53] Speaker 05:
And had they published the final determination in a timely manner, the rates could have taken effect on January 1st, 2018, or at some point in 2018.

[01:41:02] Speaker 05:
But it's on the last page where they actually address the effective date, and there they get it correct.

[01:41:07] Speaker 05:
803D2B interpreted in light of Bowen and the rest of the statute doesn't allow retroactivity.

[01:41:13] Speaker 05:
115, which Ms.

[01:41:14] Speaker 05:
Utrecht pointed out, has nothing to do with retroactivity.

[01:41:17] Speaker 05:
What that says is, board, even if you had finished this in mid-2017, even if you had published this in the Federal Register on June 1st, 2017, Thono 3 couldn't have taken effect until January 1st, 2018.

[01:41:32] Speaker 05:
That has nothing to do with retroactivity.

[01:41:33] Speaker 05:
It's simply the earliest allowable effective date.

[01:41:37] Speaker 05:
As to bundles, I think it's telling that the government can't identify which provision the judges relied on here.

[01:41:44] Speaker 05:
This is not technical.

[01:41:45] Speaker 05:
We see technical changes.

[01:41:46] Speaker 05:
We asked for some.

[01:41:47] Speaker 05:
The copyright owners asked for some.

[01:41:50] Speaker 05:
We cited one in our brief and footnote on page 60.

[01:41:52] Speaker 05:
The copyright owners mentioned the fraudulent stream definition.

[01:41:56] Speaker 05:
Those are ones where the definitions, they used an uncapitalized word.

[01:41:59] Speaker 05:
They pointed in confusing directions.

[01:42:02] Speaker 05:
This was a substantive change and the government can't identify a provision that supports, it gives an authorization to do that.

[01:42:10] Speaker 05:
They can't identify a prior example where the judges ever made that kind of substantive change without finding the exceptional cases standard to be satisfied.

[01:42:19] Speaker 05:
And they expressly found here that it wasn't.

[01:42:22] Speaker 05:
They can't say it wasn't satisfied, you didn't make a premium fashion case, but if we need to rely on our hearing authority, I guess that's what we're doing.

[01:42:30] Speaker 05:
That's not the way Congress set up the system.

[01:42:34] Speaker 05:
And so they didn't have authority to make the substantive change.

[01:42:38] Speaker 05:
If they don't like the constraints on them, and I recognize this is a complicated undertaking and the judges may well not get everything right the way they want to in the administration, but that's a dispute with Congress.

[01:42:50] Speaker 05:
What about the unforeseen circumstances language?

[01:42:53] Speaker 05:
Sure, as we read the unforeseen circumstances, first I agree with Judge Millett that this feels like a rate change, not a term change.

[01:42:59] Speaker 05:
But the only unforeseen circumstance here is, as Judge Strickler pointed out in the dissent.

[01:43:04] Speaker 06:
Don't you describe this as a term question?

[01:43:07] Speaker 05:
I would describe this as a rape question.

[01:43:09] Speaker 05:
But I think more importantly, there wasn't anything unforeseen here.

[01:43:13] Speaker 05:
The copyright owners made the conscious decision not to propose an alternative.

[01:43:18] Speaker 05:
As Judge Strickler noted, they made the decision to try to throw the baby out with the bathwater, his words.

[01:43:23] Speaker 05:
and say, we don't need a revenue-based system at all.

[01:43:27] Speaker 05:
We're going to go with a per-play system.

[01:43:29] Speaker 05:
Had they said, but in the alternative, you should change the bundled services rule in this or that way, we could have had that dispute on the record in the initial determination.

[01:43:42] Speaker 05:
But that was their litigation posture and their litigation decision to come back afterwards and say, oh, now that we've lost on our per-play regime, we'd like actually a chance to litigate this issue.

[01:43:54] Speaker 05:
I don't think that's allowable, especially when the board finds that there was no evidence adequate to support their proposals and yet adopts it.

[01:44:02] Speaker 05:
This is very much like what you found improper in settling devotional claimants where they're making a decision based on a lack of evidence in the record.

[01:44:10] Speaker 05:
It's made worse here by the fact that the copyright owners gave up on their chance to make this proposal during the hearing.

[01:44:16] Speaker 07:
I thought you would have said that it was ironic that they thought you all were on notice because everything's de novo, but they weren't on notice that that was fully looked at de novo as well.

[01:44:26] Speaker 05:
It may be ironic.

[01:44:39] Speaker 02:
Thank you, Your Honors.

[01:44:41] Speaker 02:
On our affirmative appeal, I just want to address one point that my friend Mr. Pinkus said.

[01:44:47] Speaker 02:
He alluded to the fact that there was testimony from Barry McCarthy of Spotify alluding to the fact that Spotify had conducted research on this question of willingness to pay.

[01:44:59] Speaker 02:
But not only was that research itself not produced in the record, Mr. McCarthy in fact himself acknowledged that

[01:45:07] Speaker 02:
He had no part in the preparation of that research.

[01:45:10] Speaker 02:
And indeed, even beyond that, he acknowledged that he had not seen the data and was not even aware of what form the data was produced in.

[01:45:19] Speaker 02:
And that's pages 1336 to 1337 of the appendix.

[01:45:23] Speaker 02:
And so our fundamental submission is that there was simply no evidence in the record beyond mere speculation to support that proposition.

[01:45:32] Speaker 02:
And finally, I just want to save the court receiving a letter from me.

[01:45:36] Speaker 02:
I want to provide just one citation for the court for something that I said earlier.

[01:45:40] Speaker 02:
I said that the board had taken into account the interest of all of the parties by adopting the Schaffley model and the citation for that in the record is appendix page 1075.

[01:45:51] Speaker 02:
Thank you very much.

[01:45:53] Speaker 08:
All right.

[01:45:53] Speaker 08:
Thank you.

[01:45:55] Speaker 08:
Madam Clerk, I have that Mr. Johnson has rebuttal time.

[01:45:59] Speaker 08:
Is that correct?

[01:45:59] Speaker 08:
Yes.

[01:46:01] Speaker 08:
All right.

[01:46:07] Speaker 04:
I don't have much to rebut, but if I could just make a couple of points I just wanted to make, Your Honors.

[01:46:12] Speaker 04:
I would say in defense of my friends at NNPA and NSAI, one relevant point that the 44% increase in streaming rates is clearly not going to make or break these streaming services financially.

[01:46:22] Speaker 04:
And the reason why is Apple's not here.

[01:46:24] Speaker 04:
And if it was going to make or break these companies, I think Apple would definitely be here to appeal.

[01:46:30] Speaker 04:
You know, I've made the point before again that American copyright creators

[01:46:34] Speaker 04:
painters, photographers, illustrators, they're not subject to a compulsory license.

[01:46:39] Speaker 04:
And it's still a copyright registration.

[01:46:40] Speaker 04:
It's an individual copyright, an individual expression of art.

[01:46:45] Speaker 04:
And in these hearings, you know, it's important to have market share.

[01:46:50] Speaker 04:
I have no market share.

[01:46:52] Speaker 04:
It's important to have benchmarks.

[01:46:53] Speaker 04:
I tried to get a benchmark.

[01:46:54] Speaker 04:
I couldn't get one.

[01:46:56] Speaker 04:
You know, I have no expert witnesses.

[01:46:58] Speaker 04:
I have no evidence because the judges didn't use my evidence.

[01:47:01] Speaker 04:
And I have no Nobel Prize-winning economist to come in and be an expert witness for me.

[01:47:07] Speaker 04:
So it makes it tough for us.

[01:47:11] Speaker 04:
Just I would say that last thing, sorry.

[01:47:22] Speaker 04:
Oh, man.

[01:47:23] Speaker 04:
If you look on page 9 of my May 12, 2017 conclusions of law, I cited the famous Supreme Court case precedent from 1917, Herbert v. Shanley.

[01:47:35] Speaker 04:
And I hope it's still valid precedent.

[01:47:38] Speaker 04:
But in that, Justice Oliver Wendell Holmes says famously, if music did not pay, it would be given up.

[01:47:45] Speaker 04:
And whether it pays or not, the purpose of employing it is profit and that is enough.

[01:47:50] Speaker 04:
And as you can see from Music Row, you know, all these people have given up music and that's been the effect of this compulsory license and the 2008 rate structure created in 2008.

[01:48:01] Speaker 04:
And if you look at, you know, there's a lot of cases, Supreme Court cases that use the word specific profit.

[01:48:09] Speaker 04:
They're not using income or payment or make money.

[01:48:12] Speaker 04:
And in American Geophysical Union versus Texaco they say, quote, accordingly copyright law celebrates the profit motive, recognizing that the incentive to profit from the exploitation of copyrights will redound to the public benefit by

[01:48:27] Speaker 04:
resulting in the proliferation of knowledge of the profit motive is the engine that assures the progress of science.

[01:48:33] Speaker 04:
And when you look at the 801B standards, and I've made this argument, I think, in my motion for rehearing, it seems like that those four criteria, it's 100% for the services and zero for the songwriters as far as a fair return.

[01:48:50] Speaker 04:
And it's really about the profit.

[01:48:52] Speaker 04:
And in 2015, the Copyright Office did a copyright reform study called Copyright in the Music Marketplace.

[01:49:01] Speaker 04:
And it says, there is no policy justification for standard that requires music creators to subsidize those who seek to profit from their works.

[01:49:09] Speaker 04:
And I think that's what's going on here.

[01:49:11] Speaker 04:
And it goes back to the equitable division of music industry profits between copyright owners and users.

[01:49:19] Speaker 04:
And we don't profit whatsoever.

[01:49:21] Speaker 04:
And I think there needs to be a balance of 50-50 instead of just 100% services and zero for this one.

[01:49:29] Speaker 04:
And I thank you.

[01:49:30] Speaker 08:
Thank you.

[01:49:32] Speaker 08:
Thank you all for the exhaustive arguments.

[01:49:37] Speaker 08:
I didn't say exhausting.

[01:49:38] Speaker 08:
I said exhaustive.

[01:49:39] Speaker 08:
Thank you so much.