[00:00:00] Speaker 00:
Just before we begin, I wanted to give all council a heads up that there is a chance that we will need to take

[00:00:21] Speaker 01:
a short break at some point during these arguments.

[00:00:26] Speaker 01:
And so don't be surprised if it's nothing you've done if we suddenly say we're going to take a quick recess.

[00:00:33] Speaker 01:
And with that, we're good morning and we're happy to begin.

[00:00:48] Speaker 08:
Thank you, Aaron.

[00:00:49] Speaker 08:
May it please the court to submit a degasen on behalf of petitioner NAB.

[00:00:53] Speaker 08:
In the decision below, the Copyright Royalty Board found that custom radio services like Pandora should be subject to an identical rate to broadcast radio stations that simply transmit their over-the-air content on the internet.

[00:01:06] Speaker 08:
That's so even though Steinwall casts are in all relevant respects identical to the over-the-air broadcast

[00:01:13] Speaker 08:
that Congress exempted from having to pay royalties because they understood that radio promotes record sales.

[00:01:19] Speaker 08:
And even though Pandora is very similar to on-demand services like Spotify, but Congress understood to pose the greatest threat to record sales.

[00:01:28] Speaker 08:
Critically, the board offered no affirmative explanation of how simulcast and custom radio are the same along with statutory criteria.

[00:01:37] Speaker 08:
Rather, the linchpin of the board's reasoning was that even if simulcast and custom radio are different,

[00:01:43] Speaker 08:
The two types of service should still have the same rate because simulcasts did not show that they were, as a rule, different from every other kind of webcasting service.

[00:01:52] Speaker 08:
Specifically, the board focused in on this third category, so-called internet radio, and found that NAB had not shown that simulcasting internet radio was sufficiently different.

[00:02:03] Speaker 00:
So why should simulcast radio have a different rate than internet radio?

[00:02:09] Speaker 08:
what internet radio?

[00:02:11] Speaker 08:
I think that there are reasons, I mean, the only evidence in the record on internet radio came from our own expert, and he explained that internet radio is not a significant part of the market, and also that it's much more similar to custom radio in the sense that it allows pausing and skipping of songs, in the sense that it's not subject to FCC regulations, it doesn't have the same kind of content.

[00:02:32] Speaker 08:
But I do think the error is more fundamental, which is even if that weren't the case, it doesn't really matter whether, from our perspective,

[00:02:39] Speaker 08:
Internet radio has the same rate as custom radio, has the same rate as simulcost, or has something in the middle.

[00:02:45] Speaker 08:
What really matters is whether or not these two services that are different along the statutory criteria, custom radio and simulcost, should have the same rate.

[00:02:55] Speaker 00:
Why do you get to define which differentiation there should be?

[00:03:00] Speaker 00:
I mean, the rate applies to all of the category of radio stations or webcasters.

[00:03:09] Speaker 00:
and you're choosing a subset to compare to simulcasters.

[00:03:12] Speaker 00:
But the rate applies to all of them.

[00:03:14] Speaker 08:
I think that the board's reasoning seems to think there was such a thing as the general rate and sort of anchored it at the idea that it should be a uniform rate for everyone.

[00:03:24] Speaker 08:
But I don't think the statute really contemplates that.

[00:03:26] Speaker 08:
The statute says, at first, such rates and terms should distinguish among the different types of services that are in operation.

[00:03:33] Speaker 08:
So the board's first responsibility is to basically categorize the market into the relevant types and then make a differentiation

[00:03:40] Speaker 08:
between those, and then it can sort of go on to do its willing buyer and willing seller analysis.

[00:03:44] Speaker 08:
The board assumptions seem to be that you start with the quote unquote general rate, and then anyone who wants to depart from the general rate has a button of proof, which I don't think is necessarily true, and then it then ratcheted up that button of proof to say not only do we have to show we're different to custom radio, we have to show we're different to everything, including incident radio, this third category.

[00:04:04] Speaker 03:
Can you identify anywhere in our precedent

[00:04:08] Speaker 03:
where we have said that the board has to proceed kind of in this two-step analysis that you are outlining here where you first kind of define the types of services in the in the respective categories and then after you've done that you determine basically what the willing buyer willing seller would

[00:04:34] Speaker 03:
would pay for each of those respective types or the relevant type of service that's at issue?

[00:04:42] Speaker 08:
Yeah, I don't think it's ever really been an issue, so that hasn't been laid out in that way, but I think what the board did in Web 4 was sort of similar with respect to the non-commercial and commercial and unsupported subscription.

[00:04:52] Speaker 08:
It does sort of figure out, and it's the why they're sort of different types, and then it figures out what the rate is.

[00:04:57] Speaker 08:
So it does do this analysis

[00:04:58] Speaker 08:
And I think one of the aspects that's sort of troubling here is it didn't, you know, it never subjected that differentiation to the as of rule requirement or anything like that.

[00:05:06] Speaker 03:
Isn't their language an intercollegiate that undermines your argument?

[00:05:13] Speaker 08:
I don't think so, Your Honor.

[00:05:14] Speaker 08:
I mean, that was the only question on appeal there was whether or not it was the board, they did make a distinction that between unsupported and subscription, whether that was supported by the record.

[00:05:24] Speaker 08:
And I think it could be ably supported by the record.

[00:05:27] Speaker 08:
But this argument about final cost was never presented to this court.

[00:05:32] Speaker 08:
And I think it's sort of a fundamentally different analysis here, because here we affirmatively were able to provide a significant amount of evidence in the record that showed differentiation between custom radio and final cost.

[00:05:47] Speaker 08:
And there was absolutely no evidence.

[00:05:49] Speaker 08:
I mean, remarkably no evidence on the other side.

[00:05:51] Speaker 08:
I mean, just to sort of check through.

[00:05:53] Speaker 01:
Did you show that

[00:05:56] Speaker 01:
willing buyers, willing sellers would pay a different rate for simulcasts rather than internet radio or custom radio.

[00:06:08] Speaker 08:
I think we absolutely showed that they would pay a different rate to custom radio.

[00:06:15] Speaker 08:
Every single.

[00:06:16] Speaker 01:
But again, you were arguing for the board to give you a different rate than custom radio and the rate assigned to internet radio.

[00:06:24] Speaker 01:
So there was a rate that they were going to give and you were carving yourself out from the rest of the commercial non-subscription webcasting.

[00:06:35] Speaker 01:
And so what evidence was there

[00:06:40] Speaker 08:
So we never took a position on what internet radio should have.

[00:06:44] Speaker 08:
All of our argument and all of our evidence was targeted on the idea.

[00:06:47] Speaker 01:
The board has had this category.

[00:06:50] Speaker 01:
They've done the different types of the statute.

[00:06:53] Speaker 01:
calls for, and they've broken them into, I mean, obviously terrestrial radio is its own thing, and then they've got the commercial non-subscription webcasts, obviously the commercial subscription webcasts, and then the non-profit webcasting.

[00:07:08] Speaker 01:
And those are the categories they've used, and those have been grounded in judgments not just about the nature of the services, but how those services affect the market and what people would be willing to

[00:07:19] Speaker 01:
And what you now want to do is split up that commercial non-subscription category into at least two categories.

[00:07:31] Speaker 01:
And you can say, I don't know, maybe it should be three.

[00:07:33] Speaker 01:
We didn't talk about that.

[00:07:35] Speaker 01:
But if you're going to at least break off, you are arguing to break off into maybe its own category, simulcasting.

[00:07:43] Speaker 01:
And so if you're going to break off simulcasting into its own category, if that was the

[00:07:48] Speaker 01:
your argument, then you needed to show that there's a willing buyer-seller differentiation between simulcasting and the leftovers, the existing category that you weren't touching, which was internet radio and custom radio.

[00:08:03] Speaker 01:
So where was that evidence?

[00:08:04] Speaker 08:
I think we absolutely did that, Your Honor.

[00:08:06] Speaker 08:
So every single market-based deal that was introduced in this case, that's 16 different licensing agreements between IHOT Radio,

[00:08:16] Speaker 08:
and the record labels all did exactly this.

[00:08:19] Speaker 08:
They carved out simulcasting in a separate category from internet radio and from custom radio, and they had a materially lower rate for simulcasting than they did for custom radio.

[00:08:31] Speaker 02:
All of the PRO agreements... Did the board credit that evidence?

[00:08:34] Speaker 08:
The board analyzed that evidence with respect to whether or not the exact rate was appropriate.

[00:08:41] Speaker 08:
But the more fundamental point is this was basically a control.

[00:08:44] Speaker 01:
Did the board credit your evidence as establishing that a willing buyer seller would pay less for simulcasts than for internet radio?

[00:08:53] Speaker 00:
Wait, I'm just going to finish the sentence.

[00:08:55] Speaker 01:
They would pay less for simulcasts and they would pay for the remaining category, which is internet radio and custom radio.

[00:09:04] Speaker 01:
Where's that finding?

[00:09:05] Speaker 08:
I think the board didn't credit it, but that was a problem, because there's no dispute that every single record deal that was entered into the evidence here did differentiate in exactly that way.

[00:09:17] Speaker 08:
And these IHOT deals are basically a controlled experiment.

[00:09:21] Speaker 08:
IHOT Radio has a simulcasting service, and it has a custom radio service.

[00:09:25] Speaker 08:
And the PROs, for example, this was all evidence that came into the record after Web4, the PROs went to IHOT and said,

[00:09:33] Speaker 08:
you're going to need to increase the rate for custom radio.

[00:09:36] Speaker 08:
But they didn't say you're going to have to increase the rate for simulcasting.

[00:09:39] Speaker 08:
And the rates in those PR agreements, which cover 90% of the musical works royalties, are almost double for custom radio.

[00:09:45] Speaker 01:
That's still leaving the internet radio hole there in the analysis, if you're distinguishing the custom radio and yours.

[00:09:53] Speaker 08:
Well, it is affirmative evidence that custom radio is being treated differently.

[00:09:57] Speaker 08:
than simulcast, and ultimately that's the question, are these the same and do they warrant the same rate?

[00:10:02] Speaker 08:
But if you look at the licensing agreements, they break them to multiple categories, including internet radio.

[00:10:07] Speaker 08:
And one of the PRO agreements, similarly does that, it treats internet radio as a separate category.

[00:10:13] Speaker 01:
So it should be three categories, is your position.

[00:10:17] Speaker 08:
I think it's totally fair for there to be three categories.

[00:10:18] Speaker 08:
I think that is basically how the real world, I mean, these are not terms we made up for litigation.

[00:10:23] Speaker 08:
If you look at all of the real world negotiations,

[00:10:25] Speaker 08:
Simulcast, internet radio, custom radio, this is how the real market participants treat it in all of the relevant markets, the musical works markets and the direct licensing markets for sound recording.

[00:10:35] Speaker 08:
This is the terminology they use and every 100% of all contract evidence in this record shows differentiation.

[00:10:42] Speaker 00:
There is not a single piece of evidence which is similar.

[00:10:45] Speaker 00:
Your proposal did not break this down into three categories.

[00:10:49] Speaker 00:
Your proposal

[00:10:51] Speaker 00:
you compared simulcasters to custom radio, and you did not really account for internet radio, and I think that was a problem for the board in their analysis.

[00:11:03] Speaker 00:
And so they said, the judges observe and find concern with the fact that while the NAB's proposal seeks to contrast simulcasting with all other statutory webcasting, the NAB chose to more consistently draw a contrast between simulcasting and custom radio services.

[00:11:19] Speaker 00:
The proper comparison should be

[00:11:21] Speaker 00:
with all statutory commercial webcasting and was insufficiently established.

[00:11:25] Speaker 00:
So that's what they found.

[00:11:26] Speaker 00:
Now, an oral argument, you're now telling Judge Millett there should be three categories.

[00:11:30] Speaker 00:
That wasn't your proposal.

[00:11:32] Speaker 08:
I think it would be reasonable for the bullet to find three categories.

[00:11:34] Speaker 08:
What our experts said is that custom radio and internet radio

[00:11:38] Speaker 08:
sufficiently similar, that even though they could be treated differently, they could also be treated the same, but we never took a position as to what, and they're not, we don't represent internet radio, we never took a position as to what the board should do with internet radio, and sound exchange you should use, but no evidence.

[00:11:53] Speaker 00:
But the board then said that it was insufficiently established, your proposal was insufficiently supported, so why is that?

[00:11:59] Speaker 08:
and abusive discretion or arbitrary and capricious or... Because the board's responsibility under the statute is to explain why custom radio and simulcast should have the same rate.

[00:12:09] Speaker 08:
The statute sets up differentiation as being the default.

[00:12:13] Speaker 08:
It says that such rates and terms should distinguish among the different types of services that are in operation.

[00:12:18] Speaker 08:
So the first responsibility of the board is to root the decision in substantial evidence about why along those particular criteria

[00:12:25] Speaker 08:
There should be no differentiation.

[00:12:28] Speaker 08:
And so if you have two services that are unquestionably different, they shouldn't have the same rate just because one of those services hasn't proven that they're also different from another service.

[00:12:38] Speaker 08:
And I'm happy to keep... I'm going to wait.

[00:12:40] Speaker 01:
I'm sorry.

[00:12:40] Speaker 01:
I apologize to both of you and to you as well.

[00:12:44] Speaker 01:
Apparently our simulcast equipment is not working right now.

[00:12:47] Speaker 01:
So you're going to have to take a break until that is repaired.

[00:12:51] Speaker 01:
I apologize.

[00:12:52] Speaker 01:
So everybody remember where you were.

[00:12:55] Speaker 08:
Should I keep sounding it?

[00:12:57] Speaker 01:
Oh, you can sit down until we come back in, but we'll retain your time.

[00:13:00] Speaker 08:
Great.

[00:13:01] Speaker 08:
OK, thank you.

[00:13:07] Speaker 07:
This honorable court is again in session.

[00:13:16] Speaker 01:
All right, sorry Mr. Deggerson, I apologize to everybody for the technical difficulties.

[00:13:22] Speaker 01:
Maybe we should be in class by ourselves.

[00:13:26] Speaker 08:
Thank you.

[00:13:27] Speaker 01:
You may continue.

[00:13:28] Speaker 02:
Thank you.

[00:13:29] Speaker 08:
So just to get back to where I was, if you just sort of take a step back and look at what the evidence here was, it seems like even the board doesn't disagree that the evidence shows that custom radio is different to simulcast.

[00:13:40] Speaker 08:
Then with respect to the comparison against simulcast and internet radio, all of the evidence similarly shows that they're different.

[00:13:47] Speaker 08:
And there's not much evidence.

[00:13:48] Speaker 08:
And the reason there isn't much evidence is because internet radio is not a significant feature of this case, just like it hasn't been a significant feature of the market.

[00:13:55] Speaker 08:
Sound exchange didn't even introduce any evidence or even mention it until their reply brief.

[00:14:01] Speaker 08:
So if we knew that it was going to be a critical issue, we'd certainly put in more evidence.

[00:14:06] Speaker 08:
But the only evidence came from our experts and said it's not a significant part of the market, and that it is different to similar cost, and that it is much closer to custom radio.

[00:14:15] Speaker 03:
But the board found that all three of these categories were competitors, right?

[00:14:22] Speaker 03:
that they made that affirmative finding and then that was kind of their proxy for saying that then that kind of willing buyer willing seller would be the same kind of across the board for all three categories isn't that essentially what the board did

[00:14:43] Speaker 08:
I think you could read the board as doing that.

[00:14:45] Speaker 08:
I will say so with respect to the competition.

[00:14:46] Speaker 08:
I think that is the only affirmative thing that is in the board's opinion.

[00:14:49] Speaker 08:
And with respect to that, there wasn't a single fact witness that testified that they were competitors.

[00:14:54] Speaker 08:
There wasn't any economic analysis that suggests they were competitors.

[00:14:57] Speaker 08:
Voluminous testimony said that they didn't compete.

[00:15:00] Speaker 08:
And the only thing the board relied on were these references to competition

[00:15:03] Speaker 08:
in these FCC and SEC filings.

[00:15:06] Speaker 08:
And we had witness after witness go up and look at those documents and say, what we meant by that was competition in the most general sense.

[00:15:13] Speaker 08:
You know, one of our witnesses, and this is JA 813 to 817, our executive vice president of strategic planning said, look, you know,

[00:15:22] Speaker 08:
You can think of whiskey and milk as both being beverages.

[00:15:25] Speaker 08:
And so they are sort of like in some broad sense competitors, but no one would ever think of them as being competition.

[00:15:30] Speaker 08:
And we don't think of custom radio as being our competition.

[00:15:33] Speaker 08:
And there was, you know, record label executives all testified that they didn't think of, you know, that they viewed broadcast radio and simulcast to be the same, and that they viewed those things to be different from custom radio.

[00:15:45] Speaker 01:
But the board did have evidence that it pointed to of

[00:15:51] Speaker 01:
of sellers focusing on these competing entities, maybe not competing as head to head as some other ones, but in competition.

[00:16:02] Speaker 01:
So what we're really dealing with now is a fact finding by the board, is that correct?

[00:16:08] Speaker 01:
We're dealing with a fact finding by the board here that there was competition, right?

[00:16:13] Speaker 01:
It's a fact finding.

[00:16:14] Speaker 08:
I mean I think it's basically some evidence versus no evidence.

[00:16:18] Speaker 01:
It's a fact-finding by the board.

[00:16:20] Speaker 01:
I'm just trying to get you to answer.

[00:16:24] Speaker 01:
It's a factual finding by the board that there was competition.

[00:16:27] Speaker 08:
I don't know if you would consider it a factual finding.

[00:16:29] Speaker 08:
I mean what it is is the board's reasoning was we see this information from these filings that call them competitors.

[00:16:36] Speaker 08:
And from that, we're going to reason that there's sufficient competition.

[00:16:39] Speaker 01:
We're going to conclude that there's sufficient competition.

[00:16:41] Speaker 01:
Is the finding of competition a factual finding or a legal ruling?

[00:16:44] Speaker 08:
I think it's a legal ruling, because I don't think the question is competition that is relevant to these statutory criteria for the purpose of rate differentiation.

[00:16:53] Speaker 08:
And so that's sort of a legal, this is a level of competition that warrants them to have the same rate.

[00:16:58] Speaker 08:
That, I think, is a legal conclusion.

[00:17:00] Speaker 08:
I don't think there's x amount of competition or any sort of thing that you could say is a fact finding.

[00:17:06] Speaker 08:
I think it's a legal analysis, and that legal analysis was grounded in this evidence that was extremely thin and contradicted by all of the other evidence in the record.

[00:17:18] Speaker 08:
I actually, yeah, I connected.

[00:17:22] Speaker 01:
Go ahead, because we interrupted you before too, so we'll give you another couple of minutes to get through.

[00:17:25] Speaker 01:
For a bottle, okay.

[00:17:26] Speaker 01:
Thank you.

[00:17:27] Speaker 01:
I have a couple of minutes now.

[00:17:28] Speaker 01:
You can have another couple of minutes now, just for a couple of minutes now, and we will give you some rebuttal time too.

[00:17:33] Speaker 01:
Okay, that's great.

[00:17:34] Speaker 01:
It's hard when an argument is disrupted the way it was.

[00:17:37] Speaker 00:
Thank you, Erin.

[00:17:37] Speaker 00:
I really appreciate it.

[00:17:38] Speaker 00:
If you are going to take more time now, then I'd like to ask you to talk more about intercollegiate, because I think that that case

[00:17:45] Speaker 00:
is very on point here because in that case similarly there is a request for the board to make an additional differentiation and a claim that because there was a difference between small and very small broadcasters they must differentiate but the court held that it had to be seen in the lens of whether there'd be something different negotiated in a marketplace between willing buyers and willing sellers

[00:18:12] Speaker 00:
And I think that that's very much on all fours with what's happened here because it seems to me that what the board has done is it has said that you have not established

[00:18:23] Speaker 00:
that there's a different market segmentation for simulcasters versus all the other commercial non-interactive webcasters and therefore there's not a different willing buyer-seller analysis that would support treating simulcasters differently.

[00:18:40] Speaker 00:
Why isn't intercollegiate on all fours with this?

[00:18:43] Speaker 08:
I guess I think that first half of the analysis wasn't there intercollegiate.

[00:18:46] Speaker 08:
There was never this piece of reasoning that basically said

[00:18:48] Speaker 08:
You know, we're going to say there's going to be a uniform rate, unless you can prove differentiation from some third entity over every, you know, be materially different from every other entity in the market, we're now going to have the same rate.

[00:18:59] Speaker 00:
I think that is what happened in intercollegiate, because intercollegiate said that there has been a differentiation between commercial and non-commercial, and what the board declined to do was adopt intercollegiate's proposal to make further distinctions.

[00:19:13] Speaker 00:
That's exactly what you're trying to do here.

[00:19:16] Speaker 08:
I think it would be completely fair to not make further distinctions if the record warrants it.

[00:19:20] Speaker 08:
I don't think you can say, unless someone proves a difference from every single other entity within a particular category, then sort of as a matter of law they haven't been able to establish

[00:19:31] Speaker 08:
differentiation, even if they have been able to, on the evidence show, that there are two types of things that the market treats as different types of things that are different in all the respects that the statute cares about, which is the spectrum of, does it threaten album sales?

[00:19:46] Speaker 08:
Is it a different type and quantity of sound recording being played?

[00:19:50] Speaker 08:
I think at that point, the statute places an affirmative obligation on the board to distinguish between those two things.

[00:19:57] Speaker 08:
I don't think the board can then say, regardless of that difference, even if all, I mean the board's reasoning is basically, regardless of that difference, even if he shows all the difference in the world, unless you can show a distinction between yourself and a third category.

[00:20:10] Speaker 08:
then we're going to give these two things the same rate, even if the evidence just doesn't support it, the market doesn't treat them the same way.

[00:20:16] Speaker 08:
And I just think that reasoning is a non-sequitur.

[00:20:18] Speaker 08:
I don't see that anywhere in this court's precedent or in the board's prior decisions.

[00:20:22] Speaker 08:
In the board's prior decisions, they've looked at the actual categories, they've made a differentiation, and then they've said the evidence doesn't actually warrant a distinction between these two things.

[00:20:31] Speaker 08:
The evidence doesn't warrant a distinction

[00:20:33] Speaker 08:
between different kinds of non-commercials.

[00:20:35] Speaker 08:
That's very different from saying, the evidence actually here does warrant a distinction between custom radio and simulcast, but we're still going to give you the same rate because you haven't shown a differentiation from internet radio this third category.

[00:20:47] Speaker 01:
You were asking the board though to make simulcast sort of its own independent category for this rate, for rate making purpose.

[00:20:54] Speaker 08:
Correct?

[00:20:56] Speaker 08:
We were saying that it should be different from custom radio.

[00:20:59] Speaker 01:
We didn't, you know, if Acura Radio, for example, but originally... The board had created a grouping and it has had this grouping of commercial non-subscription webcasting as a group.

[00:21:12] Speaker 01:
That's the type that it has had for years and years and years and years.

[00:21:17] Speaker 01:
And then you come and say simulcast.

[00:21:19] Speaker 01:
is different.

[00:21:20] Speaker 01:
We shouldn't be treated the same as the rate you have assigned to custom radio, which of course is the rate that's assigned to that broader category that they've had for years and years and years and years.

[00:21:31] Speaker 01:
So it seems to me, I know you keep wanting to dance around the internet radio thing, but it seems to me that at bottom, if you weren't arguing about internet radio, then they were being left behind right there with custom radio as far as you were concerned, because you weren't representing them, you weren't advocating for them.

[00:21:46] Speaker 01:
So what you were trying to do was create

[00:21:49] Speaker 01:
simulcast.

[00:21:50] Speaker 01:
I understand the arguments because it's similarity to the rest of the radio.

[00:21:55] Speaker 01:
should have their own rate as opposed to this one that you've got here for this grouping that you've otherwise employed for years and years and years, correct?

[00:22:04] Speaker 01:
Correct.

[00:22:05] Speaker 01:
And then what is... Sorry.

[00:22:07] Speaker 01:
The reason I ask that is because, and some of this is in the intercollegiate radio, intercollegiate broadcasting case that Judge Pan referenced, is at some level the board has to be worried about increasing sort of balkanization of these categories because

[00:22:25] Speaker 01:
They all cover numerous forms of webcasting and if the argument is going to be that everyone that can come up with a good enough differentiation is going to be a category of their own, suddenly the board is going to have to come up with ten times as many rates because

[00:22:45] Speaker 01:
There won't be any grouping of anything you'll be here and I really will say well we're not them and we're not them and customer go well you know her subscription service should be one thing and our non subscription service should be another everything's going to fracture.

[00:22:58] Speaker 01:
And what is.

[00:23:00] Speaker 01:
What is your response to that concern?

[00:23:02] Speaker 08:
Yeah, I mean, I don't think it's the concern the board articulated.

[00:23:05] Speaker 08:
But I also think that it is.

[00:23:07] Speaker 01:
Just as a matter of law, given the statutory tax.

[00:23:09] Speaker 08:
Right, you're right.

[00:23:09] Speaker 08:
And I think that that would be fair in some contexts.

[00:23:12] Speaker 08:
But it's not in this market.

[00:23:14] Speaker 08:
Because if you look at the PR agreements and the direct license agreements, these are real categories.

[00:23:19] Speaker 08:
This isn't just a bunch of people coming into court and saying, we want to be different.

[00:23:22] Speaker 08:
This is how the market looks at all of these entities.

[00:23:25] Speaker 08:
And it isn't that they're going to be 10.

[00:23:27] Speaker 08:
There are just these categories.

[00:23:28] Speaker 08:
Internet radio is small, so some of the agreements don't treat it as different from custom radio, but the agreements all treat every single agreement in this record, and that includes all the direct license agreements and all the PR agreements with an entity that has both simulcast and custom radio.

[00:23:44] Speaker 08:
I do think it's key that iHeart is basically a controlled experiment here.

[00:23:48] Speaker 08:
Any of the labels could have gone to I Heart Radio and said, simulcast is the same as custom radio, so they should have the same rate.

[00:23:55] Speaker 08:
None of them did.

[00:23:55] Speaker 08:
They all said simulcast is different to custom radio.

[00:23:58] Speaker 08:
And so I think that underscore is that the market recognizes these are real categories and that it treats them differently as categories.

[00:24:05] Speaker 08:
And that is affirmative evidence.

[00:24:06] Speaker 08:
I don't think the concern about vulcanization is true on this record.

[00:24:09] Speaker 08:
Now, maybe on a different record and a different piece of reasoning by the court, absolutely you could sustain that.

[00:24:14] Speaker 08:
But I don't think you could sustain it on this record.

[00:24:16] Speaker 01:
Any more questions?

[00:24:18] Speaker 08:
All right, thank you.

[00:24:18] Speaker 01:
Thank you again for accommodating our break here too.

[00:24:35] Speaker 07:
Good morning, Your Honor.

[00:24:35] Speaker 07:
Jennifer Utrecht on behalf of the Copyright Royalty Board and Library of Congress.

[00:24:39] Speaker 07:
So this is the first time I will be speaking to you all.

[00:24:42] Speaker 07:
I would like to start with a general point to make sure we're all on the same terms.

[00:24:45] Speaker 07:
Copyright royalty judges' task here is to analyze a hypothetical market, a market that's never existed, because the statutory license was created at the same time that the right to publicly perform sound recordings was created, and to decide what willing buyers and willing sellers who, in theory, would negotiate over this would agree to.

[00:25:05] Speaker 07:
With respect to the NAB's primary argument in this appeal,

[00:25:09] Speaker 07:
It is true that the Copyright Act directs that the judges shall distinguish among the different types of services than in existence when setting reasonable rates.

[00:25:18] Speaker 07:
What that means, as the judges have upheld in every proceeding, which has been affirmed by this Court, is that there have to be differences in meaningful ways, differences that would lead willing buyers and willing sellers to agree to different rates.

[00:25:32] Speaker 07:
What happened in this proceeding is very clear.

[00:25:34] Speaker 07:
The judges analyzed all of the evidence that the NAB tried to present that the NAB claimed showed that they were different from custom radio.

[00:25:42] Speaker 07:
And the judges identified two clear problems with this.

[00:25:46] Speaker 07:
One was that most of the evidence that they cite, the benchmark agreements that they talked about in this oral argument, the survey evidence that we discussed in our brief, the judges found to be methodologically flawed and didn't actually support a finding.

[00:26:00] Speaker 07:
that simulcasts were different from custom radio in meaningful ways.

[00:26:03] Speaker 07:
And the second problem that judges identified was what you're left with is essentially an assertion that because terrestrial radio has a unique promotional value, you should assume that we also have that.

[00:26:16] Speaker 07:
That's not evidence, that's a hypothesis, but more important, as the judge has explained, there is this other category of internet radio that looks like simulcasts in all the ways that you have articulated as important.

[00:26:30] Speaker 07:
We don't know what to do about that, your presentation doesn't tell us what we should do about that, so how can we actually say you're different based on this hypothesis that's not actually proven?

[00:26:39] Speaker 07:
if you're not actually accounting for a significant portion of the market.

[00:26:43] Speaker 07:
And we think that that factual determination is well explained and supported by substantial evidence.

[00:26:50] Speaker 03:
Why does it matter if they're different from something else?

[00:26:55] Speaker 03:
I mean, if you've got two things, if you've got three things, an apple, a pear, and an orange, why can't the orange say, well, we're different than the apple?

[00:27:10] Speaker 03:
Why does it matter whether the orange also proves that it's also different than the pear?

[00:27:19] Speaker 03:
If it's different from the apple, it's different from the apple.

[00:27:22] Speaker 03:
And it doesn't need to prove anything else, right?

[00:27:27] Speaker 07:
I'm going to try to answer that question.

[00:27:29] Speaker 07:
I think I'll get messed up in the specific metaphor.

[00:27:32] Speaker 07:
So I apologize for redirecting back to the Copyright Act.

[00:27:35] Speaker 07:
I mean, Congress recognized that this webcasting license was going to cover a wide spectrum of services that differ in terms of business models.

[00:27:44] Speaker 07:
They're going to differ across lots of different sorts of

[00:27:49] Speaker 07:
in terms of functionality could be one, in terms of what music they play, every service is going to differ from the other.

[00:27:56] Speaker 07:
So it isn't really sufficient to point at two different sides of the spectrum and say, well, we think this is a difference.

[00:28:03] Speaker 07:
You have to show that it's, if you want a separate rate that is unique to you, you have to show that the differences you identify actually would lead willing buyers and willing sellers to give you a different rate as distinguished from these other categories.

[00:28:17] Speaker 07:
The judges have to set rates that apply to everyone.

[00:28:19] Speaker 07:
They can't just identify, you know, specific individuals who say, well, our business model is slightly different, and because we've shown that our business model is different, we think you should give us a rate, even if Luling buyers and Luling sellers would not agree to it.

[00:28:32] Speaker 03:
So even if I agree with that framing, wasn't it the case in both intercollegiate and sound exchange that the board had affirmative evidence that it could point to

[00:28:45] Speaker 03:
that willing buyers and willing sellers had kind of comparable agreements in the two different kind of categories that were sought to be distinguished from each other.

[00:28:56] Speaker 03:
But you don't have that here.

[00:28:58] Speaker 03:
Instead, the board said, well, we find you have evidence that says that they're comparable, but we don't like your evidence, and we think you're competitors, and so

[00:29:11] Speaker 03:
We'll use the competition finding basically as a proxy for a finding that willing buyers and willing sellers would would agree to the same thing.

[00:29:24] Speaker 03:
Isn't that.

[00:29:25] Speaker 03:
what happened here and isn't that kind of pushing this even further on what we've approved?

[00:29:31] Speaker 07:
To the contrary, Your Honor, I think that what the board did here is exactly consistent with the prior decisions that this court has approved and looking at the last webcasting proceeding, sound exchange decision.

[00:29:42] Speaker 07:
The evidence that the judges there cited as evidence that ad-based services and subscription-based services should be treated as different was very, very strong affirmative evidence

[00:29:54] Speaker 07:
that there was almost no overlap between the listeners to ad-based services and the listeners to subscription-based services, and that complete differentiation made them different markets, and that's very strong evidence of what led the judges to differentiate between those two services.

[00:30:12] Speaker 07:
We don't have any evidence that resembles that here.

[00:30:14] Speaker 07:
And I know that the NAB has repeatedly said, well, simulcasts are unquestionably different.

[00:30:20] Speaker 07:
Well, that's just begging the question.

[00:30:23] Speaker 07:
Are they actually different?

[00:30:24] Speaker 07:
Where is the evidence that they are different?

[00:30:27] Speaker 07:
The NAB has cited, for example, with the direct licensing agreements.

[00:30:31] Speaker 07:
Well, the judges looked at those direct licensing agreements, and they explained exactly what was wrong with them.

[00:30:38] Speaker 07:
The NAB has tried to resuscitate that in its appeal.

[00:30:40] Speaker 07:
But that would be very obviously a factual question if they were challenging the judge's decision to reject those direct licensing agreements as evidence.

[00:30:50] Speaker 07:
They haven't done that.

[00:30:52] Speaker 03:
The board seemed to credit the argument in part by talking about this as a continuum, I think.

[00:31:00] Speaker 03:
And it's just common sense, right, as someone who likes music and listens to a lot of music and uses these various types of services.

[00:31:10] Speaker 03:
It's a lot different to have a service like a Pandora that you can say, create a station to play a certain type of music or certain artists music because if you create that station, you're at least likely to hear some of the music that you have in mind.

[00:31:30] Speaker 03:
on a regular basis, on an intermittent basis, whereas if you just kind of tune into a station, a simulcast of a station of a particular genre that you like, it's really hit or miss.

[00:31:48] Speaker 03:
And that goes to the core of what is in the statute that is supposed to be considered.

[00:31:55] Speaker 07:
Right.

[00:31:55] Speaker 07:
Sure.

[00:31:55] Speaker 07:
I understand that intuitive intuition that from a user's perspective Pandora looks very different from simulcast because there is more functionality.

[00:32:04] Speaker 07:
But what the judges reasonably expected here was for the NAB to put on evidence that that differentiation would actually affect the rates that willing buyers and willing sellers would pay, that there would actually be a meaningful difference.

[00:32:18] Speaker 07:
Looking at one of the statutory factors, for example, the promotional value or substitution effect, what that means is that

[00:32:27] Speaker 07:
A promotional value is how much a service is leading listeners to go out and purchase music, purchase digital downloads.

[00:32:34] Speaker 07:
Substitution effect is how much is it taking away from that?

[00:32:38] Speaker 07:
How much are users just using the service instead of purchasing music?

[00:32:43] Speaker 07:
And to show that you were different from custom radio, we would expect to see evidence of we have a much greater net promotional effect.

[00:32:52] Speaker 07:
Users of our services are purchasing music more than custom radio.

[00:32:56] Speaker 07:
We don't have that evidence here.

[00:32:57] Speaker 07:
And that's really what the judge said when they analyzed, for example, the survey evidence and the benchmarking.

[00:33:02] Speaker 07:
They said, we don't think this actually is methodologically sound.

[00:33:06] Speaker 07:
We don't think it actually supports a differentiation between that.

[00:33:10] Speaker 07:
That's a factual finding that is based on credibility determinations that judges are entitled to make.

[00:33:15] Speaker 07:
And the second problem, of course, is even assuming you're right that there is this difference, which we don't think you've proven,

[00:33:22] Speaker 07:
There's this other service that's out there that looks like you in the ways that you say are meaningful and that in and of itself suggests that you are not entitled to a unique rate because there are services that have these same core features.

[00:33:36] Speaker 01:
They say though that there's plenty of record evidence that different rates have been offered.

[00:33:42] Speaker 01:
for simulcast services and say something like a custom radio service.

[00:33:46] Speaker 01:
There's just a pattern of that and, you know, the board thought, well, it was just a snapshot, but that's what all of these voluntary agreements are.

[00:33:56] Speaker 07:
I would urge this court to look at the judge's final determination on pages 219 to 223, which goes through these licenses and explains why they aren't actually relevant or applicable to the actual market that we're analyzing.

[00:34:11] Speaker 07:
The first category of licensing agreements that the NAB introduced

[00:34:15] Speaker 07:
were licensing agreements for musical works.

[00:34:18] Speaker 07:
That's an entirely different copyright.

[00:34:20] Speaker 07:
We're not talking about sound recordings here, and it involves different actors, different copyright owners, the fact that they treat simulcasts differently, the judges found doesn't automatically translate into this world.

[00:34:30] Speaker 07:
And the second category were direct licensing agreements between iHeart and very small independent record labels.

[00:34:37] Speaker 07:
And the judges said, that's a very, very small, it's not really representative of the overall market.

[00:34:42] Speaker 07:
No major record labels are involved.

[00:34:44] Speaker 07:
We're looking at

[00:34:45] Speaker 07:
tiny actors, and if we're going to just rely on this, we would expect to see more substantial evidence to back it up, that the broader market is actually treating this differently.

[00:34:56] Speaker 01:
Again, these are credibility determinations the judges have made.

[00:34:59] Speaker 01:
Did the judges themselves have evidence that the broader market was different, or is there just a void of evidence in their view?

[00:35:07] Speaker 01:
You haven't shown us anything different.

[00:35:12] Speaker 07:
The things that are the same, I suppose, is to reverse that question.

[00:35:18] Speaker 07:
The judges made factual findings that webcasters are in fact competing with these other services for listeners, which is an economic consideration.

[00:35:26] Speaker 07:
Judges' decisions have explained, both this one and prior decisions have explained, if you are competing for listeners, willing sellers are likely going to want to charge you the same rate because they don't want their listeners leaving a higher paying service to go to a lower paying service.

[00:35:40] Speaker 01:
How granular was the finding of competition?

[00:35:42] Speaker 01:
I mean, to say that

[00:35:44] Speaker 01:
Okay, there's this world of, you know, free stuff to listen to.

[00:35:50] Speaker 01:
Profit-making free stuff.

[00:35:52] Speaker 01:
And, you know, people may, customers may hop back and forth between them or something.

[00:35:59] Speaker 01:
It's that type of competition.

[00:36:02] Speaker 01:
But are they competing for the same people or is it just, you know, there's the people that are kind of like the Pandora people who really want some more curation.

[00:36:10] Speaker 01:
And then there's the people who just turn on or start streaming something and in their car they would just turn on a radio and they

[00:36:17] Speaker 01:
When they're not in their car, they just start putting something on their phone.

[00:36:20] Speaker 01:
And they're just, they're not, they're different.

[00:36:21] Speaker 01:
How do we know that they're really competing for the same people?

[00:36:25] Speaker 01:
Because Pandora does feel like an entirely different product from, you know, a simulcast of something that is already being broadcast on radio.

[00:36:35] Speaker 07:
I have two responses to that, Your Honor.

[00:36:37] Speaker 07:
I mean, one, the intuition that Pandora feels different.

[00:36:40] Speaker 07:
Again, we would expect to see evidence that that is actually making a difference in the hypothetical market, both in terms of how much the users value that functionality, also how much willing sellers and willing buyers value that functionality, and we don't have that evidence here.

[00:36:56] Speaker 07:
And the second problem, the second thing I would like to redirect back to the point I made at the beginning, which is that there is this

[00:37:04] Speaker 07:
sort of default assumption.

[00:37:05] Speaker 07:
It is a blanket license.

[00:37:07] Speaker 07:
The whole point of having the statutory license was for a single rate generally to apply.

[00:37:12] Speaker 07:
There is sort of a blanket assumption that unless there is strong evidence that you are a different service, there's no reason to distinguish among the rates.

[00:37:20] Speaker 07:
And that is what we're missing here.

[00:37:23] Speaker 07:
The NAB has tried to flip that and suggest that the burden is on the judges to somehow prove that everything is the same.

[00:37:29] Speaker 07:
But that's a scheme Congress set up.

[00:37:31] Speaker 07:
Congress treated everything as the same unless the judges decide that people are different.

[00:37:35] Speaker 07:
And it's entirely reasonable for the judges to have put the burden on the NAB to show that they are different through factual evidence rather than mere assertions that they should be treated the same as terrestrial radio.

[00:37:49] Speaker 02:
Do we know that they're competing for the same people?

[00:37:52] Speaker 01:
Is there any evidence like that in this case and the first case when they were grouped together?

[00:37:57] Speaker 07:
I would just start by saying we know that listeners on the internet, once you have a device that can connect to the internet,

[00:38:08] Speaker 07:
You have a wealth of options, and to be clear, that's very different from terrestrial radio, where there is a dial, it only gets AM, FM stations, and it's limited in location.

[00:38:17] Speaker 07:
Once you are on the internet, you have a wealth of options available to you, and that intuition suggests that you are in fact competing for listeners just as a, if we're talking about common sense matters as opposed to evidence.

[00:38:29] Speaker 07:
The evidence here, there's no evidence that listeners are actually preferring simulcast and won't go to other services of simulcast.

[00:38:37] Speaker 01:
I get the point about no evidence, but what about affirmative evidence that in fact, when you say there's competition, that they really are materially competing for the same?

[00:38:50] Speaker 07:
As far as I'm aware, the only direct evidence as to listener competition was the survey that the judges found to be methodologically flawed, and so I would be hesitant to draw any conclusions from that.

[00:39:03] Speaker 01:
We have said that absence of evidence is not substantial evidence.

[00:39:07] Speaker 07:
Well, again, it's not substantial evidence, but we're starting from the proposition that these services are all the same unless they're

[00:39:15] Speaker 07:
a different, unless they are different types of services, the judges have to make the decision about whether they're different types of services.

[00:39:22] Speaker 01:
I take your statutory point, but there are real limits to it because the statute says they shall distinguish between different types.

[00:39:29] Speaker 01:
The judges themselves have an obligation.

[00:39:32] Speaker 01:
They can't sort of go,

[00:39:33] Speaker 01:
We're treating everything as the same.

[00:39:36] Speaker 07:
To be very clear, Your Honor, the judges followed that statutory obligation.

[00:39:39] Speaker 07:
They did distinguish between non-commercial services, subscription-based services, and advertising-based services, and they made that differentiation.

[00:39:48] Speaker 01:
I understand there's those three groups, and what I'm asking is, did they cast too wide a logical net or too wide an empirical net with the commercial non-subscription?

[00:40:01] Speaker 01:
webcasting because it just covers such a varied range of services and presumably sort of customer preferences.

[00:40:15] Speaker 07:
There's no evidence in this proceeding that the ways in which the business models for ad-supported services would actually affect the rates of willing buyers and willing sellers would agree to.

[00:40:24] Speaker 07:
That's the judge's task, to distinguish among the rates

[00:40:27] Speaker 07:
when those differences would lead to the virus to agree to different rates.

[00:40:32] Speaker 01:
I keep hearing you're no evidence, which is

[00:40:36] Speaker 01:
a perfectly good point as far as it goes.

[00:40:37] Speaker 01:
I was just asking for affirmative evidence of the opposite.

[00:40:43] Speaker 07:
I don't think it's incumbent upon the judges to identify ways in which they are the same because we start with the premise that they are all services broadcasting over the internet.

[00:40:52] Speaker 07:
They're all broadcasting sound recordings over the internet.

[00:40:55] Speaker 07:
They all have the same business model.

[00:40:57] Speaker 07:
They monetize by appealing to advertisers, so in a minimum they're competing for advertising dollars.

[00:41:02] Speaker 07:
There are lots of ways in which, just as a definitional matter, they are the same as other ad-based services.

[00:41:09] Speaker 07:
And the ways in which the NAB has asserted they are different are an assumption that they have a unique promotional value because they're playing the same music as terrestrial radio.

[00:41:19] Speaker 07:
That's not proven.

[00:41:20] Speaker 07:
And that's enough for this court to affirm.

[00:41:25] Speaker 02:
Thank you very much.

[00:41:26] Speaker 02:
Thank you.

[00:41:27] Speaker 02:
All right.

[00:41:28] Speaker 02:
We'll give you, and I apologize.

[00:41:30] Speaker 01:
Am I saying it right, Mr. Degerson?

[00:41:33] Speaker 01:
Did I say that right?

[00:41:33] Speaker 01:
If I didn't, tell me.

[00:41:34] Speaker 01:
Yes, that's right.

[00:41:35] Speaker 01:
We'll give you two minutes for rebuttal.

[00:41:37] Speaker 01:
OK.

[00:41:38] Speaker 08:
Thank you, Your Honor.

[00:41:39] Speaker 08:
And four quick points.

[00:41:40] Speaker 08:
I do think all the funded evidence we just heard is all stuff that would apply to everything.

[00:41:46] Speaker 08:
I mean, everything, not just in the non-interactive realm, but also Spotify.

[00:41:50] Speaker 08:
Clearly, there are also things broadcast over the internet and compete for advertisers, even things like YouTube and Google.

[00:41:55] Speaker 08:
And that goes to the problem with the competition evidence.

[00:41:58] Speaker 08:
All the evidence that they were relied on actually even used those as comparatives, competition in that broader sense.

[00:42:03] Speaker 08:
That's not relevant.

[00:42:05] Speaker 08:
kind of competition.

[00:42:06] Speaker 08:
And I think we just heard a concession, basically, that there was no other kind of affirmative evidence in this case.

[00:42:12] Speaker 08:
On this point about this, I think, again, what we heard was that there's a strong assumption in favor of a uniform rate.

[00:42:19] Speaker 08:
And I just don't read the statute that way.

[00:42:21] Speaker 08:
The statute doesn't make that assumption there's going to be uniform rate.

[00:42:24] Speaker 08:
The statute starts with saying that there should be differentiation.

[00:42:27] Speaker 08:
So then the question is, what do you do when you have something like internet radio?

[00:42:31] Speaker 08:
You know, the CRB, unlike a lot of administrative agencies, has subpoena power to subpoena non-witnesses, non-participants.

[00:42:38] Speaker 08:
If it thought there was some concern about what rate internet radio should have and there wasn't enough evidence, it could have used that.

[00:42:44] Speaker 08:
And if the concern was, well, what's some other party going to do?

[00:42:47] Speaker 08:
you know, who's not part of this proceeding, what rate are they going to pay?

[00:42:51] Speaker 08:
You know, they could have defined the categories such as they cover the waterfront.

[00:42:55] Speaker 08:
And if there was any concern about that, section 114 F1C has a provision that allows new entities to petition and get a rate determination.

[00:43:03] Speaker 08:
So there are lots of ways to remove the lack of clarity without anchoring this to uniform rates.

[00:43:08] Speaker 08:
on this PRO, IHOT deal issue, maybe the judges had problems with it with respect to whether it was a perfect benchmark, but that is not the same thing as rejecting it, and they couldn't permissively reject it, as at least evidence that the market is treating these differently.

[00:43:23] Speaker 08:
As I said, IHOT is basically a controlled experiment in this regard, and even if it's slightly off ...

[00:43:31] Speaker 01:
They could reject it as showing what the market does if they say this is just some tiny corner and it had some other unique factors on the nature of the music being offered.

[00:43:43] Speaker 01:
That's exactly what they said.

[00:43:46] Speaker 01:
It doesn't tell us what the market at large would do.

[00:43:50] Speaker 08:
It was 20 percent, that was the direct licenses, that's 20 percent of all of iHeart's deals, that's pretty substantial, and the board in other cases has used 20 percent as being a benchmark, and it shows that... Wait, 20 percent of iHearts?

[00:44:02] Speaker 01:
Right, but it's... And they've said before 20 percent of a single entity, I mean you could have a tiny, tiny entity that could do this, 20 percent of a business.

[00:44:09] Speaker 08:
Of course not many people are going to directly license in a situation where there's a statutory rate.

[00:44:13] Speaker 08:
So inherently the direct license evidence, that's always going to be a problem with it.

[00:44:16] Speaker 08:
And so just saying, well, we objected for that reason, I don't think it's sufficient.

[00:44:19] Speaker 08:
And the PROs was 90% of the musical works market.

[00:44:22] Speaker 08:
Of course, it's a different rate.

[00:44:23] Speaker 08:
There's always going to be some differences.

[00:44:24] Speaker 08:
You can't inherently have something that's exactly the same.

[00:44:27] Speaker 08:
But 100% of all the available evidence treated them as differently and dramatically differently.

[00:44:32] Speaker 08:
The PROs custom radio was twice as much.

[00:44:35] Speaker 08:
double of what simulcast was so that's at least something affirmative in the record even if you say maybe it was only 20% more maybe it should have been less than double that doesn't mean that they should be exactly the same and there's no countervailing evidence on the other side and then finally on this question of promotional effect there was tons of evidence in the record or you know we had their own witness Aaron Harrison explaining that all of the

[00:44:56] Speaker 08:
things about broadcast radio are equally true for simulcast, the earworm effect, the music discovery, there was evidence that there was huge tens of millions of promotional dollars that are spent on radio plays with no differentiation made by anyone between simulcast and broadcast and zero dollars spent on custom radio.

[00:45:16] Speaker 08:
So there was voluminous evidence in the record, it was all ignored and again on the other side of the ledger there was no affirmative evidence.

[00:45:22] Speaker 08:
I didn't hear any argument as to how

[00:45:23] Speaker 08:
Affirmatively, custom radio and simulcast are the same.

[00:45:27] Speaker 08:
The evidence found the opposite, and that at least warrants differential treatment between those two entities.

[00:45:32] Speaker 01:
Any more questions?

[00:45:33] Speaker 01:
All right.

[00:45:33] Speaker 01:
Thank you very much.

[00:45:34] Speaker 08:
Thank you, Your Honor.

[00:46:51] Speaker 01:
Good morning.

[00:46:53] Speaker 09:
May I please the court?

[00:46:54] Speaker 09:
My name is Karen Ablin and I represent the National Religious Broadcasters Non-Commercial Music License Committee, the appellant in this case.

[00:47:02] Speaker 09:
The Copyright Royalty Board violated the Administrative Procedure Act and the Religious Freedom Restoration Act in setting non-commercial webcasting rates that resulted in a huge fee disparity between the only two groups of webcasters that have audiences above an average threshold of only 218 people.

[00:47:23] Speaker 09:
That's about the size of an average-sized college lecture hall.

[00:47:27] Speaker 09:
The first group of stations are NPR stations.

[00:47:31] Speaker 09:
The second group is almost exclusively religious, yet the religious groups pay fees that are multiple times more on average than the NPR.

[00:47:41] Speaker 02:
So almost exclusively religious.

[00:47:42] Speaker 02:
What percentage?

[00:47:44] Speaker 02:
95%, Your Honor.

[00:47:47] Speaker 09:
So 5% are not non-religious.

[00:47:50] Speaker 09:
That is true, Your Honor.

[00:47:51] Speaker 09:
There is one.

[00:47:52] Speaker 09:
one webcaster, it's a group of 20 webcasters, there's one of the 20 that is not religious.

[00:47:59] Speaker 09:
Because religious broadcasters, right, so there's an average disparity of multiple times, there's also a very large marginal disparity between the average, the rates that these groups pay.

[00:48:12] Speaker 02:
Because... Just settled an agreement with NPR, didn't it also include collegiate broadcasters?

[00:48:17] Speaker 01:
Collegiate broadcasters are in a separate category.

[00:48:21] Speaker 01:
But they had an agreement as well.

[00:48:23] Speaker 01:
They did have an agreement as well.

[00:48:24] Speaker 01:
And so they are getting a different rate than has been set by the board for nonprofit broadcasters, including

[00:48:33] Speaker 01:
your clients.

[00:48:34] Speaker 09:
Yes, Your Honor.

[00:48:35] Speaker 09:
It's somewhat different, although it includes, it is somewhat different.

[00:48:39] Speaker 09:
They have lower fees for the same amount of listenership, 218.

[00:48:45] Speaker 09:
But that group includes both religious and non-religious broadcasters.

[00:48:50] Speaker 09:
The college group, to the extent that they run student run stations, that is true.

[00:48:56] Speaker 09:
But the important point is with that group, if they go over that threshold, they are

[00:49:02] Speaker 09:
essentially booted out of that group and put into our group and so even the religious broadcasters and the college group would end up paying these very large marginal rates.

[00:49:13] Speaker 01:
Do any of them go over?

[00:49:15] Speaker 01:
No.

[00:49:16] Speaker 01:
So they don't.

[00:49:17] Speaker 01:
So the collegiate broadcasters, it's a mix of both secular and religious music, have their own rate which is less than what your clients are paying

[00:49:28] Speaker 01:
Right, but even though that's not a discrimination as you would call it between religious and non-religious.

[00:49:36] Speaker 09:
Your Honor, the Tandon v. Newsome case says that it doesn't matter if there's a group that's treated better, it only matters if there's a group that's treated worse to create a religious discrimination problem under the First Amendment.

[00:49:53] Speaker 00:
So the premise of your argument is that NPR is being treated better.

[00:49:59] Speaker 00:
But didn't the board find that there was insufficient testimony to make any finding about the comparability between NPR.

[00:50:08] Speaker 00:
I just wonder is there actually a factual basis for you to argue.

[00:50:12] Speaker 00:
that NPR is being treated better on this record, given what the board found about that.

[00:50:17] Speaker 09:
Yes, Your Honor.

[00:50:19] Speaker 09:
Our argument with respect to the insufficient comparability testimony from experts is that that is something that the board has never required, particularly of non-commercial webcasters in the Web 3 case and also the Web 4 case,

[00:50:34] Speaker 09:
the board accepted without question and without expert testimony agreements that have the same characteristics that the NPR agreement has.

[00:50:45] Speaker 09:
Not the same rates, but they involved a group of non-commercial webcasters that was negotiated by a representative for them.

[00:50:52] Speaker 09:
sound exchange on the other side and the rates were the statutory rates.

[00:50:56] Speaker 09:
They were submitted in the course of a rape court proceeding.

[00:50:59] Speaker 00:
So can I just ask then, if we think that the board acted within its discretion to say that expert testimony was required, then your religious freedom restoration act claim fails.

[00:51:15] Speaker 00:
Because we have no factual basis to support it.

[00:51:18] Speaker 09:
No, Your Honor.

[00:51:19] Speaker 09:
The Religious Freedom Restoration Act is an overlay on top of the Copyright Act that creates a requirement that the board set rates for religious broadcasters that are certainly no worse than rates that the board is saying.

[00:51:36] Speaker 00:
No, I understand that, but I think the premise of that claim is that NPR was treated better.

[00:51:43] Speaker 00:
And the board, as a factual matter, said, we don't know what to do with this NPR evidence because there's no expert testimony.

[00:51:51] Speaker 00:
If we say the board acted within its discretion to reject the NPR methodology or comparison, then the factual premise of your RFRA claim fails because there's no finding that NPR is being treated better.

[00:52:10] Speaker 00:
There's no basis to find that NPR is being treated better.

[00:52:13] Speaker 09:
Your Honor, the government in its brief admitted that our group was paying more than NPR stations.

[00:52:19] Speaker 09:
But any way you slice it, whether it's by average fees or marginal fees, which are 17 times higher at the margin once our clients go over that threshold of 218 listeners, which is a pretty small amount, if they go over that, they're paying 17 times more.

[00:52:36] Speaker 09:
than NPR stations.

[00:52:37] Speaker 09:
And again, the government admitted that in its brief, that there is a difference in the fees that these groups are paid.

[00:52:44] Speaker 02:
And the government had the- How many go over that threshold?

[00:52:47] Speaker 02:
I'm sorry.

[00:52:48] Speaker 02:
How many go over that threshold?

[00:52:50] Speaker 09:
Your Honor, out of the- So 20 webcasters in the record evidence have gone over the threshold.

[00:52:56] Speaker 09:
19 are religious.

[00:52:57] Speaker 09:
And while that sounds like a small number compared to the-

[00:53:01] Speaker 09:
well over 1000 stations that are webcasters that are within this non-commercial class, including all of the non-commercial webcasters, but yet the 19 religious broadcasters, if you just look at their usage fees, not even looking at their minimum fees,

[00:53:18] Speaker 09:
They're paying the substantial majority of all fees that non-commercial webcasters pay.

[00:53:23] Speaker 09:
It's well over 50% just for this usage category, and that's because the rates just skyrocket once this threshold has been hit.

[00:53:33] Speaker 09:
So with respect to the APA and talking about the NPR agreement, we recognize that the board does have discretion in how it chooses benchmarks, but what it cannot do in looking at one benchmark over another is apply a test that's been in place

[00:53:55] Speaker 09:
for a long time and then change the rules without explaining why, without even acknowledging that they're departing from their precedent in other cases, and that's what happened here.

[00:54:05] Speaker 09:
They had a comparability test, and it was from Web 1.

[00:54:09] Speaker 09:
It's been carried through.

[00:54:11] Speaker 09:
It was cited in Web 3 and even in a very recent satellite radio proceeding.

[00:54:18] Speaker 09:
And that test says that in determining whether a benchmark is comparable,

[00:54:23] Speaker 09:
The judges consider such factors as whether it has the same buyers and sellers as the target market and whether they are negotiating for the same rights.

[00:54:32] Speaker 09:
That's in the satellite case at 83 Federal Register.

[00:54:35] Speaker 09:
Such as.

[00:54:37] Speaker 09:
Such as.

[00:54:38] Speaker 09:
It's not an exhaustive list.

[00:54:40] Speaker 01:
of things to be considered.

[00:54:41] Speaker 09:
Well, if you look at the analysis that all of these cases have done, when there has been an analysis with a non-commercial rate, sometimes there's not much of an analysis.

[00:54:51] Speaker 09:
These are the factors that are looked at.

[00:54:54] Speaker 09:
In Web 3, for example, there's lots of testimony about an agreement that NAB reached with SoundExchange, another one that Sirius Satellite Radio

[00:55:09] Speaker 09:
reached with sound exchange.

[00:55:11] Speaker 09:
So again, they have these same attributes of agent negotiations, you know, a trade group negotiating on behalf of buyers, for example.

[00:55:19] Speaker 09:
And the board there, they applied this test.

[00:55:21] Speaker 09:
They said same buyers, same sellers, same rights.

[00:55:24] Speaker 09:
And what's interesting here, or

[00:55:25] Speaker 09:
is that the NPR agreement, unlike a lot of other agreements that the board does look to, involves the exact statutory rights that are at issue.

[00:55:35] Speaker 09:
This is the type of agreement that when the DMCA, when this statutory license was first created for this type of webcaster in 1998, that is the type of agreement that the judges, that Congress specifically invited, not required but invited,

[00:55:51] Speaker 09:
the judges to consider.

[00:55:53] Speaker 09:
It was agreements that were submitted to the judges for statutory rates.

[00:55:58] Speaker 01:
Do you want this agreement to be used, even assuming there was some kind of a crosswalk to translate it, the lump sum into royalty rates?

[00:56:08] Speaker 01:
Just to be clear, your position is that the board should have set a rate for members of your trade association.

[00:56:18] Speaker 01:
That the board, we had two alternative proposals, Your Honor.

[00:56:22] Speaker 01:
Yeah, I don't, so put aside the lump-some one right now.

[00:56:25] Speaker 01:
Okay, and as to having them set a rate, they were supposed to set a rate for your trade association members.

[00:56:35] Speaker 01:
Yes, the lump-some.

[00:56:36] Speaker 01:
What in the statute allow, put aside the lump-some one for this question, all right.

[00:56:40] Speaker 01:
What in the statute allows the board to set

[00:56:45] Speaker 01:
a different rate for a trade association whose members are all part of a category that's not being challenged here, the nonprofit webcasters.

[00:56:57] Speaker 01:
What in the statute or precedent allows a setting of a rate for a single trade association group within a type, a category of webcasting?

[00:57:09] Speaker 09:
Well, Your Honor, the copyright royalty judges have the obligation to set rates certainly that cover the universe of non-commercial webcasters.

[00:57:19] Speaker 09:
Our proposal included another rate to cover people not in the universe.

[00:57:24] Speaker 09:
The class that our religious broadcasters cover are more like NPR, and that's why that was one of our alternative proposals.

[00:57:31] Speaker 01:
My question is again, it's a different one.

[00:57:34] Speaker 01:
What is the statutory authority

[00:57:37] Speaker 01:
precedent or statutory language you can point me to for setting a singular rate for members of a trade association that doesn't apply to everyone else within the category.

[00:57:50] Speaker 01:
Your Honor, I asked about lump sum proposal.

[00:57:53] Speaker 01:
So I'm trying to separate the two.

[00:57:56] Speaker 01:
You can answer the lump sum one second.

[00:57:58] Speaker 01:
But you had two arguments here.

[00:58:00] Speaker 01:
Lump sum proposal or set a rate that parallels the NPR rate.

[00:58:06] Speaker 01:
And that rate would have been for members of your trade association only, correct?

[00:58:12] Speaker 01:
Correct?

[00:58:13] Speaker 01:
Yes.

[00:58:13] Speaker 00:
Okay.

[00:58:14] Speaker 01:
What is the precedent authority for the board to set a rate under the statute or unprecedented?

[00:58:19] Speaker 01:
What is the authority to set a different rate for members of a trade association

[00:58:24] Speaker 01:
within a category.

[00:58:25] Speaker 01:
I don't want you to rephrase that.

[00:58:29] Speaker 01:
I want you to tell me the source of your authority.

[00:58:32] Speaker 01:
Is there statutory language or a case where this has happened?

[00:58:36] Speaker 09:
The judges have authority to set rates for everyone and there is nothing in the statute that prevents them

[00:58:42] Speaker 01:
from setting different rates for different types of groups and this type of... No, no, they have to first find, this was the prior argument we had, they shall make distinctions between different types based on criteria that you're not arguing about here at all.

[00:58:57] Speaker 01:
So is there a case, is there statutory language that says apart from the language about breaking licenses based on different types of webcasters that

[00:59:11] Speaker 01:
Even within a single type, we can break it up more and give a different rate to a trade association just because they're members of the trade association.

[00:59:22] Speaker 09:
Well, Your Honor, that proposal, we don't believe it is a different rate.

[00:59:27] Speaker 09:
And the reason we included it is because it mirrors the NPR metrics.

[00:59:33] Speaker 09:
That is why it's in there.

[00:59:34] Speaker 01:
The NPR metric comes from a voluntary agreement.

[00:59:37] Speaker 01:
It's not from a statutorily set rate.

[00:59:39] Speaker 01:
You argued for a statutorily set rate.

[00:59:41] Speaker 09:
The NPR rate is a statutory rate.

[00:59:46] Speaker 09:
It is not a private settlement.

[00:59:49] Speaker 09:
It was agreed to voluntarily by those parties, but then it was submitted to the judges for adoption.

[00:59:55] Speaker 01:
Yes, and they have direct statutory authority to approve rates agreed to in a private settlement agreement.

[01:00:02] Speaker 01:
You don't have a private settlement agreement, correct?

[01:00:05] Speaker 01:
No, we don't.

[01:00:07] Speaker 01:
So you are in the other category of where they statutorily calculate

[01:00:11] Speaker 01:
a license, right?

[01:00:13] Speaker 09:
Well, just to be clear, this agreement is not a private settlement agreement because the NPR agreement, because it applies to non-parties to that agreement.

[01:00:23] Speaker 09:
It was adopted as the basis for statutory rates for an entire class of webcasters.

[01:00:29] Speaker 09:
Our group of webcasters have different characteristics from other types of non-commercial broadcasters that may not need an additional threshold.

[01:00:39] Speaker 09:
But when you have the two

[01:00:40] Speaker 09:
only groups that are large that go over a very modest listenership.

[01:00:46] Speaker 09:
That's why we included two proposals and the lump sum included rates that also are, they're similar in effect, we believe, based on the evidence to the lump sum.

[01:01:02] Speaker 03:
Didn't the board make a finding that the

[01:01:08] Speaker 03:
NPR rates that you're basing this argument on were the wrong NPR rates?

[01:01:13] Speaker 03:
Were the wrong NPR rates?

[01:01:17] Speaker 03:
Were outdated?

[01:01:18] Speaker 09:
I'm not sure what you're referring to, Your Honor.

[01:01:24] Speaker 09:
The NPR agreements that we've relied on

[01:01:27] Speaker 09:
were those from 2016 to 2020, which was the then current term when the case was proceeding, as well as the 2021 to 2025 agreement.

[01:01:40] Speaker 09:
And we relied on both of those.

[01:01:42] Speaker 09:
And if the judges below did not like that lump sum, they could have also looked at a document which they completely ignored and said they were barred from looking at it.

[01:01:54] Speaker 09:
It said JA 1616.

[01:01:57] Speaker 09:
And that's the spreadsheet that is the spreadsheet and that that spreadsheet and there were two two reversible errors with respect to it.

[01:02:06] Speaker 09:
The first was that.

[01:02:08] Speaker 09:
spreadsheet.

[01:02:09] Speaker 09:
The judges said it was backward-looking.

[01:02:11] Speaker 09:
It was not backward-looking.

[01:02:13] Speaker 09:
It was forward-looking.

[01:02:15] Speaker 09:
I just refer you to JA 1616 since it's restricted, but there are markings on that document that make it forward-looking.

[01:02:22] Speaker 09:
More importantly, when SoundExchange produced it, and none of this was talked about in the determination, this was produced in response to a discovery request.

[01:02:32] Speaker 09:
for documents that valued the components of the MPR agreements, starting in 2016 going through 2025.

[01:02:39] Speaker 09:
And when that document was produced, it was characterized by sound exchange as an analysis of value

[01:02:46] Speaker 09:
of those settlements, of the settlements that started in 2016.

[01:02:50] Speaker 09:
The judges found that they couldn't look at it because it was backward-looking and did nothing more than repeat rates from the earlier time period, which was covered by the Webcaster Settlement Act, and those rates would be non-precedential.

[01:03:03] Speaker 09:
But to say that numbers that come out of an agreement that's non-precedential but then are used to derive a new agreement that is not

[01:03:13] Speaker 09:
that is a precedential agreement is reversible error and it's contrary to the register's binding precedent, the decision that she issued a few years back that we cite in our briefs.

[01:03:27] Speaker 01:
Are there non-commercial religious webcasters that are not a member of your group?

[01:03:34] Speaker 09:
There are ones that we do not represent, yes.

[01:03:39] Speaker 02:
Any questions?

[01:03:41] Speaker 01:
All right, thank you very much.

[01:03:42] Speaker 01:
We'll give you some time for rebuttal.

[01:04:04] Speaker 07:
Thank you.

[01:04:04] Speaker 07:
Good morning.

[01:04:05] Speaker 07:
Again, your Honor, Senator Utrecht, on behalf of the Copyright Royalty Board,

[01:04:09] Speaker 07:
I'd like to, I think, start with the basic proposition that the RFRA argument that the religious broadcasters have made only comes into play if you agree with them that the NPR settlement agreements reflect a lower usage fee than the one that they proposed.

[01:04:26] Speaker 07:
We did not admit that they do.

[01:04:28] Speaker 07:
In fact, our entire brief was dedicated to explaining why the judges found that they don't actually know what the usage fee is that's reflected in the flat fee agreement for NPR.

[01:04:36] Speaker 07:
And so unless this court finds that the judges erred in that respect and they should have found that we could identify the usage fee in the NPR agreement, the entire underpinnings of the Riffer argument fall apart.

[01:04:51] Speaker 07:
With respect to the religious broadcasters' arguments about whether the judges should have accepted the NPR settlements as a benchmark,

[01:05:00] Speaker 07:
The judge's decision was very thorough in their explanations of all of the many reasons that together led them to reject this settlement agreement as a benchmark, starting most fundamentally with the point that the flat fee agreement contained within the settlement was not what the religious broadcasters were proposing.

[01:05:20] Speaker 07:
Even their flat fee agreement had

[01:05:22] Speaker 07:
factual differences from the NPR agreement, setting aside the legal question of whether the judges could even set a rate that applies to a trade organization without strong economic data showing that we should actually differentiate on that basis.

[01:05:36] Speaker 07:
And with respect to their alternative of the per-play above a threshold rate, it required some very intricate

[01:05:49] Speaker 07:
extrapolations from the data that I'm happy to answer specific questions about, but I think it was well within the judge's discretion to say, we're not confident that the usage fees you're proposing are actually reflected in this flat fee agreement.

[01:06:05] Speaker 07:
And that alone is fatal to their case.

[01:06:17] Speaker 02:
Any other questions?

[01:06:19] Speaker 06:
No.

[01:06:20] Speaker 07:
If there are no further questions, we will wrestle the briefs.

[01:06:22] Speaker 07:
Thank you.

[01:06:22] Speaker 07:
Thank you.

[01:06:28] Speaker 01:
Ms.

[01:06:28] Speaker 01:
Ablin, we'll give you two minutes for rebuttal.

[01:06:37] Speaker 09:
Your Honor, first, the government did admit on page 85 of their brief, quote, that the rates are higher for our group than for NPR stations.

[01:06:46] Speaker 09:
And those are the rates.

[01:06:48] Speaker 09:
no matter how they are structured that we are seeking, whether it's by our threshold structure or by our lump sum structure.

[01:06:56] Speaker 00:
But regardless of what they said, if the record doesn't support it, if the record doesn't support that the NPR rates are lower, then your claim fails, correct?

[01:07:05] Speaker 09:
Well, I refer, Your Honor, to also to our opening brief, page 9, where we showed that the record evidence that came in was for the year 2018.

[01:07:16] Speaker 09:
And we showed that that group, that group that's above the threshold, is paying multiple times what NPR stations are overall.

[01:07:23] Speaker 00:
But if the record demonstrates that the board determined that the NPR agreement

[01:07:33] Speaker 00:
They didn't, they didn't find that MPR is taking a lower rate.

[01:07:37] Speaker 00:
Then.

[01:07:38] Speaker 00:
your claim fails, right?

[01:07:39] Speaker 09:
I don't think the board found that, Your Honor.

[01:07:44] Speaker 09:
The board found that our expert did not put in sufficient comparability testimony.

[01:07:50] Speaker 09:
Again, that conflicts with loads of precedent and that the adjustments were not, that we should have made adjustments to it that were not made.

[01:07:59] Speaker 00:
But if there's no finding that NPR is paying a lower rate than you, then you don't have anything to rely on to make your legal argument under RFRA.

[01:08:07] Speaker 09:
Well, your honor, the rates are public.

[01:08:10] Speaker 09:
The NPR rate you can easily calculate.

[01:08:13] Speaker 00:
It's extrapolated.

[01:08:14] Speaker 00:
It's an extrapolated rate from a lump sum.

[01:08:17] Speaker 00:
You've made it into a rate.

[01:08:18] Speaker 00:
And so if there's no factual support,

[01:08:21] Speaker 00:
for your assertion of what that rate is and that it's lower than what you're paying than your RFRA claim fails.

[01:08:28] Speaker 09:
Well, again, the rates and the agreements can be extrapolated or it's simple division.

[01:08:35] Speaker 09:
There's an average ATH rate that you can easily, you take two numbers and divide them.

[01:08:41] Speaker 00:
Should we be doing that as a court?

[01:08:44] Speaker 09:
Well, it's certainly in the record to do.

[01:08:46] Speaker 09:
The NPR agreement has price metrics, and from the price metrics, there's a per every hour of music rate.

[01:08:52] Speaker 09:
And if you compare that to what happens to our clients, they.

[01:08:55] Speaker 01:
Well, I think what Judge Penn is asking is, are you asking us to make a fact finding that the board did not?

[01:09:01] Speaker 09:
Well, Your Honor, the board didn't reach this point.

[01:09:04] Speaker 01:
So are you asking us to make a fact finding?

[01:09:07] Speaker 01:
You say it's there in the record, and basic math can do it.

[01:09:11] Speaker 01:
So you're asking us to make that fact finding.

[01:09:13] Speaker 01:
I think that's what you were talking about.

[01:09:15] Speaker 01:
Fact-finding, which is critical to determining whether or not you're being treated differentially, your clients.

[01:09:23] Speaker 09:
I wouldn't characterize it as a fact-finding, Your Honor.

[01:09:26] Speaker 09:
It's simply a... What else is math?

[01:09:28] Speaker 09:
It's the agreement itself has price metrics, and in that agreement, whether it's by a threshold structure which document... What would you call it if not a fact finding?

[01:09:41] Speaker 01:
It's just the price of the agreement.

[01:09:43] Speaker 01:
Is that a fact?

[01:09:45] Speaker 01:
That's a fact.

[01:09:46] Speaker 01:
But it's in the record.

[01:09:48] Speaker 09:
And again, the government admitted that NPR was paying more.

[01:09:52] Speaker 09:
We showed that NPR was, I'm sorry, that we were paying more.

[01:09:55] Speaker 09:
We showed that.

[01:09:56] Speaker 09:
The board didn't find that.

[01:10:02] Speaker 01:
Did the board find that?

[01:10:05] Speaker 09:
The board rejected, at a minimum, Your Honor, the case should be remanded because- My quick question, sorry.

[01:10:12] Speaker 01:
If you can just answer this question, I think it's a yes, here's the site, or it's a no.

[01:10:17] Speaker 01:
Did the board find that your clients, the members of your trade association, were going to be paying a higher rate?

[01:10:29] Speaker 01:
than those covered by the NPR agreement?

[01:10:33] Speaker 09:
I don't believe they said those words, but it's clear from the agreement what the effect of both of these structures are.

[01:10:41] Speaker 09:
And if I could just have one more half a minute to talk about the lack of substantial evidence.

[01:10:47] Speaker 09:
So regardless of what our proposal was and regardless of how the board treated that, it wholly lacked substantial evidence to support its own determination.

[01:10:57] Speaker 09:
It relied on only three components in finding that it would adopt sound exchange's rates, and that's at JA 1362 to 64.

[01:11:06] Speaker 09:
It was the Web 2 determination, which is old and based on NPR evidence, and the judges in this case have said at JA 1224 that each case is a de novo proceeding that needs a record.

[01:11:20] Speaker 09:
in that case, and that there's no a priori reason why rates from an earlier case, Web 4, for example, should resemble Web 5, it's a J81224.

[01:11:30] Speaker 09:
The other two, only other two components where they adopted reasoning were a solely seller-side testimony, Mr. Orszag,

[01:11:39] Speaker 09:
that he based his testimony only on seller evidence and also, incidentally, relied on- You need to wrap this up here.

[01:11:47] Speaker 01:
You're way over your time here, so you need to wrap up quickly.

[01:11:49] Speaker 09:
OK.

[01:11:50] Speaker 09:
He relied on settlements, and the board adopted that.

[01:11:53] Speaker 09:
So the board is acting arbitrarily by relying on settlements with respect to SoundExchange's case, but then throwing ours out and treating them very differently.

[01:12:03] Speaker 09:
Thank you.

[01:12:05] Speaker 01:
Thank you very much.

[01:12:06] Speaker 01:
Thank you.

[01:12:56] Speaker 05:
Good morning, your honor.

[01:12:57] Speaker 05:
Thank you, and may it please the court.

[01:12:59] Speaker 05:
I'm Matthew Hellman on behalf of Appellant Sound Exchange.

[01:13:03] Speaker 05:
This is a case where the underlying math may be complicated, but the critical legal error is straightforward.

[01:13:10] Speaker 05:
The CRB was obligated to set a royalty rate that a willing seller would accept.

[01:13:15] Speaker 05:
But no willing seller would accept a rate below its opportunity cost.

[01:13:20] Speaker 05:
No one would give up more to accept less.

[01:13:24] Speaker 05:
The government agrees that yet that's precisely what the CRB did here.

[01:13:28] Speaker 05:
It set a royalty rate of 2.1 tenths of a penny per streamed song, despite crediting evidence that every one of those streamed songs, everyone would cause record companies and artists to lose out on 2.22 tenths of a penny in royalties from other music services.

[01:13:46] Speaker 05:
In other words, the CRB set a rate below opportunity cost.

[01:13:50] Speaker 05:
a shortfall worth tens of millions of dollars over the rate term.

[01:13:54] Speaker 05:
And no welling seller would accept that.

[01:13:57] Speaker 05:
But the problem is worse than that, because the 2.22 opportunity cost figure itself is too low.

[01:14:03] Speaker 05:
The un-rebutted record shows that that is only a part of the record company's opportunity costs.

[01:14:10] Speaker 05:
The CRB simply forgot to address the rest of the opportunity cost evidence in this case.

[01:14:15] Speaker 05:
Second, the 2.22 figure is itself based on a faulty calculation.

[01:14:21] Speaker 05:
The CRB, nor any other party, disputed that the calculation was faulty.

[01:14:25] Speaker 05:
Instead, the CRB contended that the error wasn't identified in the record.

[01:14:29] Speaker 05:
But it was.

[01:14:30] Speaker 05:
It's right there on pages JA613 to 614.

[01:14:35] Speaker 05:
So what is the government saying in response?

[01:14:37] Speaker 01:
Well, can I ask a question?

[01:14:38] Speaker 01:
Please.

[01:14:41] Speaker 01:
The board here relied, the evidence you're talking about is all from the game theory modeling, but the board ultimately rested its decision on a benchmarking analysis and chose a benchmarking framework.

[01:14:54] Speaker 01:
So just, we're not doing the game theory stuff, we're doing benchmarking.

[01:14:59] Speaker 01:
And the board has, I think at least twice before, said that given the way benchmarking works,

[01:15:05] Speaker 01:
agreements that actually happened between willing sellers and willing buyers.

[01:15:08] Speaker 01:
Opportunity cost is already baked into any benchmarking analysis.

[01:15:14] Speaker 01:
Do you disagree with that proposition?

[01:15:18] Speaker 05:
I don't disagree that a board could take a path like that.

[01:15:24] Speaker 01:
Could take a path like what?

[01:15:26] Speaker 01:
What I said is the board has found that when we look at benchmarks, do benchmarking analysis,

[01:15:32] Speaker 01:
Opportunity cost is already baked into whatever the benchmark is that we choose is appropriate.

[01:15:37] Speaker 05:
Yes, that proposition, I'm not here to dispute that proposition.

[01:15:40] Speaker 01:
And you don't dispute it in this case either.

[01:15:42] Speaker 05:
We're not here to dispute that in this case.

[01:15:44] Speaker 05:
But that proposition does not decide this case because of the path that the board took here.

[01:15:49] Speaker 05:
The parties put in enormous amounts of evidence on opportunity cost, and the board spent a lot of time parsing through that evidence.

[01:15:58] Speaker 05:
And everyone here agrees that it would be error

[01:16:01] Speaker 05:
to set a rate, a willing seller rate below opportunity cost.

[01:16:05] Speaker 05:
What the board did not say, although I think my friends on the other side tried to re-characterize what it says, is that looking at all that opportunity cost evidence, the evidence of the part that they left out, the error that they said was not inside the record,

[01:16:19] Speaker 05:
When you look at all of that, we're comfortable that the benchmark rate is still appropriate.

[01:16:24] Speaker 05:
The board never made those kinds of findings.

[01:16:26] Speaker 05:
It never addressed it.

[01:16:27] Speaker 05:
It simply skipped over it.

[01:16:29] Speaker 05:
What the board did say after pages and pages of analysis was a page 200.

[01:16:34] Speaker 01:
I'm confused about this whole point.

[01:16:35] Speaker 01:
I know you got your things where they talked about the opportunity class as adjusted.

[01:16:40] Speaker 01:
But you said they didn't say that the benchmark in this case

[01:16:48] Speaker 01:
necessarily included opportunity costs?

[01:16:51] Speaker 01:
Just like you, I thought you said you agreed with that as a principle and you didn't challenge it here.

[01:16:54] Speaker 01:
Did you argue below that this benchmark that they used here was somehow deficient in that it didn't capture opportunity costs?

[01:17:05] Speaker 05:
Yes, Your Honor.

[01:17:06] Speaker 01:
You argued that this benchmark

[01:17:09] Speaker 01:
did not capture opportunity costs, even though you thought you just agreed with me that benchmarking analysis necessarily has faked into an opportunity cost and you weren't challenged at as a general principle or in this case.

[01:17:22] Speaker 05:
What we contended was, we were arguing for a higher rate, obviously, a higher ultimate rate.

[01:17:28] Speaker 05:
Of course.

[01:17:29] Speaker 05:
Not just the opportunity cost, but a higher ultimate rate.

[01:17:32] Speaker 05:
We contended, as the board has recognized as well in past proceedings, that a willing seller rate

[01:17:38] Speaker 05:
cannot be set a low opportunity cost.

[01:17:43] Speaker 05:
Of course.

[01:17:43] Speaker 05:
OK.

[01:17:44] Speaker 05:
Let me see if I can take you to the next step in what we presented.

[01:17:46] Speaker 05:
So we put in a lot of evidence on opportunity costs.

[01:17:49] Speaker 05:
So did our friends in the proceeding.

[01:17:51] Speaker 05:
And the board then, for reasons, because the board had relied on opportunity cost as a floor, I think is the word that the board used in prior proceedings, for setting a lower incelerate, the board purported to make a finding as to what that opportunity cost is.

[01:18:08] Speaker 05:
The board never said, despite that opportunity cost finding being x, or 0.222 on page 200 of the opinion, it never said, nonetheless, we accept this 2-1 number.

[01:18:24] Speaker 05:
Notwithstanding that, based on the principles that you're talking about, they simply didn't do the analysis.

[01:18:31] Speaker 05:
And they weren't consistent.

[01:18:32] Speaker 01:
Why do they need to do it if they've said in the past, and you haven't challenged that precedent, that a benchmark

[01:18:38] Speaker 01:
agreement necessarily captures opportunity costs.

[01:18:42] Speaker 01:
There was a lot of fighting about what the opportunity cost number was.

[01:18:45] Speaker 01:
And they said, here's a benchmark agreement.

[01:18:47] Speaker 01:
We're going to assume that the people that had an agreement there weren't silly.

[01:18:51] Speaker 01:
They didn't agree to something that didn't cover their opportunity cost.

[01:18:55] Speaker 01:
It's necessarily baked in.

[01:18:56] Speaker 01:
They've said that before.

[01:18:57] Speaker 01:
You haven't contested it.

[01:18:58] Speaker 01:
It's established.

[01:18:59] Speaker 01:
Why do they need to say it again?

[01:19:03] Speaker 05:
This all falls under the rubric of what we would call reason decision making.

[01:19:08] Speaker 05:
Having found that the opportunity cost in this case was .222,

[01:19:15] Speaker 05:
They are under an obligation to explain why they're setting a wrinkle of that opportunity.

[01:19:19] Speaker 01:
And so everything in your case hinges on whether the record establishes that the board conclusively found that the opportunity cost in this situation is 0.22.

[01:19:34] Speaker 01:
And so if there was a benchmark agreement that was less than that, that must have been the freakish benchmark agreement that didn't have baked into it opportunity cost?

[01:19:45] Speaker 01:
No, I don't think so.

[01:19:47] Speaker 01:
Okay, what am I missing in this step here?

[01:19:49] Speaker 01:
Because we got this benchmark agreement and we all agree that is going to have, that's where the number came from.

[01:19:54] Speaker 01:
They didn't commit an error when pulling the number out of that benchmark.

[01:19:59] Speaker 01:
And so they've got the benchmark.

[01:20:00] Speaker 01:
It had its number.

[01:20:01] Speaker 01:
And we agree that that would have had baked into it opportunity costs.

[01:20:06] Speaker 01:
And so this is where I'm getting confused.

[01:20:07] Speaker 01:
You're over here on the game theory number.

[01:20:10] Speaker 01:
And they're over here going, we're done with that.

[01:20:13] Speaker 01:
We're going with the benchmark route.

[01:20:15] Speaker 01:
Opportunity cost is already in there.

[01:20:18] Speaker 01:
We're done.

[01:20:19] Speaker 01:
What's wrong?

[01:20:20] Speaker 01:
What am I missing?

[01:20:21] Speaker 05:
With respect, what I think is absent from that account is it wasn't just us over there in opportunity cost land.

[01:20:28] Speaker 05:
The board attempted and purported to decide what the opportunity cost, the relevant opportunity cost in this case was.

[01:20:37] Speaker 01:
If the board had wanted to simply... Look, they might have said, under game theory, all this stuff has to be adjusted, and if it all got adjusted, here's what the number would be.

[01:20:48] Speaker 01:
But having done all this, we're not going with game theory approach here to setting the rates.

[01:20:53] Speaker 01:
We're doing a benchmark analysis.

[01:20:54] Speaker 01:
At which point, we don't need to separately find opportunity cost.

[01:20:59] Speaker 01:
There's no error there.

[01:21:01] Speaker 05:
Well, there is an error.

[01:21:04] Speaker 05:
I think the way you've laid it out, Hunter.

[01:21:07] Speaker 05:
There's a difference between the rate that game theory produces and the opportunity cost input that you use to ultimately calculate that rate.

[01:21:17] Speaker 05:
We're not here to say, our argument on appeal is not that they needed to adopt a game theory rate.

[01:21:23] Speaker 05:
That's not what we're here arguing about.

[01:21:25] Speaker 05:
But our argument is that in a world, sorry, in a determination where the board does address opportunity costs, as it has in the past, in S-Stars III and other determinations,

[01:21:40] Speaker 05:
it is irrational and it is arbitrary to say on the one hand it would be no loan seller would accept a rateable opportunity cost to find what that opportunity cost is not in an aside or in a frolic or a detour but in pages and pages.

[01:21:58] Speaker 01:
No one's saying frolic or detour.

[01:21:59] Speaker 01:
There's two methods of analysis and they did that one and then they said we're going having worked through that.

[01:22:05] Speaker 01:
We've had to do a lot of work on that.

[01:22:06] Speaker 01:
We're going with the benchmark.

[01:22:07] Speaker 01:
Is it your view that the benchmark that they adopted, which had the .0021 rate, that that benchmark was somehow fatally flawed and that that benchmark agreement did not reflect, in establishing that rate, did not cover the opportunity costs of those buyers and sellers?

[01:22:32] Speaker 01:
Is that your position?

[01:22:34] Speaker 05:
The benchmark agreement is what it is.

[01:22:36] Speaker 01:
No, no, no, no.

[01:22:37] Speaker 01:
I'm not asking you what it is.

[01:22:38] Speaker 01:
I'm asking you, so I think your position has to be, if you say we have to go look at this other opportunity cost number, it has to be that the benchmark they chose didn't already reflect opportunity costs.

[01:22:54] Speaker 01:
Don't you have to show that?

[01:22:56] Speaker 05:
I do understand the question.

[01:22:57] Speaker 05:
And the best answer I can give you is,

[01:23:00] Speaker 05:
to the extent that benchmark reflected opportunity cost entered into in the market with all sorts of adjustments, of course.

[01:23:08] Speaker 05:
The board also had in front of it other, in fact, other evidence of opportunity cost, most of which, a significant portion of which it forgot to address.

[01:23:18] Speaker 05:
And it is not reason decision making.

[01:23:21] Speaker 05:
Just have the principle that you shouldn't set below opportunity cost.

[01:23:23] Speaker 05:
I think we're all in agreement on that.

[01:23:25] Speaker 05:
And then to do the analysis halfway with doing a lot of analysis, taking you down to the 222 number, but then failing to address the other aspects of opportunity.

[01:23:37] Speaker 05:
It's not like the board said, you know what?

[01:23:40] Speaker 05:
That other aspect of opportunity cost, we're still comfortable with the benchmark rate.

[01:23:45] Speaker 05:
They never said that.

[01:23:46] Speaker 05:
They never addressed it.

[01:23:47] Speaker 05:
They never said that Professor Willig's pointing out of a further error in that number was wrong or not worthy of consideration next to the benchmark.

[01:23:57] Speaker 05:
They never considered it.

[01:23:58] Speaker 05:
And it's that kind of halfway.

[01:24:00] Speaker 00:
Can we go to the calculation of what you say is the opportunity cost?

[01:24:04] Speaker 00:
Because my review of that record is there were pages and pages where they started with Dr. Willig and then they made adjustments based on

[01:24:13] Speaker 00:
Dr. Shapiro.

[01:24:15] Speaker 00:
But it seemed to me, as I read through it all, that the board sort of enumerated a bunch of problems with Dr. Willick's testimony and said we can adjust some of them this way.

[01:24:26] Speaker 00:
And if we made the adjustments, the number would be this.

[01:24:29] Speaker 00:
But there were several problems they identified where there was no adjustment for them.

[01:24:33] Speaker 00:
And those were the complementary oligopoly effect discussed at JA 1312.

[01:24:39] Speaker 00:
and the opportunity benefits discussed at 1310 right and then the board said so.

[01:24:44] Speaker 00:
You know this is just a guide post this is not right the opportunity cost number because the number came up with did not account for these problems so in light of that.

[01:24:57] Speaker 00:
isn't that a weakness in your argument, because you're saying they definitively found the opportunity cost and set a rate that is below it, but they didn't definitively find an opportunity cost because there are two factors here that were not reflected in the number that you are pinning as the opportunity cost.

[01:25:14] Speaker 05:
Let me answer that question in two, possibly three parts.

[01:25:19] Speaker 05:
The first part is, just to go back to Judge Millett's point, this is the board attempting to do something but not getting it right, and that's the error that we're complaining about here.

[01:25:27] Speaker 05:
They thought this was important, and the adjustments that Judge Pan talks about aren't enough to save them.

[01:25:34] Speaker 05:
And now let me talk about those two adjustments.

[01:25:36] Speaker 05:
opportunity benefits.

[01:25:38] Speaker 05:
That is the concept that if there wasn't webcasting, fewer people might be listening to music.

[01:25:47] Speaker 05:
Therefore, with webcasting, more people will end up paying royalties to the webcasters.

[01:25:52] Speaker 05:
Perfectly sound point.

[01:25:53] Speaker 05:
We couldn't agree more.

[01:25:55] Speaker 05:
Our expert dealt with that in depth

[01:25:57] Speaker 05:
in his survey, which asked people if there was no webcasting, what would you do?

[01:26:02] Speaker 05:
You could say, I don't listen to music at all.

[01:26:04] Speaker 05:
You could say, I listen to FM radio.

[01:26:05] Speaker 05:
None of those provide royalties.

[01:26:07] Speaker 05:
All of that was taken into account.

[01:26:10] Speaker 05:
None of that was addressed by the board.

[01:26:13] Speaker 00:
Well, the board made some adjustments to the opportunity cost number, and you're telling us we have to take that number as the gospel.

[01:26:23] Speaker 00:
All I'm saying is that that number doesn't take into account other flaws that the board found, regardless of how they dealt with the flaws.

[01:26:33] Speaker 00:
This number that you're trying to rely on is not the relevant number if it doesn't account for flaws that the board identified.

[01:26:41] Speaker 00:
That means it's not the number that the board chose as the opportunity cost number.

[01:26:46] Speaker 00:
The true opportunity cost is reflected, as Judge Millett says, the one that's baked in to the rate that they ultimately chose.

[01:26:52] Speaker 00:
It's a different rate.

[01:26:54] Speaker 05:
Yes, your honor.

[01:26:55] Speaker 05:
But that sets up a question, which is, they came to a spot, and then did they have good reason to move further from that spot?

[01:27:05] Speaker 05:
You just gave two reasons that the board offered for doing that.

[01:27:08] Speaker 05:
If those reasons are irrational,

[01:27:10] Speaker 05:
not supported by the record.

[01:27:12] Speaker 05:
I mean, if they said they also failed to account for, excuse me, the price of motor vehicles, you know, something irrelevant, we'd all agree that's not a basis for moving down.

[01:27:21] Speaker 00:
But I think they just said that we don't have a way to adjust for these.

[01:27:25] Speaker 05:
They did say that, but if I could, if they said they didn't have a way to adjust for the price of motor vehicles, that still wouldn't make it a good basis for finding to go downward.

[01:27:35] Speaker 05:
And with respect to opportunity benefit,

[01:27:38] Speaker 05:
What I am saying to the court is the thing they are talking about is completely We agree with it and the evidence in the case addressed it and they did not and that's why it's an agency What about the complementary oligopoly point?

[01:27:53] Speaker 05:
Sure, complementary oligopoly point.

[01:27:55] Speaker 05:
The two points there, the points that my friends focus on

[01:28:01] Speaker 05:
has nothing to do with opportunity cost, the passages they discuss.

[01:28:05] Speaker 05:
We talk about this in our briefing.

[01:28:06] Speaker 01:
Look, here's what catches my eye.

[01:28:08] Speaker 01:
So just to cut to the chase here, all right?

[01:28:11] Speaker 01:
And this is in the public record 497, JA 497.

[01:28:16] Speaker 01:
Thus, because the royalty rates derived from Professor Willig's shapely value model, which obviously is where the opportunity cost came from as well, reflect complementary oligopoly power even as adjusted supra.

[01:28:29] Speaker 01:
So that's the Shapiro adjustment.

[01:28:31] Speaker 01:
They must be discounted to reflect effective competition.

[01:28:36] Speaker 01:
However, the judges find nothing in the record to estimate the value of an effective competition adjustment.

[01:28:42] Speaker 01:
All right, so it seems to me that that rather blows up your argument that they said even if adjusted, which is your .222 number, there's zeros in front of it.

[01:28:52] Speaker 01:
I don't want to repeat all that.

[01:28:54] Speaker 01:
Even as that, it's not good.

[01:28:56] Speaker 01:
We can't rely on it because you didn't take care of complementary oligopoly.

[01:29:01] Speaker 01:
Yes, they're here, they're talking about rates, but the rates necessarily,

[01:29:04] Speaker 01:
And so if the rate was too high, it had to go down more.

[01:29:10] Speaker 01:
And secondly, when you say they had no business going over here and going down in the benchmark analysis, it's begging the very question of whether they went down from opportunity cost.

[01:29:21] Speaker 01:
The buyers and sellers that were part of that benchmark agreement thought they were covering their opportunity costs.

[01:29:27] Speaker 01:
So I don't think you can make the down point when we don't have a basis here for finding a higher opportunity cost.

[01:29:34] Speaker 01:
And so it's a language on 497 I'd like you to address for me.

[01:29:37] Speaker 01:
Yes.

[01:29:38] Speaker 05:
So that's page 203 of the determination?

[01:29:40] Speaker 01:
I don't.

[01:29:41] Speaker 05:
That's what I have it as.

[01:29:43] Speaker 03:
Yes.

[01:29:44] Speaker 05:
Page 203 of the determination.

[01:29:46] Speaker 05:
Right.

[01:29:50] Speaker 05:
A couple of answers to that, Your Honor.

[01:29:53] Speaker 05:
Yes, that is what they say.

[01:29:54] Speaker 05:
And they say, even as adjusted, we need to go down further.

[01:29:57] Speaker 05:
That's correct.

[01:29:59] Speaker 01:
And we can't take it down further.

[01:30:00] Speaker 01:
There's nothing in the record that lets us take it down further.

[01:30:03] Speaker 01:
That's their next sentence.

[01:30:04] Speaker 05:
Yes.

[01:30:06] Speaker 05:
OK.

[01:30:07] Speaker 05:
So that is the frame that I think the court should be understanding this case.

[01:30:11] Speaker 05:
They came to 2-2, 2, and then they said this thing, which you're pointing to.

[01:30:15] Speaker 05:
The government doesn't actually emphasize this very much.

[01:30:17] Speaker 05:
But nonetheless, it is what they say now.

[01:30:21] Speaker 05:
It is not reasoned decision making to have come to the 222 number, given one reason which just simply is not substantial, and then to say what you're saying there.

[01:30:32] Speaker 05:
There's no quantification of this downward adjustment.

[01:30:35] Speaker 05:
There's no attempt to say how far below 222 it goes.

[01:30:39] Speaker 05:
But they say, nonetheless, we think something, there's like a tug down.

[01:30:43] Speaker 05:
All right.

[01:30:44] Speaker 05:
But there's hugs up, too, that they don't address.

[01:30:49] Speaker 01:
I understand you want to refight the record here, but here's your whole argument.

[01:30:53] Speaker 01:
I said it depends critically on a determination that the board found rock solid finding of an opportunity cost

[01:31:06] Speaker 01:
that was more than the benchmark rate.

[01:31:09] Speaker 01:
And there is no rock solid finding, you didn't even say any opportunity, you said Professor Willings as adjusted opportunity cost.

[01:31:18] Speaker 01:
There is no finding of a rock solid opportunity cost.

[01:31:23] Speaker 01:
This page says the opposite.

[01:31:25] Speaker 01:
Even as that adjusted number, which is the one your argument has relied on,

[01:31:30] Speaker 01:
It still can't work for us because of the oligopoly thing.

[01:31:33] Speaker 01:
And so you know what we're going to do?

[01:31:34] Speaker 01:
Tell me how this is not reason decision making.

[01:31:39] Speaker 01:
We've done this, and now we can't figure it out.

[01:31:41] Speaker 01:
We'll give it guidepost status, but we can't come up with an opportunity cost number through this game theory.

[01:31:48] Speaker 01:
on this record.

[01:31:49] Speaker 01:
We can't do it.

[01:31:50] Speaker 01:
The Willie Gwinn anyhow.

[01:31:51] Speaker 01:
That's the only one we're talking about.

[01:31:53] Speaker 01:
And so you know what we're going to do?

[01:31:54] Speaker 01:
We're going to go over here.

[01:31:54] Speaker 01:
We're going to do a benchmark.

[01:31:56] Speaker 01:
And benchmarks, everyone agrees, already have opportunity costs baked into them.

[01:32:00] Speaker 01:
And so we don't need to resolve that number.

[01:32:02] Speaker 01:
It's already baked in, done.

[01:32:05] Speaker 01:
What's unreasoned about that?

[01:32:06] Speaker 05:
What is unreasoned about that?

[01:32:09] Speaker 05:
I was struggling to think of a metaphor while you were laying it out because I do understand your point, Your Honor.

[01:32:13] Speaker 05:
But what is unreasoned about it is

[01:32:17] Speaker 05:
I hope you'll allow me to get this out.

[01:32:19] Speaker 05:
The 222, maybe it's not rock solid.

[01:32:23] Speaker 05:
Maybe it needs to go down further.

[01:32:25] Speaker 05:
Maybe there's some problem with it.

[01:32:27] Speaker 05:
That's what they say.

[01:32:28] Speaker 05:
We disagree with that, but I'm not here to be quibbling about that.

[01:32:33] Speaker 05:
But it's unreasoned to say,

[01:32:36] Speaker 05:
Let's just pretend for a moment that there was also record evidence that was under-budded that there was another 333 of opportunity cost in the record.

[01:32:44] Speaker 05:
Let's just say for the moment that was what the record showed.

[01:32:47] Speaker 05:
If the board failed to address that upward aspect of the opportunity cost,

[01:32:56] Speaker 05:
That would be unreasoned decision-making.

[01:32:58] Speaker 01:
Why?

[01:32:58] Speaker 05:
It would be unreasoned.

[01:32:59] Speaker 01:
They don't have to find the opportunity cost number.

[01:33:01] Speaker 01:
That's why they said we don't have to find it because the benchmark has already done it for us.

[01:33:06] Speaker 01:
What's unreasoned about that statement?

[01:33:08] Speaker 05:
It's unreasoned because they don't know how far down from the choo-choo-choo of this other.

[01:33:14] Speaker 01:
Doesn't matter.

[01:33:15] Speaker 01:
The benchmark has already solved the answer to the question for us.

[01:33:18] Speaker 01:
It's baked into the benchmark number, which you agree at the beginning of this argument.

[01:33:22] Speaker 06:
I don't think...

[01:33:25] Speaker 01:
That's where I'm getting, that's where my confusion is.

[01:33:29] Speaker 01:
I don't need to spend, we've spent hundreds of pages on this.

[01:33:32] Speaker 01:
We don't need to spend more.

[01:33:33] Speaker 01:
It's not working for us.

[01:33:35] Speaker 01:
You agreed.

[01:33:37] Speaker 01:
The board agrees.

[01:33:38] Speaker 01:
Benchmark covers opportunity cost.

[01:33:41] Speaker 01:
That's where we're going.

[01:33:42] Speaker 01:
Done.

[01:33:43] Speaker 01:
What's unreasoned?

[01:33:44] Speaker 05:
What is unreasoned is having attempted to determine opportunity cost, which they did,

[01:33:55] Speaker 05:
and then to say that they're comfortable just moving to the benchmark because of problem X with the opportunity cost analysis.

[01:34:03] Speaker 05:
X is a downward pull on the 2-2.

[01:34:06] Speaker 05:
The 2-2 is too high for some reason, for this reason that they didn't get it.

[01:34:10] Speaker 05:
Okay, let's just assume that that's correct, which again we dispute, let's just assume that's correct.

[01:34:15] Speaker 05:
It is unreasoned if that opportunity cost is actually significantly higher.

[01:34:19] Speaker 05:
We don't know what

[01:34:20] Speaker 05:
The government wants this court, I believe, to say the following, something along the following lines.

[01:34:25] Speaker 05:
It doesn't matter that they ignore the other upward evidence of opportunity cost, because they found this one, two, I think only one is serious here, one downward tug.

[01:34:37] Speaker 05:
But the board was justified in ignoring the rest.

[01:34:39] Speaker 01:
That might be if that's what they did, but instead, this is the part, I'm not hearing an answer from you.

[01:34:44] Speaker 01:
Sure.

[01:34:45] Speaker 01:
And that, because what they said is,

[01:34:47] Speaker 01:
I don't care how many up and down there are.

[01:34:49] Speaker 01:
We can't solve this thing.

[01:34:50] Speaker 01:
We spent hundreds of pages.

[01:34:51] Speaker 01:
We can't solve this thing.

[01:34:52] Speaker 01:
We can't get the number.

[01:34:54] Speaker 01:
But we have door number two here.

[01:34:57] Speaker 01:
And it gives us a rate that includes opportunity cost.

[01:35:01] Speaker 01:
No one disputes that it includes opportunity cost.

[01:35:04] Speaker 01:
So we're going with that.

[01:35:05] Speaker 01:
They're not failing to find opportunity cost.

[01:35:08] Speaker 01:
They're not ignoring up or down.

[01:35:10] Speaker 01:
They're saying, you know what?

[01:35:11] Speaker 01:
Let's let the market tell us what rate covers the opportunity cost.

[01:35:15] Speaker 01:
And we're going with that.

[01:35:16] Speaker 01:
What's unreasonable about that?

[01:35:17] Speaker 05:
What's unreasoned about that is, well, there's really two components to that, Your Honor.

[01:35:24] Speaker 05:
If somebody wants to argue that the 2-2 number that you get to after doing a lot of math with a lot of evidence is wrong,

[01:35:31] Speaker 05:
then you would expect them to come forward with some evidence quantifying, even attempting to quantify what the problem is.

[01:35:36] Speaker 05:
We don't know if this is a millimeter problem, a meter problem, or whatever problem.

[01:35:42] Speaker 05:
None of that's there.

[01:35:43] Speaker 05:
And even the government says it's an unquantified downward adjustment.

[01:35:46] Speaker 05:
What is quantified are the upward adjustments that the board ignores.

[01:35:51] Speaker 01:
So your position is the opportunity cost that was baked into the benchmark.

[01:35:54] Speaker 01:
I just need a yes or no.

[01:35:55] Speaker 05:
Yes.

[01:35:56] Speaker 01:
That the opportunity cost that was baked into the benchmark they chose

[01:36:02] Speaker 01:
was not the true opportunity cost?

[01:36:05] Speaker 01:
That benchmark did not incorporate opportunity cost.

[01:36:09] Speaker 05:
Because we're here on APA review, this is my answer to your question.

[01:36:14] Speaker 05:
It was error for the board to go where it did on the 2-2 and then say, ultimately, we don't need to use this because it goes down anyway, and we can use the 2-1 without looking at the things that bring it back up.

[01:36:29] Speaker 01:
I still need my answer about the benchmark.

[01:36:33] Speaker 01:
The benchmark rate that they chose.

[01:36:37] Speaker 01:
Did it or did it not cover opportunity cost?

[01:36:40] Speaker 05:
It did not cover opportunity costs as the record showed in this case.

[01:36:44] Speaker 01:
Okay, and so when you said at the beginning you agree that benchmarks automatically have opportunity costs baked into them, and you weren't disputing that in general or in this case, that's wrong.

[01:36:56] Speaker 01:
You are now arguing, and I did not see this in your brief.

[01:36:59] Speaker 01:
I didn't see any attacks on their benchmark analysis, but it sounds like your argument now is that there's something wrong about that benchmark that it did not cover opportunity costs.

[01:37:09] Speaker 01:
Is that where we end up?

[01:37:13] Speaker 05:
Yes, although I think this is the central argument of our brief.

[01:37:16] Speaker 05:
If you want to say, Your Honor, that the benchmarking analysis has some sort of opportunity cost aspect baked into it, that's not what the board said, but let's just go with that for the moment.

[01:37:29] Speaker 05:
There is other evidence of opportunity cost in the case, higher, significant evidence of opportunity cost.

[01:37:36] Speaker 05:
It is a failure to engage in reason decision making to explain why that other evidence isn't the evidence you go with.

[01:37:44] Speaker 05:
If the board had said sort of what you're saying, which is there's a lot of stuff out there, there's this, there's this, there's this, but ultimately we can't rely on it because we don't understand what it is, these pieces of evidence, the part that they left out, and we're going with something else as a superior measure of opportunity cost,

[01:38:01] Speaker 05:
I probably wouldn't be up here, or at least my argument would be very different.

[01:38:05] Speaker 05:
But when you have, let's just accept for the moment, multiple addition of opportunity cost, and you're going to pick one.

[01:38:14] Speaker 05:
And again, that isn't really how the board put it, but let's again just say that that's what they said.

[01:38:18] Speaker 05:
If you're going to pick one, you have to look at everything.

[01:38:21] Speaker 05:
You can't do the analysis halfway.

[01:38:23] Speaker 05:
And that's what the board did here.

[01:38:25] Speaker 05:
And I don't hear my friends on the other side to say, no, they did, in fact, consider the other parts of opportunity cost, or the board did reject on the merits the errors that we pointed out.

[01:38:35] Speaker 05:
All we are asking for is that if they're going to do an opportunity cost analysis, they do it completely, and not only look at some of the evidence, but all of the evidence.

[01:38:44] Speaker 05:
And that's why it is not reason decision making and why

[01:38:49] Speaker 05:
reported decision to adopt the benchmark as sufficient evidence of opportunity costs is a reason decision because you got to compare it to something and you didn't compare it to the whole record.

[01:38:59] Speaker 02:
Thank you very much.

[01:39:02] Speaker 05:
Thank you.

[01:39:18] Speaker 07:
Good morning, Your Honors.

[01:39:19] Speaker 07:
Jennifer Utrecht, once again.

[01:39:21] Speaker 07:
I think it's important to start by emphasizing what the only issue on appeal that subject change has raised is.

[01:39:28] Speaker 07:
And no one disputes that the rate the judges picked was based on a benchmark model and not on a game theory model.

[01:39:36] Speaker 07:
No one disputes that opportunity costs are baked into benchmarks because real world actors are presumed to make rational decisions when they're agreeing to these licenses.

[01:39:47] Speaker 07:
nor has SoundExchange actually directly challenged the benchmark that the judges rely upon.

[01:39:53] Speaker 07:
So at the bottom, the only argument that SoundExchange has made in this appeal is premised on the fact that in SoundExchange's view, the judges made a factual finding about opportunity costs that was ultimately inconsistent with the rate they derived from the benchmark.

[01:40:08] Speaker 07:
There's no finding in this record.

[01:40:10] Speaker 07:
As our brief explains, the judges

[01:40:13] Speaker 07:
analyzed the game theory evidence and the game theory models that SoundExchange presented, identified multiple problems with the opportunity cost calculations within that model.

[01:40:23] Speaker 07:
And the only sentence in that lengthy decision that SoundExchange quotes in this court is a sentence that says the judges accept an adjustment by one expert, but that doesn't account for the various other problems with the opportunity cost adjustments.

[01:40:41] Speaker 07:
And once we accept that, there is no finding, then the rest of sound exchange's argument falls apart.

[01:40:46] Speaker 07:
Because there's no factual finding about opportunity costs, there is no argument that this is arbitrary and capricious.

[01:40:53] Speaker 07:
There's one other thing that I would like to mention, which is that there's sort of a new flavor of argument that was raised today at the podium, which is a

[01:41:03] Speaker 07:
Sound exchange suggests that perhaps the judges should have accepted that .22 instead of relying on the benchmark.

[01:41:10] Speaker 07:
But that's not an argument that was raised at the opening grief.

[01:41:14] Speaker 07:
And I don't think it's necessary for this court to address that because this is not the actual argument that they have made for this court.

[01:41:22] Speaker 07:
And also, again, to actually make that argument, they would have to show that the benchmark on which the judges rely

[01:41:30] Speaker 07:
was somehow not adequately addressing for opportunity costs that are understood to be baked in.

[01:41:35] Speaker 07:
For all those reasons, we don't think that there's any reason to doubt the judge's decision as to his part of the appeal.

[01:41:42] Speaker 07:
And we would ask that you affirm.

[01:41:44] Speaker 07:
I'm happy to answer specific questions as to that.

[01:41:47] Speaker 07:
But otherwise, we would rest on our briefs.

[01:41:54] Speaker 07:
Any questions?

[01:41:54] Speaker 07:
Thank you, Your Honor.

[01:42:23] Speaker 04:
Hello, Your Honours.

[01:42:24] Speaker 04:
I'm David Matterham for Intervener at Google.

[01:42:27] Speaker 04:
So I want to use my time today to emphasize two points.

[01:42:30] Speaker 04:
The first is drawing on something that it seems everyone agrees on, which is that the board here ultimately relied on a benchmarking approach.

[01:42:37] Speaker 04:
Benchmarking necessarily bakes in opportunity costs as the board is found in two other decisions.

[01:42:42] Speaker 04:
Here, one point I want to add is that what the board had to do was decide what is a rate a willing buyer willing seller would find an effectively competitive market.

[01:42:51] Speaker 04:
The board didn't have to find what opportunity cost was just had to find what satisfied the willing buyer willing seller standard, and it decided that the.

[01:42:57] Speaker 04:
and the benchmarking analysis of Google's expert, Dr. Peterson, satisfied that standard.

[01:43:02] Speaker 04:
I think that alone is enough to reject sound exchange's appeal here, but I'd like to also emphasize just two reasons on merits why the sound exchange's appeal fails that are just a little different than some of the reasons the government emphasized.

[01:43:14] Speaker 04:
So Sound Exchange, as they've set up their argument, has concerned the board's determination as just rejecting, or sorry, as just applying the complementary oligopoly power of the record labels at sort of the end point, at the output point of Dr. Willig's model.

[01:43:29] Speaker 04:
And they say that the issue here is that they should have, they didn't make any findings about how this applies to the input point when you look at opportunity costs.

[01:43:36] Speaker 04:
And that's just wrong.

[01:43:37] Speaker 04:
And Judge Pan, I think when you asked some questions to the government's attorney, you really honed in under the two pages where the,

[01:43:42] Speaker 04:
which is JA 1310 and JA 1312, and this is when the board is discussing the Fork in the Road approach.

[01:43:49] Speaker 04:
And I realize that this terminology maybe is an obvious to a reader about what it means, but Fork in the Road is the term that Dr. Woodley used to describe a choice for whether he should adjust his opportunity cost model to account for the complementary oligopoly power of the record labels in the interactive streaming market.

[01:44:07] Speaker 04:
And to sort of unpack this,

[01:44:09] Speaker 04:
What Dr. Lillig was doing was saying, okay, well, if you make a non-interactive screening service, what's the cost because it would sort of divert away streams from the interactive market?

[01:44:19] Speaker 04:
And Dr. Lillig said that, okay, we're just going to accept the rates in the non-interactive market as they come and not make any adjustments to account for the fact that the rates in that market are inflated by the relatively most complementary oligopoly power, which is something the board has found in a number of cases and something that this court also talked about in the Johnson decision from a couple years ago.

[01:44:37] Speaker 04:
And so Dr. Lake said, no, I'm not going to make other judgments.

[01:44:40] Speaker 04:
And the board squarely rejected that when it said that his

[01:44:43] Speaker 04:
his work-in-the-road approach fails to account for the complementary oligopoly power.

[01:44:48] Speaker 04:
And this is just about opportunity costs.

[01:44:50] Speaker 04:
It's not about the surplus value.

[01:44:51] Speaker 04:
In some exchange, I think it speaks volumes, doesn't address these pages at all in its opening brief or its reply brief, even though it's discussed extensively in our brief intervention.

[01:44:59] Speaker 04:
And I think just to sort of add to that, the board confirms this in footnote 279, where it also says that, hey, in addition to the problems we're discussing here about surplus value,

[01:45:09] Speaker 04:
The board has, sorry, Dr. Lilley has failed to consider the opportunity cost problem because appropriate approach is invalid.

[01:45:19] Speaker 02:
Any questions?

[01:45:20] Speaker 02:
No.

[01:45:21] Speaker 02:
Thank you very much.

[01:45:21] Speaker 04:
Thank you, Your Honor.

[01:45:25] Speaker 02:
Mr. Hellman, we'll give you two minutes for rebuttal.

[01:45:32] Speaker 05:
I'll be brief.

[01:45:34] Speaker 05:
I think there's just two points that I want to try to get across in my time here.

[01:45:39] Speaker 05:
On this concept of whether or not the benchmark agreements capture opportunity cost, I just want to be sure that we're all, I'm being responsive to your questions and being accurate about this.

[01:45:51] Speaker 05:
Yes, real agreements do necessarily capture opportunity cost, otherwise nobody would enter into those agreements.

[01:45:59] Speaker 05:
But of course, those agreements set a rate of which the opportunity cost might be.

[01:46:03] Speaker 05:
Less than.

[01:46:04] Speaker 05:
Less than, right?

[01:46:05] Speaker 01:
Necessarily less than.

[01:46:07] Speaker 05:
Less than or equal to, correct.

[01:46:09] Speaker 05:
So, but when you're doing a benchmark analysis to set rates in this proceeding, you take the rate over here and then you try to figure out, well, what do we need to do to adjust it to be a worthy rate over here?

[01:46:22] Speaker 05:
You're not adjusting for opportunity cost.

[01:46:25] Speaker 05:
You're adjusting the rate based on all the different features of the market, the functionality of this service versus that service.

[01:46:34] Speaker 05:
Opportunity cost isn't what you're solving for in that area.

[01:46:37] Speaker 05:
You're just trying to figure out what the rate is based on the difference between the benchmark market and the market that you're solving for.

[01:46:44] Speaker 05:
So opportunity cost doesn't carry over in some even way.

[01:46:49] Speaker 05:
The evidence of opportunity cost in this market

[01:46:52] Speaker 05:
was what Professor Wood put in, what Professor Shapiro commented on, and what the board parsed.

[01:47:00] Speaker 05:
So you can't.

[01:47:01] Speaker 01:
You submitted a benchmark analysis as well to the board, correct?

[01:47:05] Speaker 01:
We did submit a benchmark analysis.

[01:47:07] Speaker 01:
And did you tell the board that you can't just adopt this benchmark?

[01:47:12] Speaker 01:
You can't do that.

[01:47:12] Speaker 01:
That would be unreasoned decision making, because you're going to make some adjustments.

[01:47:16] Speaker 01:
And so you're going to have to make a finding on opportunity cost.

[01:47:20] Speaker 05:
our benchmark exceeds the opportunity.

[01:47:24] Speaker 01:
Well, you said there's ups and downs.

[01:47:25] Speaker 01:
There's ups and downs that weren't determined.

[01:47:27] Speaker 01:
That's what you said.

[01:47:27] Speaker 01:
There was some downward pressure.

[01:47:28] Speaker 01:
There was upward pressure.

[01:47:29] Speaker 01:
And that wasn't determined by the board.

[01:47:32] Speaker 01:
Okay?

[01:47:32] Speaker 01:
So we don't know.

[01:47:33] Speaker 01:
No.

[01:47:34] Speaker 01:
We don't know what the final number is.

[01:47:36] Speaker 01:
They were arguing down.

[01:47:37] Speaker 01:
You said, well, there's some ups.

[01:47:38] Speaker 01:
We don't know what that difference was.

[01:47:40] Speaker 01:
So did you tell the board, here's our benchmark, but you will also separately have to find, through game theory, the opportunity cost before you can adopt our benchmark?

[01:47:50] Speaker 01:
Because you're going to make adjustments to our benchmark.

[01:47:52] Speaker 01:
Did you tell the board that?

[01:47:55] Speaker 05:
Yes, because what we said were... Okay, where did you tell them that?

[01:47:59] Speaker 05:
Well, these are the things we said to the board, which I think are telling them that.

[01:48:02] Speaker 05:
Obviously, you can assess.

[01:48:05] Speaker 05:
One, we had our benchmark.

[01:48:07] Speaker 05:
Two, we had our opportunity cost estimate.

[01:48:09] Speaker 05:
And three, we took the position that a willing seller would not pay below opportunity cost.

[01:48:14] Speaker 01:
I don't... So you told them they could not adopt a benchmark without first solving the math problem over here under game theory.

[01:48:20] Speaker 01:
They could not simply do a benchmark analysis.

[01:48:23] Speaker 01:
You have to do both.

[01:48:24] Speaker 01:
You have to get opportunity cost and the only way to get, this is the premise of your position, the only way to get the accurate opportunity cost is going through the game theory process because the benchmark itself isn't reliable because you're going to make adjustments to it and oops, you might get below opportunity cost.

[01:48:44] Speaker 01:
That's your argument.

[01:48:45] Speaker 01:
Am I understanding that correctly?

[01:48:48] Speaker 05:
Well, what we said was... No, no.

[01:48:51] Speaker 05:
Tell me what.

[01:48:52] Speaker 01:
I think you're saying it correctly, but... You can't do benchmark itself, because you submitted benchmark and one knows they're going to noodle with it, right?

[01:48:58] Speaker 01:
Right.

[01:48:59] Speaker 05:
Well, you can... If you accept what we said was, here's our evidence of opportunity cost.

[01:49:09] Speaker 05:
It's here.

[01:49:10] Speaker 05:
You should reject any benchmark that results in a rate below that opportunity cost.

[01:49:15] Speaker 05:
You should accept our benchmark analysis, because one of the things it has going forward in its favor is that it exceeds the opportunity cost number.

[01:49:22] Speaker 05:
So that was our position to the board, which I think, again, isn't really disputed here.

[01:49:28] Speaker 05:
The only question is, is this a rate below opportunity cost?

[01:49:30] Speaker 01:
What was the rate in your benchmark?

[01:49:36] Speaker 05:
Your Honor, I'm going to have to.

[01:49:38] Speaker 02:
Was it 0023?

[01:49:41] Speaker 05:
I think we started with a three.

[01:49:44] Speaker 05:
Where there was a two, we were a tenth higher.

[01:49:47] Speaker 05:
So we were significantly higher, Your Honor.

[01:49:49] Speaker 05:
And that's all the piece, and that was our submission to the board.

[01:49:53] Speaker 01:
So the board's error here was it had to finish the game theory job before it could pick a benchmark.

[01:49:59] Speaker 01:
The game theory job that I'm referring to is find the opportunity cost through the record created through the game theory models.

[01:50:08] Speaker 05:
The board's error here was, to the extent you read the board as saying something to the effect of, we're comfortable with this benchmark rate because it doesn't violate the principle that opportunity costs, the rate needs to be set at opportunity cost or higher.

[01:50:25] Speaker 05:
To the extent you read that as what they're saying, which is not what they say, but to the extent that's what you read them saying,

[01:50:31] Speaker 05:
that is unreasoned because they ignored opportunity cost evidence.

[01:50:38] Speaker 05:
And again, my friends aren't disputing that they ignored it, they're just saying it's okay for them to have ignored it.

[01:50:43] Speaker 05:
And it isn't okay for them to ignore it because how can you say something satisficing numerical test when you don't know what the number is?

[01:50:53] Speaker 05:
And that is the proposition that

[01:50:56] Speaker 05:
my friends on the other side are saying it's okay for that to be the case.

[01:51:00] Speaker 05:
And that's basic, that is unreasonable decision making.

[01:51:04] Speaker 01:
All right.

[01:51:06] Speaker 01:
Thank you very much to all the attorneys.

[01:51:07] Speaker 01:
We appreciate all the hard work and thought into the briefing and oral arguments.

[01:51:11] Speaker 01:
The case is submitted.