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Recently, the U.S. Register of Copyrights, Marybeth Peters, addressed a “novel question of law” under �802(f)(1)(B) of the Copyright Act: Are ringtones-those ubiquitous musical snippets announcing an incoming phone call – “digital phonorecord deliveries (DPDs),” under the act, subject to compulsory licensing? In a decision with far-reaching implications, she answered: Yes. 1 Ringtones are big business. In 2005, U.S. ringtone sales reached $500 million, and the Wall Street Journal estimates 2006 sales will top $600 million. M:Metrics, a mobile industry researcher, reports over 10 percent of Americans have purchased ringtones. Record labels have gotten into the act, offering ringtones utilizing snippets of original recordings. Billboard reports that over 6.5 million “mastertones” are sold each week in the United States and, in May 2005, a ringtone-the “Crazy Frog” rendition of the “Beverly Hills Cop” movie theme-beat rock group Coldplay to the top of the U.K. singles charts. Billboard has published a Hot Ringtones chart since late 2004 and recently, rapper Chamillionare notched the first RIAA “triple-platinum” award with 3 million sales. What Is a Ringtone? “Ringtones” are downloadable digital files transferred to and permanently stored in the memory of a cellular phone that sound with an incoming call. Ringtones can be set to trigger with specific callers, and may consist of spoken words, electronic sounds or video segments, in addition to musical excerpts. Each ringtone is transmitted as a compressed digital file to the cell phone. “First generation” ringtones were “monophonic” files embodying single note melodies. Improved handset technology has now enabled transfer, storage and replay of larger digital files, resulting in increased sales of “polyphonic” ringtones (harmonically complex melodies) and so-called “mastertones,” “realtones” or “ringtunes” (containing sound recording excerpts). Polyphonic tones and mastertones typically retail between $1.99 to $2.99 per track. Monophonics cost less. Many ringtones include a segment of a musical work, which must be licensed for use. Most such licenses have been “voluntary” licenses between the ringtone providers and the publishers of the musical work, generally providing for publishing royalties equal to the greater of 10 percent of the retail price or 10 cents. For a $2.99 mastertone, this means publisher royalties of 30 cents per ringtone. The register’s decision means publisher royalties may be reduced to 9.1 cents-the current compulsory license fee-a huge victory for ringtone providers and economic loss for publishers. Copyright Rights, �115 Among the �106 exclusive copyright rights 2implicated by the sale and exploitation of ringtones are the rights to reproduce and distribute the underlying musical work embodied in the ringtone -the so-called “mechanical right.” For CD sales, mechanical licensing is done by way of voluntary licenses issued by publishers (or their agent, The Harry Fox Agency (HFA)) to record labels. These licenses authorize the reproduction of the musical work in the form of “phonorecords” and their distribution for sale in the United States. This occurs, however, against the backdrop of the compulsory license provisions of �115 of the act. Section 115 provides an exception to the �106 rule that reproduction and distribution rights are exclusive, allowing that: [w]hen phonorecords of a non-dramatic musical work have been distributed to the public in the United States under authority of the copyright owner, any other person . . . may, by complying with the provisions of this section, obtain a compulsory license to make and distribute phonorecords of the work. Those “provisions” are (i) compliance with the licensing formalities set forth in 37 CFR ��201.18 and 19 and (ii) payment of the compulsory licensing fee set forth in 37 CFR �255.3-currently the greater of 9.1 cents per song or 1.75 cents per minute. Section 115 of the act was amended in 1995 by the Digital Performing Right in Sound Recordings Act (DPRSRA). 3DPRSRA expanded the definition of “phonorecords” to include “digital phonorecord deliveries” or “DPDs.” This change made clear the �115 compulsory license extends beyond physical media (like CDs) to digital files used to store, transmit or distribute sound recordings (like mp3 files). DPRSRA defined a “digital phonorecord delivery” as any “individual delivery of a phonorecord by digital transmission of a sound recording which results in a specifically identifiable reproduction by or for any transmission recipient . . . .” 4Neither the act nor subsequent regulations have further defined “DPDs,” though the act suggests there may be different species of DPDs, including “incidental” DPDs. 5 By agreement between the record companies and publishers, subsequently enshrined in 37 CFR �255.5(b), the rate for DPDs currently remains the same as the rate payable for traditional phonorecords. The compulsory licensing rate has increased over time, from the 2 cents per song originally set in 1909 (where it stayed for 69 years) to the current rate of 9.1 cents (representing the last of the statutorily prescribed increases). In 2004 Congress enacted the Copyright Royalty and Distribution Reform Act (PL 108-419), commonly referred to as the “CARP Reform Act.” Sections 803(b)(1) and 804(b) of the CARP Reform Act mandated that there be a new rate proceeding to adjust the �115 compulsory rate, which was to commence in January 2006. The CARP Reform Act also provided for copyright royalty judges to certify to the register of copyrights “novel material questions of law,” 6and required that a decision be rendered within 30 days after briefing. Following the “notice of commencement” issued in January 2006, the Recording Industry Association of America (RIAA)-the trade organization for the record labels-gave notice of its election to participate in the rate proceeding. The RIAA subsequently requested the copyright royalty judges to certify two questions to the register of copyrights, pursuant to its rule-making authority for “novel questions.” � First, does a ringtone constitute a digital phonorecord delivery under �115? � Second, if so, what are the legal conditions and limits to statutory licensing? The RIAA filed a brief, as did HFA, the Songwriters Guild of America and the Nashville Songwriters Association International in opposition (collectively, the copyright owners). Applicability of �115 The register first decided that ringtones are in fact “digital phonorecord deliveries” and are therefore subject to �115 of the act. The register characterized the question as “one of pure statutory construction” and found: 1) Ringtones are sound recordings, resulting from “fixation[s] of a series of musical, spoken, or other sounds,” 7 2) The fixation in a digital file constitutes a “phonorecord,” and 3) Digital delivery of the ringtone creates a “specifically identifiable reproduction.” 8 Ringtones thus satisfy the definitional criteria for a DPD set out in �115, which is consistent with congressional intent to extend compulsory licensing to “new technologies.” 9 The register cautioned, however, that not all ringtones are categorically DPDs. The determination hinges upon whether the ringtone is a mere extract, or if it includes additional material sufficient to create a derivative work. Derivative Works The copyright owners argued that �115 does not extend to derivative works and that the truncation and excerpting necessary to create a ringtone resulted in a “recast[ing], transform[ation] or adapt[ation]” of the composition, rendering the ringtone a “ derivative work” under the act. 10 The register disagreed, holding that the mere editing of the musical work to create a ringtone did not create a derivative work, because it lacked the requisite “originality and creativity” under Feist.For ringtones that are mere excerpts of compositions, “the creative spark is utterly lacking or so trivial as to be virtually nonexistent.” 11However, the register noted that for those ringtones containing the requisite quantum of new or original material, compulsory licensing is not available, and she reserved as to those marginal cases where only limited additions were made. Arrangement Privilege The copyright owners also challenged the application of �115 on the basis the creation of the ringtone transcends the “arrangement privilege” under �115. Section 115 permits a licensee to arrange the original composition to “conform it to the style or manner of interpretation of the performance involved, but the arrangement shall not change the basic melody or fundamental character of the work . . . .” 12The copyright owners argued that ringtones were impermissible changes to the “fundamental character” of a composition. The register disagreed, observing that: 1) the user’s right to arrange was limited so as to preserve the basic character of the work; 2) ringtones that merely shorten the work to conform to the physical limits of cell phones are not arrangements; and 3) mastertones that make only minor changes are merely renditions, not arrangements, of the composition. The register determined that edits that shorten a ringtone or change tempo do not change the basic melody or fundamental character of the work. Private Use Next, the copyright owners argued that �115 requires that distributions of phonorecords be for “for private use,” and ringtones involve “public uses” because users (i) intend the ringtone to “publicly” sound, and (ii) use ringtones to publicly express themselves. The register rejected those arguments, holding that “private use” is not the opposite of “public performance” and noting this requirement is directed to individual consumers’ personal enjoyment. She noted that the law would be compromised if any use of a work in public voided the compulsory license, e.g., listening to a CD in a park or listening to a car radio. The register concluded that because ringtones are distributed to individuals for their individual use, 13the “private purpose” requirement of �115 was satisfied. Despite any “public” expression, the use was fundamentally a “private” one. First Use Copyright owners finally argued that �115 was inapposite because there was no prior “first use” of the ringtone, a condition of compulsory licensing. The register found that the “first use” requirement typically was satisfied by the prior authorized distribution of the original recording embodying the musical work. The register noted that a “first use” license would only be required where a sufficiently original version of the song -in other words, a derivative work -was created and no prior copy had been distributed to the public. Implications of the Decision The most important implication is the immediate financial one-ringtone licensing payments are likely to decrease, now that ringtones are subject to compulsory licensing. Mastertone providers that were previously paying 30 cents per ringtone may now pay 9.1 cents per ringtone. The register’s decision on the derivative works issue provides a “bright line rule” that should result in more certainty. Most ringtones clearly will fall either within or outside the compulsory license on the basis of the addition of new material or not. The language deciding the “public/private” nature of ringtones may have a significant impact on the issue of whether ringtones implicate “public performance” rights. Publishers and their collection societies-ASCAP, BMI and SESAC-have insisted on collecting public performance license royalties from ringtone purveyors. The register’s opinion-in determining ringtones involve “private” rather than “public” use-suggests that public performance licensing fees also may be subject to challenge. If no public performance right is implicated by ringtones, the total royalty cost to ringtone providers (and the royalties accruing to publishers) will be further reduced. As to potential appeal, we note the register-an agent of the Executive Branch-addressed the scope of a federal statute, traditionally the purview of Article III judges. But federal courts generally review agency determinations under a deferential “arbitrary and capricious” standard to determine if the ruling runs counter to congressional intent. 14Thus, any appeal likely will face an uphill fight. DPRSRA does not appear to permit interlocutory appeals. The copyright register’s decision will be incorporated in the rate-decision rendered by the Copyright Royalty Board, 15and any challenge thus will be limited to the 30-day period following publication in the Federal Register. 16 Finally, this decision may open the door to compulsory licensing for other uses of musical snippets-doorbells, clocks, car alarms, and other products. Further expansion of the compulsory license may affect other areas in which voluntary, rather than compulsory, licensing has been the rule for publishers. Joseph Salvo is of counsel to Weil Gotshal & Manges, having previously served as vice president of the law department of Sony BMG Music Entertainment.Campbell Austin is an associate at the firm. Endnotes: 1. Register of Copyrights Op. In the Matter of Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, No. RF 2006-1 (Oct. 17, 2006), available at http://www.copyright.gov/docs/ringtone-decision.pdf (hereinafter “Op”). 2. 17 USC �106. 3. Public Law 104-39, 109 Stat. 336. 4. Streamed transmissions are not DPDs because there is no specifically identifiable reproduction that results. 5. See 17 USC �115(c)(3)(C). 6. 17 USC �802 (f)(1)(B) 7. 17 USC �101 8. Op. at 10. 9. Op. at 11. See H.R. Rep. No. 60-2222, at 7 (1909) 10. See definition of “derivative work,” 17 USC �101. 11. Op at 18, citing Feist Publications, Inc., v. Rural Telephone Service Corp.,499 US 340 (1991) 12. 17 USC �115(a)(2) 13. H.R. Rep. No. 94-1476, at 108 (1976)(“the compulsory license does not extend to manufacturers of phonorecords that are intended primarily for commercial use” as distinguished from individual private use). 14. See United States v. Mead Corp. , 533 US 218, 226-27 (2001) (“[Whether] Congress delegated authority to the agency generally to make rules carrying the force of law . . . may be shown in a variety of ways, as by an agency’s power to engage in adjudication or notice-and-comment rulemaking.”). 15. 17 USC �802(f)(1)(B)(i) 16. 17 USC �803(d)(1)

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