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It sounded so good on paper. Eliminate a wasteful government agency where squabbling bureaucrats admitted they didn’t have enough work to do. Turn to the private sector to deliver economical, high-quality results. That was the promise from Congress 10 years ago when it abolished the Copyright Royalty Tribunal, assigning its quasi-judicial task of setting licensing rates and distributing billions in royalties to panels of highly paid private arbitrators. The result? A massive disappointment. That’s the message from copyright owners, licensees, lawyers, and even Register of Copyrights Marybeth Peters, all of whom are urging Congress to fix the royalty process once and for all. “The system is broken. Everyone agrees it’s broken,” says Michael Remington, a D.C.-based partner at Drinker, Biddle & Reath who represents Broadcast Music Inc. What’s less clear, though, is how to repair it. Rep. Lamar Smith, R-Texas, who chairs the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, recently introduced legislation that would abolish the current system, known as the Copyright Arbitration Royalty Panel, or CARP. In its place, the librarian of Congress would appoint a single copyright royalty judge, who would serve a five-year term, and two full-time staff assistants. Insiders say the bill, which should move to mark-up in the next several weeks, has a good chance of passing in the House, where it has the backing of Judiciary Chairman James Sensenbrenner Jr., R-Wis. Its prospects in the Senate are less certain, though many of the major copyright owners and licensees have vowed to lobby for its passage. Copyright Office head Peters praised the draft legislation in testimony before the House subcommittee earlier this month, noting that it would “reduce costs, promote stability and the administrative efficiency of the copyright royalty distribution and rate adjustment system.” The royalties at issue — more than $100 million each year — are primarily paid by cable operators for retransmitting television and radio broadcasts, by satellite carriers for retransmitting “superstation” and network signals, and for some digital audio recording products, including the broadcast of music over the Internet, or Webcasting. The money is collected by the Copyright Office and paid out to copyright owners in the motion picture industry, professional and collegiate sports leagues, and network broadcasters. But what makes the job tricky is determining how much the royalty rates should be in the first place, and who gets what share of the fees. That’s where the need for some kind of decision-maker comes in. Under the original Copyright Royalty Tribunal system, the responsibility fell to a panel of three political appointees without any specialized qualifications. For example, the last chair of the nine-employee agency, Cindy Daub, was not a lawyer, and garnered the appointment after serving as head of the Coalition of Asian Americans for Bush/Quayle in the 1988 campaign. “It was like practicing before a jury without a judge,” says Arnold & Porter partner Robert Garrett, whose clients include major sports leagues and the Recording Industry Association of America. Nor is the royalty statute simple to apply, because it requires rates to be based on a hypothetical free competitive market. “The notion of what is an appropriate rate is a very elusive concept,” says Garrett. “Everyone has a different way to prove what is appropriate.” Few came to the defense of the Copyright Royalty Tribunal. Legislators were eager to score points for government downsizing, and public in-fighting among the last three commissioners eroded what little support the agency might have mustered. But as Congress was moving to kill off the agency, a major proceeding over cable rates was in progress. Stakeholders feared that if they got involved with the effort on Capitol Hill, they would alienate the judges currently deliberating their shares of a multi-million-dollar pot. “We were absolutely immobilized,” says one lawyer. The outcome was a process that has turned out to be not much better — and many would say is worse — than what it replaced. One of the biggest criticisms of the CARP system is its expense. Cases are heard by three arbitrators, most from JAMS or the American Arbitration Association, who are paid $200 to $400 an hour apiece. The CARP participants foot the bill, either out of their own pockets or as a deduction from the pool of royalties, and the costs can add up quickly. In a recent arbitration to set royalty rates for Webcasting, the arbitrator fees totaled approximately $1 million — more than the entire budget of the Copyright Royalty Tribunal in its final year of existence. The Copyright Office’s Peters says the high costs exclude some from the process. Testifying before Congress on April 1, Peters said that “there is no question that in some rate adjustment proceedings, some interested parties conclude they cannot afford the cost of participating.” Rep. Smith’s bill, the Copyright Royalty and Distribution Reform Act of 2003, would use public funds to pay the salary of the judge. Still, compared with what the parties spend on lawyers and expert witnesses, says JAMS arbitrator Curtis von Kann, one of the Webcasting panelists, “arbitrator fees, at the end of the day, are a small percentage of the total cost.” The CARP for Webcasting included 40 days of hearings, a record of thousands of pages, large teams of lawyers from Arnold & Porter and Weil, Gotshal & Manges, and conflicting expert witnesses on almost every point. And the price tag has been estimated at $25 million. “These are tough cases. There can be billions riding on [the outcome],” continues von Kann, a former D.C. Superior Court judge. “The parties are going to gear up like crazy whether the people on the other end of the room are government employees or outside arbitrators.” But sometimes, the costs are excessive even when the stakes are very low. In distribution CARPs, where the arbitrators are paid from the royalty pool, very small claimants bear virtually none of the costs. A few have pursued nuisance suits, shunning offers of settlement and demanding full-blown hearings. In one case involving the 1992-94 Digital Audio Recording Technology distribution, two claimants were awarded $11.03, but saddled opponents with $12,000 in arbitration bills. Another fight over $6.06 cost $21,000 in fees. The arbitrators’ hands are tied in these cases, since the system does not provide sanctions to discourage frivolous suits or the option to forgo oral hearings in small claims matters. Smith’s bill allows for paper proceedings in cases where less than $500 is at issue. But costs aren’t the only objection to using outside arbitrators. The individual jurists vary from one panel to the next, and it’s rare to find arbitrators who are familiar with the esoteric intricacies of copyright law and procedures. “There’s no institutional memory among rotating sets of arbitrators,” says Remington of Drinker Biddle. Making the judge a permanent government employee would add stability and predictability to the process, says Remington, as would giving their findings the status of precedent. However, he and many others strongly urge Congress to modify the bill so there are three judges instead of just one. In part, that’s so the judges could serve staggered terms and preserve institutional memory. But more worrisome, considering the economic power the person will wield, says Remington, is the risk of “one bad judge. It would be a disaster.” One advantage of the CARP system, notes Garrett of Arnold & Porter, is that if an arbitrator turns out to be a dud, “there’s a way of not inviting them back.” While Garrett agrees reform is necessary, he argues it could also be done within the existing system rather than starting anew. Yet another procedural problem with CARP cases, adds R. Bruce Rich, a partner at Weil Gotshal, is that matters tend to be “underdiscovered and overtried.” Crucial documents are withheld, cross-examinations turn into lengthy fishing expeditions, and “what ultimately comes into the record of a CARP case is governed, not by any meaningful rules of evidence, but by the whims of the arbitrators,” Rich testified in the April 1 subcommittee hearing. CARP decisions are reviewed by the register of copyrights and the librarian of Congress, who oversees the Copyright Office. The bill would eliminate that responsibility. Decisions could still be appealed to the U.S. Court of Appeals for the D.C. Circuit. Finally, the CARP system is hampered by the lack of mechanisms to facilitate settlement. Indeed, during the Webcasting CARP, some of the parties actually came to an agreement, says von Kann of JAMS. “But it became very difficult for the librarian of Congress to figure out how to handle a mid-trial settlement,” he says, since public notice and comment would have been required. “This is tough terrain,” says von Kann. “But I’m not really sure shifting the whole process from three outside arbitrators to one copyright judge [is the solution].”

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