Phonorecords V Cannot Be Another Rate Freeze by Another Name

Phonorecords V Cannot Be Another Rate Freeze by Another Name

The Copyright Royalty Judges’ September 10th Order (Order 10) in the Phonorecords V proceeding suggests that the proposed settlement governing statutory mechanical royalties for physical phonorecords and permanent downloads will receive far more scrutiny than a routine settlement approval. Rather than accepting the agreement based solely on the fact that major industry participants reached consensus, the Judges have directed the settling parties to answer a series of substantive questions concerning both the economic foundation of the proposal and the process by which it was negotiated.

The message from the Board is straightforward: a settlement does not become an industry-wide statutory rate simply because influential parties support it.

The CRB’s Questions Focus on the Foundation of the Settlement

The Copyright Act permits settlements in rate proceedings, but the Judges retain an independent responsibility to determine whether a proposed settlement provides a reasonable basis for statutory rates and terms. Order 10 at 2.

The questions identified by the Judges indicate concern not merely with the existence of an agreement, but with whether the record supports adoption of that agreement as the governing statutory framework for an entire industry. Order 10 at 2-3.

Among the issues identified are:

Whether the settlement was negotiated at arm’s length.
Whether the proposed rates are supported by current economic evidence.
Whether inflation calculations underlying the proposed mechanical benchmark are accurate and complete.
Whether the record adequately justifies continuation of the current framework into the 2028-2032 rate period. Order 10 at 2-5.

Those are substantive questions, not procedural formalities.

The 12-Cent Mechanical Rate Is Now at the Center of the Proceeding

The most significant issue raised by the Board concerns the continued use of a 12-cent mechanical royalty benchmark.

The proposed settlement appears to retain the 12-cent rate while continuing future CPI-U adjustments. The Judges, however, are asking a more fundamental question: why should 12 cents remain the starting point at all? Order 10 at 5.

Specifically, the Board has directed the settling parties to address:

Whether the settlement contains a 12-cent base rate.
Why that base rate remains reasonable.
Whether CPI-U increases from 2021 and 2022 were included in the calculations supporting the benchmark.
What the resulting rate would be if those inflationary increases were included.
Why the benchmark should not instead be set at 13.7 cents. Order 10 at 5.

Those questions strike at the core economic assumptions underlying the proposal.

CPI Adjustments Do Not Answer the Baseline Question

One issue that can easily be overlooked is the distinction between annual inflation adjustments and the rate benchmark itself.

A royalty structure may include CPI-U adjustments and still undervalue copyrighted works if the starting benchmark is too low. Inflation indexing preserves purchasing power going forward. It does not establish that the underlying benchmark accurately reflects present market conditions.

The apparent premise of the settlement is that the 12-cent rate adopted during Phonorecords IV should simply continue into Phonorecords V. But continuation is not itself a justification.

Statutory rates are intended to be supported by evidence relevant to the applicable rate period. The mere fact that a benchmark was accepted in a prior proceeding does not automatically establish that it remains reasonable for 2028 through 2032.

The Omitted Inflation Question Matters

The Judges’ focus on 2021 and 2022 CPI-U figures may prove particularly important.

Multiple objectors argued that the current benchmark does not fully account for inflation experienced during those years. The Board has now required the settling parties to explain whether those increases were incorporated into the calculations supporting the current rate and, if not, why not. Order 10 at 3, 5.

To the extent the current benchmark reflects inflation data available during earlier proceedings while omitting later inflationary increases, the issue is no longer historical.

The Board is not setting rates for the past. It is setting rates for the 2028-2032 period.

Even if prior omissions were understandable when data was unavailable, the question now becomes whether there is an economic justification for continuing those omissions in future rate periods. The Judges appear unconvinced that historical inertia alone is sufficient.

The Board Is Also Examining the Negotiation Process

Order 10’s most notable procedural feature may be its examination of how the settlement was negotiated.

The Judges have requested information concerning ownership structures, corporate relationships, approval authority, negotiation procedures, and the degree of independence among the settling parties. They have also asked whether objecting participants had opportunities to participate in discussions or review drafts before execution of the agreement. Order 10 at 5-6.

These requests reflect concerns raised by objectors regarding whether the settlement was truly negotiated at arm’s length.

That inquiry matters because statutory rates apply far beyond the parties who ultimately sign the agreement. Songwriters, composers, lyricists, publishers, and other copyright owners will be bound by the resulting framework regardless of whether they participated in its development.

As a result, the legitimacy of the process carries significance independent of the rates themselves.

A Settlement Is Not the End of the Inquiry

Perhaps the most important takeaway from Order 10 is that the Copyright Royalty Judges are treating the proposed settlement as the beginning of the inquiry, not the end.

The Board has bifurcated the proceeding, stayed further consideration, and required additional submissions before determining whether the settlement warrants adoption. Order 10 at 6-7.

For songwriters and other copyright owners, the significance is clear. The debate is no longer confined to objections raised by creators and industry groups. The issues now driving the proceeding are questions identified by the Judges themselves.

Ultimately, a statutory mechanical royalty should not be adopted simply because influential stakeholders reached agreement. It should be adopted because the record demonstrates that the resulting rates provide a reasonable basis for compensating the creators whose works power the music economy. Order 10 at 2.

The questions raised in Order 10 suggest that the Board is prepared to demand that showing. Whether the settling parties can provide it may determine whether Phonorecords V becomes a genuine rate-setting proceeding or simply another rate freeze by another name.