Identifying an “Effectively Competitive” Market: The Work of the Copyright Royalty Board

Abstract

Because the statutes supplant the actual market, the CRB Judges must establish a “hypothetical market” that satisfies the statutory standard. A critical element in that regard is the testimony of the parties’ economists, which consists of various forms of economicThe United States Copyright Royalty Board (“CRB”) establishes royalty rates for compulsory statutory licenses of sound recordings paid by Webcaster licensees to sound recording companies. These rates are set by the government, rather than the market, because the licensed sound recordings are not simply individual copies of discrete sound recordings in competition with each other, but rather are collections of repertoires offered under a blanket license by the major record companies and one independent consortium—who control the vast majority of recordings.

Accordingly, coexisting with the efficiencies of collective ownership is the market power of these collectives. Absent a regulatory rate, the collectives, “complementary oligopolies,” can exploit the “Must Have” (essential) nature of their blanket licenses by setting non-competitive royalty rates. When rates are not “effectively competitive,” the market is beset by inefficient and exploitive pricing.

It is for this reason that many collective licensors are subject to royalty rate regulation. The fact that unregulated copyright collectives may not achieve an economic optimum establishes the strong theoretical foundation for the regulation of such collectives.

The CRB’s three-judge panel is required by statute to “establish rates . . . that would have been negotiated in the marketplace between a willing buyer and a willing seller.” To accomplish this economic task, the Judges preside over adversarial trial proceedings between licensors and licensees.

Because the statutes supplant the actual market, the CRB Judges must establish a “hypothetical market” that satisfies the statutory standard. A critical element in that regard is the testimony of the parties’ economists, which consists of various forms of economic modeling. The experts who proffer such testimony are typically well-credentialed economists who have been, inter alia, the highest-ranking economists at the Antitrust Division of the U.S. Department of Justice and distinguished professors of microeconomics and industrial organization. Their direct oral and written testimonies, akin to expert reports, are subject to adverse expert rebuttals, examination by skilled counsel, and inquiries from the Judges, one of whom (the author of this Article), by statute, “shall have significant knowledge of economics.”

This Article focuses on a seminal opinion by the CRB Judges, affirmed by the D.C. Circuit: the Web IV Determination holding that the statutory “willing buyer-willing seller marketplace” standard shall reflect the workings of an “effectively competitive” market. In all subsequent CRB royalty rate setting determinations, the Judges have applied this “effective competition” standard to the particular facts of the case.