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the present system is unfair and unnecessarily burdensome on copyright owners and that the present statutory rate is too low.

A central agreement that we had with that position I think is stated on page 36, and the tone of this statement is admittedly a little rueful. But let me read it in any case.

In view of the failure of the Copyright Office's 1961 proposal to eliminate the compulsory licensing system for recording copyrighted music and the developDents since then, one thing seems certain: The compulsory license has taken solid root in U.S. copyright law. We are past the point of talking about free negotiations in this area. However, Congress must consider the extent to which any real negotiations under a rate ceiling would be realistically possible.

Now, this is my conclusion, Mr. Chairman. I do not find it a very happy one, but it is the basic conclusion on the question that you had.

The nest, second issue is a somewhat surprising one, and I do not think you have heard any direct testimony on it, although it was certainly referred to several times in the testimony that you had from the tape duplicators.

The basic question this is discussed on pages 21 to 26, and it is whether under the compusory licensing provisions of section 1 (e) of the present law or under 115 of the revised law, can a manufacturer who is duplicating someone else's recording without authorization go through the compulsory licensing mechanism in the statute and secure a compulsory license for the music? Ile is going ahead and duplicating someone else's record, but can he legalize his use of the music by going through the compulsory licensing procedure?

Now, this is kind of a fascinating case study. There was, by the way, a 1:12 direct decision on this in Federal court, and the plaintiff was the Aeolian Co., who had been the big bugaboo in 1909—and I think this is on page 22. It starts on 21. This is pages 21 to 26 that I am now dealing with.

The court held in favor of the Aeolian Co., saying that the provision in the present law that the compulsory licensee can only make similar ue of the copyrighted musical composition did not mean that they could duplicate somebody else's piano roll or recording—they even said recording-but, to quote the judge-

... must resort to the copyrighted composition or sheet music and not pirate the work of a competitor who has made an original perforated roll.

Now, this is one of those cases that has sat there for generation after generation, and people knew about it and I think they regarded it as kind of a biological sport. As I said on page 22, although the Aeolian decision seemed to open an inviting door to both copyright owners and record producers for the protection of recorded music, it was 60 years before anyone walked through it. And, one of those unexplained mysteries of U.S. copyright law, the Aeolian case lay dormant, neither cited nor overruled, for generations, during which efforts to obtain legislation against record piracy went for naught, and the result of etforts to obtain judicial relief on other theories were problematical, at best.

Finally, in 1972, at alınost the same time Congress recognized sound recordings as copyrightable subject matter and gave performers and record producers protection against unauthorized duplication, the

Heroepent law requires the 2 cents to 7 6., put practically all of the lic ***:n provisions of the standard

**s that you pay on the record 991. But this is under a negotia

7* 1 rstionship. 59. Ederation of negotiators, the .*'mmunittee of the ABA was a qu* **'s early on had agreed to ke 5733, to have the royalty applical "Ms manufactured whether t

up on the procedural obl * were very onerous, and w ** the negotiated licenses unde **... able on page 27. You had to o n had to be under oath, if

rarious versions of the b parech up to the Senate cons

courts started holding that a compulsory license under section liel of the 1909 copyright law gives the compulsory licenser only the right to make similar use of a copyright work and that similar use does not include the duplication of someone else's recording.

Now, at pages 22 to 24 I review these decisions and I do not want to go into a lot of detail over them. There are four circuit courts of ap peals that with split decisions, and in many ca-es reversing low courts, have held as the Aeolian case did. One of these casessell, a.! of them went to the Supreme Court on petitions for writs of crtion On one of them the Supreme Court asked the Justice Departawn: to make comments, and the comments were, essentially, do not grat wertiorari; in effect, the 1972 amendment has taken care of this, a four circuit Courts of Appeals have heid all along the war." Supreme Court denied certiorari in this case. And this issue about as settled as these things ever are without a definitive Sun Court decision.

And as a result, whether you agree with this or not-and I am it clined to, more or less I think that it is certainly debatable. It is not shake me up as a matter of principle. I am inclined to think this this should be written into the statute.

Now, the Senate did, but it was before the Supreme Court *** in denving certiorari in this one case and before it was really que as settled as it is now, and I have some qualifications about the 13guage that the Senate has used in two shots at this problem, in to express this principle, and what I am really concluding and I w read this conclusion, which I think is on page 37-is, esentially. 1: at the Senate approach of trying to write this into the statute is one but we should take another look at the language.

The Copyright Office agree that Section 115 should deal with the queste of whether a person who duplicates a particular sound recording of a mis musical work without a negotiated license from anyune meid korale to rely on a omulsory licence as far as the main is concerned in to the solid authority provided by the four case, we also agree that the ( f' T license should be precluded where the sound recording reproduring his si raposition is an unauthorized duplication of a reording aireads in ruisle.* However, we believe that the languake of the last sentrate of Wition 11.!!!! both in its original forn and as amnended by the Senate Judiciary (*?" need some substantial redrafting to express its purpuse.

If I may go on to the third question, which is the basis of the mora':y and the procedures for working the compulsory linen, let me mai the questions from page 1. This is question 2, parts B and C.

A«-uming that you have a compleory license, shonld the basis of the monelt he the number of phonorerurds made or the number manufactured and d. tributel; and, rond, what formality shonld be rwuired for obtaining D pulsory 11une and for making payments and accounting under it?

The fundamental question here it is still a very lively one is whether or not the amount to be paid on ricords under a compulsory license should deal in the number that the compulsory licence maan at the out- or the number that he is able to sell finally. The book ground of this issue is laid out in part in the fint part of the chapter, in the legislative history part, and is dis "lesed specifically at pages

to 30). and I will try to make a long story short on this. It has been up and down and sideways several times

Larynyz. How does this accou **

Y ip between those who y Haberis and pay royalties

sind or the number of books d of mass produced, copyrighte **,nebar compulsory or otherw to as to wherber it is manufact

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them, and a lot are what ? * other term for it in thi 1 * !* did accept the compro . lipnapp who has no pery *. points under a statutory: *!!* pintset. And this was justi **, step, an issue was made.

yong in the record industry 01 go e ie to cell and then ta **A tt music publishers w

The present law requires the 2 cents to be paid on every record manufactured, but practically all of the licenses are negotiated, and one of the main provisions of the standard license form for a negotiated license is that you pay on the records sold, not on the records manufactured. But this is under a negotiated license where there is a contractual relationship.

An early generation of negotiators, the ones that were operating when the subcommittee of the ABA was considering the problem in the early 1960's, early on had agreed to keep the 1909 approach; in other words, to have the royalty applicable under the compulsory license to records manufactured whether they were sold or not, but agreed to ease up on the procedural obligations of a compulsory licensee, which were very onerous, and which were also excused or liberalized in the negotiated licenses under the 1909 act, as I show here on this table on page 27. You had to have monthly reporting, and the report had to be under oath, if required by the copyright owner, and in the various versions of the bill that have emerged since 1963, the approach up to the Senate consideration of this in recent Venre

Mr. KASTENMEIER. How does this accord with other practices, as far as rate relationship between those who manufacture whether they are books or otherwise--and pay royalties on, whether the number of books published or the number of books distributed and sold, or any other forms of mass produced, copyrighted material for which there is a license, either compulsory or otherwise? How does this accord with that, as to whether it is manufactured or manufactured and distributed ?

Ms. RingER. This is the only compulsory license that involves the mit sale of a chattel or whatever you want to call it, so there is nothing to compare it with in the copyright law. Under negotiated license, it is normally the number sold, but it is a negotiated thing, and obviously, many, many contracts contain provisions dealing with returns. In other words, if there is a danger-and this is one of the points I am coming to-if there is a danger that the returns will get back into the channels of commerce, then you should have some handle on getting paid for it, and this is what this hassle is all about right now.

I think you heard testimony on something called cutouts, which is a phenomenon of the moment, and I think this is what we are really argiing about on this issue.

Nr. KASTENMEIER. Does the word distributed--that does not mean sola?

Ms. RINGER. Yes, but of course, you can distribute a lot of records without selling them, and a lot are what are the so-called freebies, and maybe there is another term for it in this decade-I do not know. In any case, the House did accept the compromise that did involve requiring a compulsory licensee who has no permission from anyone and just goes ahead and records under a statutory scheme, to pay for everything he makes at the outset. And this was justified in your report.

In the Senate later, an issue was made, because I think there is a very large practice in the record industry of manufacturing a good deal more than you expect to sell and then taking them back as what they call cutouts. And the music publishers were very concerned about the stors rather than *.malone and sho 17 to be paid on fins MYT is that have el

it out, zuppa-rd *;:'nehier the stre

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danger, which was real, of the cutouts getting back into the chany's of commerce, either in this country or abroad. And there was an * drawn about this in the Senate, and Senator McClellan did as the respective protagonists on this issue to try to get together and Work out a compromise, and the compromise is einbodied in the revision laite as it-I think as it now exists. Yes, that is in here.

The new compromise is just the reverse. The 2 cents or 21, centa 3 cents, or whatever, is paid only on records manufactured and is tributed. But the reporting procedures, the accounting prorr lures are substantially increased, the idea being that, all right, we will only require you to pay on records that you manage to sell, but we will on very heavy reporting and accounting procedures to make sure the you are not selling these cutouts on the side. And this is a matter of some concern to me. I will try to explain why by reading from parts 37 to 38. Mr. Wiggins. Mr. Chairman, may I interrupt? Mr. KASTENMEIER. Yes; of course.

Mr. WIGGINS. I do not know whether to share your concern or 0because it is my impression that whatever the law may be, it is sure to to negotiation. It is within the power of the parties, at les i, to neno tiate different terms and the conditions agreeable to them. And 117 under the impression that the negotiation is always down from ti statutory language and never up.

Jl. RINGER. Right.

Vr. Wiggins. If Congress really means to reflect sound pille pri. T that certain things occur, we ought to be talking about minimum Inan. datory conditions and let the parties negotiate up if they wish, byt Ink below that, which is understood to be good policy. And at some point, I hope you will talk about this question which troubles me. And I 11 it as whether we should establish floors or ceilings, and I hope at some point you will address this.

Ms. RINGER. I agree with you, Jr. Wiggins. Actugily, in this cradtext, you base the payment on ricord" made, because you have sinato yot to make something before you can sell it, so that the more owner is going to get more from the compulsory licensee if the ! is based on the records made and not jilat sold. And it senas to 1. vt that is consistent with your position. I will get to this question of ceiling

In trving to express my concerns here. I do not want to lead row to think that this is an irreconciluble difference. I think that there is a out of this, which I will try to explain.

The Copyright Online has considerable misgivings about the charry with resp*t to the basis of royalty and the recounting prominen 3* tion 116. since pasage of the 1907 bill. I make the point orties stitution of the word "manufacture." but I do not think that is IT important. More important, we remain convinced that, as stated in the Iloring reports of 1966 and 1967, a recor Imaker should not be free to riproluce many phonorrcoris ale wabaya without any partiva from or obligation to the copyright owner, and then to par a ruraits only with reput to the phononcord he eventually distribute to tie

. *p, 12) we prefer it:

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tape duplicators rather than copyright owners, we believe that the problem is a real one and should not be ignored. It is unclear whether the royalty to be paid on final records distributed includes payments for phonorecords that have entered the stream of commerce, have been returned or cut out, supposedly to be destroyed, but which are known on arra-ion to reenter the stream of cominerce. These records and tapes certainly should be paid for be fore they leave the compulsory licensee's hands.

The tradeoff for basing royalties on records distributed is the imposition of unrealistic accounting and certification requirements which a large record company might be able to observe, but which would be extraordinarily onerous and expensive for small record producers. I tried to lay some basis for this conclusion earlier in the paper.

The Copyright Oflice believes that section 115 of the 1967 House bill represented a reasonable procedural reform of the 1909 compulsory license, and we prefer its approach.

Now, if I may, this was distributed several weeks ago, and after it was distributed, I was taken to task in a friendly way by one of the protagonists of the compromise, because they had been asked to make a compromise, by Senator McClellan, and they had made a compromise, and here I was knocking it. I will stick with what I said, but I will throw out another possibility which it seems to me maybe would solve the problem. You could base the royalty on records made and distributed, but refer specifically to the problem of returns, as the negotiated licenses do in other fields. I am talking about the cutouts now. And require accounting as to three things, the records manafactured, the records sold, and a clear-cut accounting for the disposition of the difference,

I think that is what they were searching for when they put in these rather Draconian procedural requirements, and I do not really think it is practical to require a small record company to make monthly accountings and hire a CPA to certify each one. This seems a little unrealistic. I think most record producers would agree with this, and you have testimony to that effect, with which I agree.

If I may go on the fourth question, I can dispose of that rather quickly. This is the basis for the royalty rate and the question which is item 2D at the top of page 2, “Shonld the amount of the royalty be based on a fixed monetary amount per phonorecord, or should it be a fixed percentage of the price of the phonorecord ?" And there is a good deal in the earlier part of this chapter about the history of this issue in the Senate. It was considered here, but not in any great detail, because at that point, it was not being urged by anyone. Later on, it was put forward as an alternative to the 21,-cent rate that you came forth with in 1967. And Senator Hart actually did introduce a formal amendment setting up an 8-percent royalty, 8 percent on the retail selling price. This did not go, and I think we have gotten past this in the discussions.

But let me read what I say here on pages 39 and 40. A royalty rate basis involving a percentage of selling price is, at least on its face, a fairer and more flexible approach than a flat rate per record. It is the approach followed in other countries that have adopted compulsory licensing systems, but it really should be recognized that

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