This morning the U.S. Court of Appeals for the D.C. Circuit released its opinion in SoundExchange, Inc. v. Librarian of Congress. A three-judge panel consisting of Judges Ginsburg, Henderson, and Kavanaugh, largely rejected SoundExchange's challenge to the royalty rate set by the Copyright Royalty Board that satellite radio services must pay to copyright owners for the use of sound recordings. The panel concluded that the rate was not arbitrary, capricious, or unsupported by substantial evidence, but found (as the government conceded) that the Board failed to set a rate for "ephemeral copies."

While he joined the court's opinion in full, Judge Kavanaugh wrote a brief concurrence noting a potential separation-of-powers question raised by the manner in which Board members are appointed.

As this case demonstrates, billions of dollars and the fates of entire industries can ride on the Copyright Royalty Board’s decisions. The Board thus exercises expansive executive authority analogous to that of, for example, FERC, the FCC, the NLRB, and the SEC. But unlike the members of those similarly powerful agencies, since 2004 Copyright Royalty Board members have not been nominated by the President and confirmed by the Senate. Instead, as a result of a 2004 statute, Board members are appointed by the Librarian of Congress alone. Board members are removable by the Librarian, but only for cause. Moreover, in exercising important duties, Board members are apparently unsupervised by the Librarian of Congress or by any other Executive Branch official.

The new statutory structure raises a serious constitutional issue. Under the Appointments Clause, principal officers of the United States must be nominated by the President and confirmed by the Senate. U.S. CONST. art. II, § 2, cl. 2. Copyright Royalty Board members plainly are officers of the United States. And they appear to be principal officers – not inferior officers – because they are not removable at will and their decisions regarding royalty rates apparently are not reversible by the Librarian of Congress or any other Executive Branch official. See Edmond v. United States, 520 U.S. 651, 662-66 (1997); see also 17 U.S.C. §§ 701, 801-03; Tr. of Oral Arg. at 24 (Government counsel agreeing that Librarian of Congress and Register of Copyrights cannot change copyright royalty rates set by the Board).

If the members of the Board are in fact principal officers, then the present means of appointing Board members is unconstitutional. But no party here has timely raised a constitutional objection. We therefore may resolve the case without deciding whether the Board is constitutionally structured, and so I join the opinion of the Court.

On Tuesday, I noted the U.S. Court of Appeals for the D.C. Circuit's decision in SoundExchange, Inc. v. Librarian of Congress, in which it largely rejected a challenge to royalty rates set by the Copyright Royalty Board. Judge Kavanaugh wrote a separate concurrence noting that the manner of the CRB's appointment raises constitutional concerns. Yet SoundExchange had not challenged the constitutionality of the CRB, so the question was not before the court.

If SoundExchange wanted to challenge the royalty rates set by the CRB, why did it fail to press the constitutional challenge? Invalidating the CRB would seem to be an effective way of voiding the royalty rates at issue. Was it bad lawyering? I don't think so. Rather, it appears that SoundExchange made a strategic decision because invalidating the CRB altogether would be adverse to its economic interests and compromised its position in other proceedings.

Yesterday, a separate panel of the D.C. Circuit decided Intercollegiate Broadcast System, Inc. v. Copyright Review Board. SoundExchange was again a party, this time as an intervenor on the side of the CRB. In this case, the Intercollegiate Broadcast System (IBS) and others challenged the CRB's decisions setting rates and terms relating to webcasting and designating SoundExchange as the sole royalty collective. At some point in the litigation, petitioners argued the appointment of Copyright Royalty Judges to the CRB is unconstitutional, because the judges are appointed by the Librarian of Congress. Here, SoundExchange defended the CRB's constitutionality and argued the petitioners had forfeited the argument by not raising it in a timely fashion.

Had SoundExchange pressed the constitutional challenge in the first case, it could have produced an adverse result in the second -- and SoundExchange may have had more to lose from this result than it had to gain. Moreover, as a repeat player in copyright royalty disputes, SoundExchange could prefer fighting over the merits of individual decisions than forcing a complete restructuring of the administrative structure governing copyright royalties. Repeat players in other regulatory contexts often behave the same way, and larger challenges to administrative proceedings, whether constitutional or otherwise, are often brought by marginal industry players who are less invested in the structure of the status quo.

In any event, the D.C. Circuit again passed on the constitutional question, concluding the petitioners had forfeited the constitutional argument. Instead, the D.C. Circuit addressed petitioners' challenges to the CRB decisions on the merits, vacating the $500 minimum fee for both noncommercials and commercials but otherwise upholding the CRB's determinations. And so, resolution of the underlying constitutional question will have to wait for another day.

In two separate decisions in July, judges on the U.S. Court of Appeals for the D.C. Circuit noted that there are questions about the constitutionality of the Copyright Review Board, a three-member federal agency that sets copyright royalty rates whose members are selected by the Librarian of Congress and subject to removal only for cause. In SoundExchange v. Librarian of Congress, Judge Brett Kavanaugh wrote a separate concurring opinion raising questions about the Board's constitutionality, but noted the issue had not been raised by the parties. A few days later, in Intercollegiate Broadcast System, Inc. v. Copyright Review Board, the D.C. Circuit noted but passed on this issue again, as the issue had been raised too late.

It looks the D.C. Circuit will get another chance to consider the question. BLT reports that internet radio aggregator Live365 has filed suit directly challenging the CRB's constitutionality. Specifically, Live365 argues that under the Appointments clause Congress may not delegate authority to appoint the members of the CRB to the Librarian of Congress, a department in the legislative branch of government.

Will the third time be the charm? Perhaps, but the viability of Live365's suit likely depends upon how the Supreme Court resolves Free Eneterprise Fund v. Public Company Accounting Oversight Board, an appointments clause challenge to the constitutionality of the PCAOB. While the issues presented are not precisely the same, the two entities are likely to rise and fall together. If the current Supreme Court is willing to follow Justice Scalia's lead and embrace a relatively formalist view of the clause, both the CRB and PCOAB should go down. If, on the other hand, the Court adopts a more pragmatist posture, as the Court did in the independent counsel case, Morrison v. Olson, I would expect both to survive. Any predictions?