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ACA Urges Copyright Office To Scrap Its Cost-Shifting Audit Proposal

The American Cable Association called on the Copyright Office to craft regulations that will minimize the costs for cable operators, especially smaller ones, in the event copyright owners demand audits of royalty payments submitted by Multichannel Video Programming Distributors (MVPDs).

"Audits are burdensome, particularly for the audited party, and can include a lengthy back-and-forth process that would likely involve a significant amount of operator and auditor time. ACA urges the Copyright Office not to adopt rules that could result in cable operators, especially those that are small, being forced to foot the bill for these programmer-initiated audits," ACA President and CEO Matthew M. Polka said.

ACA's comments filed Aug. 13 came in response to a Notice of Proposed Rulemaking (NPRM) issued by the Copyright Office under the authority of the Satellite Television Extension and Localism Act (STELA). Among other things, the NPRM called on cable operators to absorb the entire cost of audits if found to have underpaid royalties by more than 5%. The NPRM also proposed giving MVPDs just two weeks to prepare written responses to audit reports.

In its comments, ACA strongly recommended that the Copyright Office not include a cost-shifting provision in its final regulations implementing audits. ACA explained that the cost-shifting proposal is imbalanced because a single cable operator could be held solely responsible for the cost of the audit while copyright owners, to the extent they initiated an audit, can spread the costs among multiple firms. ACA recommended that if copyright owners trigger an audit of a Statement of Account (SOA), they should assume all of the costs, regardless of the outcome, not only because this is the fairest system but also because it will minimize wasteful audit requests.

Should the Copyright Office include a cost-shifting requirement, ACA said the underpayment threshold for triggering cost-shifting should be set significantly higher than 5% or be based on the underpayment surpassing a minimum dollar amount. ACA explained that in the case of many small cable operators, a 5% threshold would be unreasonable because the cost of the audit could greatly exceed the dollar amount of a 5% underpayment. ACA said it was inequitable to subject an individual cable operator to potentially thousands of dollars in auditing costs for a small underpayment representing a miniscule percentage of the total amount of royalties that the Copyright Office collects from all cable operators.

ACA also said that a proposal giving just two weeks to prepare a written response to the auditor's report was unreasonable. A two-week response limit would serve only to increase administrative burdens on smaller cable operators, which would have to meet with an auditor, review the auditor's report, and prepare a written response setting forth its views.  Depending on the complexity of the disputed issues, the cable operator may also need to devote significant financial resources to retain outside legal or accounting assistance, for which two weeks may not be sufficient to allow a complete review of the issues at hand.

"ACA believes that the Copyright Office must not limit a cable operator's response time to two weeks. To give cable operators a better opportunity to respond to an audit, ACA recommends that the Copyright Office provide cable operators flexibility and allow them to respond within a reasonable amount of time," Polka said.

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