SPEAKERS CONTENTS INSERTS
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IMPLEMENTATION OF THE ''NET'' ACT AND ENFORCEMENT AGAINST INTERNET PIRACY
SUBCOMMITTEE ON COURTS AND INTELLECTUAL
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MAY 12, 1999
Serial No. 25
Printed for the use of the Committee on the Judiciary
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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
Page 3 PREV PAGE TOP OF DOCJOE SCARBOROUGH, Florida
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
Subcommittee on Courts and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
Page 4 PREV PAGE TOP OF DOCELTON GALLEGLY, California
BOB GOODLATTE, Virginia
WILLIAM L. JENKINS, Tennessee
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
MARY BONO, California
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
MITCH GLAZIER, Chief Counsel
BLAINE MERRITT, Counsel
VINCE GARLOCK, Counsel
DEBBIE K. LAMAN, Counsel
ROBERT RABEN, Minority Counsel
EUNICE GOLDRING, Staff Assistant
C O N T E N T S
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Coble, Hon. Howard, a Representative in Congress from the State of North Carolina, and chairman, Subcommittee on Courts and Intellectual Property
Cohen, Tod, Vice President and Counsel, New Technology, Motion Picture Association of America
Di Gregory, Kevin V., Deputy Assistant Attorney General, Criminal Division
McGrath, Timothy, Interim Staff Director of the United States Sentencing Commission
Oktay, Batur, Corporate Counsel, Adobe Systems, Inc. on behalf of the Business Software Alliance
Starback, Tim, Emigre, Inc., on behalf of the Software and Information Industry Association
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Page 6 PREV PAGE TOP OF DOC Cohen, Tod, Vice President and Counsel, New Technology, Motion Picture Association of America: Prepared statement
Di Gregory, Kevin V., Deputy Assistant Attorney General, Criminal Division: Prepared statement
McGrath, Timothy, Interim Staff Director of the United States Sentencing Commission: Prepared statement
Oktay, Batur, Corporate Counsel, Adobe Systems, Inc. on behalf of the Business Software Alliance: Prepared statement
Starback, Tim, Emigre, Inc., on behalf of the Software and Information Industry Association: Prepared statement
Material submitted for the record
IMPLEMENTATION OF THE ''NET'' ACT AND ENFORCEMENT AGAINST INTERNET PIRACY
WEDNESDAY, MAY 12, 1999
House of Representatives,
Subcommittee on Courts and
Page 7 PREV PAGE TOP OF DOCCommittee on the Judiciary,
The subcommittee met, pursuant to call, at 2 p.m., in Room 2237, Rayburn House Office Building, Hon. Howard Coble [chairman of the subcommittee] presiding.
Present: Representatives Howard Coble, Bob Goodlatte, Edward A. Pease, and James E. Rogan.
Staff Present: Mitch Glazier, Chief Counsel; Debbie Laman, Counsel; Eunice Goldring, Staff Assistant, and Bari Schwartz, Minority Counsel.
OPENING STATEMENT OF CHAIRMAN COBLE
Mr. COBLE. Good afternoon, ladies and gentlemen. The subcommittee will come to order. As is oftentimes the case on this hill, we have to be in five places simultaneously.
My good friend from California is supposed to be somewhere as we speak. I am going to let Mr. Berman make his opening statement first, and I will follow him.
The gentleman from California.
Mr. BERMAN. Thank you very much, Mr. Chairman, you are very kind. I have to testify over at a Senate committee now, and I want to just thank you for setting this hearing.
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I just want to make one point, and that is that I think we should be overseeing the enforcement of this legislation. The only thing that I would say to the groups who have the highest interest in that enforcement is that no one has talked to our office about any inadequacy in the Justice Department enforcement of these provisions.
If there is a problem there, we would have been quite happy to help to talk to people, and so I say, let us know. In fact, in the couple of specific instances that I am aware of, folks interested in trying to make sure that copyright is protected were quite happy with the Department of Justice efforts in this particular area.
The fact that there are people now very concerned about inadequate enforcement is a total surprise to me, and there are ways of trying to deal with that when they happen rather than having to get into a full-fledged hearing. That is the only point that I wanted to make, Mr. Chairman, and I appreciate your understanding of my situation and I will say good-by.
Mr. COBLE. We will all say good-by.
Mr. BERMAN. Thank you.
Mr. COBLE. We obviously have a vote on. Let me make my opening statement and then I will go vote and then we will resume the hearing.
Today we are here to discuss the implementation of the NET Act and enforcement against Internet piracy. During the first session of the 105th Congress, H.R. 2265, the No Electronic Theft Act which has come to be known as the NET Act, was enacted into law.
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H.R. 2265 reversed the practical consequences of the case of the United States v. LaMacchia which held that electronic piracy of copyrighted works may not be prosecuted under the Federal Wire Fraud Statute and that criminal sanctions available under title 17 and 18 of the U.S. Code for Copyright Infringement do not apply in instances in which a defendant does not realize a commercial advantage or profit financial gain.
H.R. 2265 criminalized computer theft of copyrighted works whether or not the defendant derives a direct financial benefit from the acts of misappropriation.
Since the enactment of the NET Act in December 1997, there have been no prosecutions brought by the Department of Justice under the Act. This is troubling to me and, according to U.S. intellectual property based industries, troubling to them as well. There is no shortage of potential prosecutions that could be pursued under the Act, it is believed by many.
Also, currently the U.S. Sentencing Commission does not have any sentencing commissioners, and is therefore unable to promulgate sentencing guidelines for the Act. The report issued by the Commission's staff failed to address the NET Act's explicit instructions to consider that deterrence be adequately addressed in the sentencing guidelines.
These facts have made enforcement of the NET Act virtually impossible, if not impossible. This is important because in order to be successful in the battle against Internet piracy, not only must the Congress enact legislation giving legal recourse to copyright owners, but those laws must be implemented by the appropriate law enforcement agencies.
Page 10 PREV PAGE TOP OF DOC In line with accomplishing the goal of deterrence, today we will also be discussing the need to increase the statutory damages available to copyright owners whose registered works have been infringed. Copyright piracy is flourishing in the world. With the advanced technologies available and the fact that many computer users are either ignorant of the copyright laws or simply believe that they will not be caught or punished, the piracy trend likely will continue.
One way to combat this problem is to increase the statutory penalties for copyright infringement so that they will be an effective deterrent to this conduct. It is vital that the United States recognizes the intellectual property rights and provide strong protection and enforcement against violations of those rights. By doing so, the United States will protect its valuable intellectual property and encourage other countries to enact and enforce strong copyright protection laws.
Let me determine what the status is on the House floor. I think there is probably one vote perhaps to be followed by another vote. I am going to depart and return imminently. You-all rest easy in the meantime.
I will return imminently.
Mr. COBLE. We will resume the hearing.
Thank you-all for your patience, and I apologize for that. We can't control those voting bells, as you know. The gentleman from Virginia, who is no stranger to the matter at hand, has asked permission to make an opening statement.
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I now recognize him.
Mr. GOODLATTE. Thank you very much, Mr. Chairman. I do have the Y2K bill on the floor and have to get back.
I thank you very much for holding this important hearing today. As you know, the No Electronic Theft or NET Act which I sponsored in the last Congress was passed overwhelmingly to ensure that persons who illegally traffic in copyrighted works do not escape criminal prosecution solely because they fail to derive a pecuniary benefit from their actions.
I believed then, as now, that closing the loophole that existed in the law was important for preventing an open season on copyrighted works from coming to pass on the Internet. As you know, we had a celebrated case in Massachusetts where an individual put a lot of valuable copyrighted software on the Internet and virtually invited everybody to come and steal it, this valuable material belonging to other people.
The Court held that because he was giving it away and not receiving any benefit from it, he couldn't be prosecuted under the old law. The problem is that the old law might have served under other technologies, to photocopy a book, to make copies of a cassette, to make video tapes, whatever the case might be, and includes a substantial cost of using those tapes or cassettes or paper or whatever you might have.
But when you put something up on the Internet, the cost to the individual is virtually nil. But the effect on the copyright holder, the person who has put their creative talent to work to do something to create a contribution to society, whatever it might be, could be great. It might be valuable software, it might be a musical recording, whatever the case might be, but they still are entitled to be protected, and they weren't protected under the old law.
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With your help, we were able to pass the NET Act and took a major step in the right direction. Since passage of the NET Act, however, we have heard from several software publishers, several of whom are represented here today, who are still encountering the problem of their works being offered on a widespread basis on pirate sites on the Internet.
While I can gladly say that Congress and the administration worked together last Congress to take actions to strengthen laws in this area, I am disappointed to learn that they have been unable to report on law enforcement efforts currently under way based upon this new authority. I am not only unaware of any efforts by the Department of Justice or the FBI to apply resources to address theft of software on the Internet or through other channels, letters inquiring as to the status of these efforts have gone unanswered until this hearing was announced. I think that is totally irresponsible.
I am looking forward to hearing from our witnesses here today, especially Deputy Assistant Attorney General Di Gregory, about the kinds of problems that still exist in this area and what steps are being taken to address them. This is a multi-billion dollar problem. If we are going to respect intellectual property rights of people in this country, it is vitally important that this law be enforced.
We need to know whether existing resources are adequate to the task, and it is critically important that we work to ensure that our country's creators of intellectual property do not find their markets and their future literally stolen out from under them by these new breeds of pirates. We must work together to ensure that U.S. law enforcement is able to meet the challenge.
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I look forward to hearing from our witnesses today. And I thank the Chairman again for indulging me.
Mr. COBLE. I thank the gentleman.
The gentleman from California.
Mr. ROGAN. Mr. Chairman, thank you. I commend you for holding a hearing on this important issue. As you know, much of our recent economic growth is a direct result of the rapidly expanding technology-based economy. The product driving this expansion depends on the strict enforcement of copyright protection statutes.
Currently, copyright violation on the Internet is a growing problem. We must work to ensure that changes in Federal law keep up with changes in technology. One way we can ensure this is by raising the penalties violators face when convicted of copyright infringement.
To do so, the Chairman and I have introduced the Copyright Damages Improvement Act of 1999 which makes significant improvements to the Copyright Act. This bill will increase damages for copyright infringement and serve as a strong deterrent for those who wish to skirt the law. As we are all aware, the Internet and online commerce have opened a whole new world to consumers and to businesses. But at the same time it has created a new venue for those who deliberately break the law and violate copyright protections.
The Copyright Damages Improvement Act will increase the range of statutory damages for which violators can be held liable. These penalty levels have not been increased in over 10 years. Mr. Chairman, it is crucial that our country remain the leader in protection and enforcement of intellectual property rights. It is our obligation to continue to support the value and integrity of intellectual property and to set an example for other countries to follow.
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Thank you, Mr. Chairman. I yield back the balance of my time.
Mr. COBLE. I thank the gentleman. This is going to be a disjointed afternoon, ladies and gentlemen, because at 3 o'clock I have to attend another meeting, and the gentleman from California has very kindly agreed to chair the hearing. But we will proceed along and hopefully may realize some accomplishments.
Our first witnesses this afternoon will be Mr. Kevin V. Di Gregory who is the Deputy Assistant Attorney General of the Criminal Division at the Department of Justice. Prior to joining the Department, he was a chief assistant state attorney to Miami Dade County State Attorney, Janet Reno. From 1993 to date, he has supervised several litigating sections including the fraud section, the terrorism and violent crime section, and the computer crimes intellectual property section. Our second witness is Mr. Timothy B. McGrath who is the interim staff director at the United States Sentencing Commission. From 1995 to 1998, he was also the executive assistant to the Chair of the United States Sentencing Commission.
We have written statements from the witnesses on this panel and I ask unanimous consent that they be submitted into the record in their entirety. Gentlemen, it is good to have you all with us. We try to operate under the 5-minute rule here. When you see that red light illuminate, you will not be forcibly evicted from the room, but that will be your signal to wind down if you can. I assure you that your written testimony will be examined very thoroughly and very deliberately in detail. It is good to have you both with us.
Mr. COBLE. Who wants to go first? Mr. Di Gregory, why don't you go ahead?
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STATEMENT OF KEVIN V. DI GREGORY, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION
Mr. DI GREGORY. Thank you, Mr. Chairman, and I thank you for the opportunity to be here this afternoon.
With your permission, Mr. Chairman, I will summarize the remarks that I have already submitted and that you have already adopted for the record of this hearing.
Mr. Chairman, Mr. Goodlatte, Mr. Rogan, since the passage of the No Electronic Theft Act in December 1997, the growth of the Internet and advancements in technology have only increased the problems of digital piracy. Now there are numerous web sites offering the public pirated software and other copyrighted materials, some charging money and some providing the material for free.
Prosecuting digital pirates poses different challenges to law enforcement agents than when copyright crime occurs in the physical word. Law enforcement is extending increasing resources to combating theft of intellectual property including pirated copyright material. Our efforts in this area have been devoted to educating agents and prosecutors on the importance and scope of this crime problem and training them on the techniques and programs applicable to copyright crime in order to develop and prosecute cases in the future.
We are also working through the Criminal Division's Computer Crime and Intellectual Property Section and through the Federal Bureau of Investigation to develop sound prosecutions of large-scale digital piracy regardless of whether the activities are for profit. While we have not yet brought any indictments under the NET Act, we are working closely with the affected industries in an ongoing program to identify serious offenders.
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Law enforcement has been conducting investigations of such offenders to develop adequate evidence of who is responsible for the distribution of the copyrighted works, where the criminal activity is taking place for venue, and that the violations of the law are willful. We are confident that our investigative strategy is proper and will result in cases being brought against appropriate defendants under the NET Act in short order. These cases when combined with educational campaigns sponsored by industry and technology advances designed to make illegal copying more difficult hopefully will make a real dent in the practice of digital piracy.
Finally, we note that the applicable sentencing guideline continues to result in disproportionately low sentences by failing to take into consideration the value of the legitimate goods that are pirated. Although Congress in the NET Act directed the sentencing commission to remedy that problem, the problem was studied. But, as yet, the guideline has not been changed. We hope that the Sentencing Commission, once it is reconstituted will make fixing this problem one of its top priorities.
Thank you, Mr. Chairman. And I will be happy, when the time come, s to try to answer any questions that you or the Members present have.
Mr. COBLE. You deserve a blue ribbon. You beat the red light very measurably. Thank you, Mr. Di Gregory.
Folks, I don't want anybody to feel that you can't take your full 5 minutes. By all means do that. But I appreciate that, Mr. Di Gregory.
Page 17 PREV PAGE TOP OF DOC [The prepared statement of Mr. Di Gregory follows:]
PREPARED STATEMENT OF KEVIN V. DI GREGORY, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION
Mr. Chairman and members of the Subcommittee: As you may recall, in September of 1997 I testified before this Subcommittee to express the Department's strong support for the ''No Electronic Theft (NET) Act,'' which was subsequently enacted as Pub. L. No. 105147. Your efforts resulted in the passage of an Act that substantially improved the criminal copyright law. I greatly appreciate this opportunity to describe for you the experience of law enforcement in combating digital copyright piracy, and particularly our efforts to enforce the NET Act.
The Department of Justice and the law enforcement agencies responsible for criminal enforcement of the laws protecting intellectual property are devoting more resources and attention to this area of crime than ever before. Our efforts to combat digital copyright piracy have concentrated on training agents and prosecutors, and on developing good cases for prosecution. These efforts include an initiative to bring NET Act cases in jurisdictions around the country under appropriate circumstances. While none of these investigations has yet resulted in indictments, we are on course to bring sound cases under the NET Act in the near term.
A. THE CHALLENGES OF DIGITAL PIRACY
As I testified in 1997, digital piracy presents many significant challenges to law enforcement that are not present in investigating and prosecuting the physical distribution of copyrighted works. First, physical-world copyright piracy typically requires expensive manufacturing equipment, storage facilities, and a distribution chain, including middlemen and retailers. The producer of such material makes a worthwhile target for criminal investigation. By contrast, the illegal digital distribution of copyrighted works requires only a $600 computer and an Internet account. That means that almost anyone so inclined can become a digital pirate without a significant investment in time or money, and the Internet pirate is a less obvious focus for a criminal investigation.
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Second, while illegally copied videotapes or compact discs are distributed to the end user, digitized copyrighted works can themselves be recopied and distributed as second, third, or fourth generation piracy, with no degradation in quality. By this process, the illegal software can propagate widely, resulting in incalculable harm to the copyright holder and important practical difficulties in calculating loss and damages.
Third, digital distribution occurs behind closed doors, and so does not create a noticeable crime problem within a particular geographical area in a manner likely to draw the attention of law enforcement agents or a local United States Attorney. Instead, the crime problem occurs in cyberspace, where no specific United States Attorney has primary responsibility or jurisdiction. Indeed, even if law enforcement agents in one jurisdiction decide to conduct an online investigation into copyright piracy, they are likely to discover after substantial investigation that the venue belongs elsewhere, leaving them without a crime to prosecute in their own district.
Finally, and perhaps most importantly, investigating digital copyright piracy requires agents that are not only experienced criminal investigators, but also possess special technical skills. Law enforcement agencies are often unable to pay the salaries that enable them to compete with the private sector to attract or retain such computer savvy agents. Those agents who are technically adept are in high demand to fight the growing incidence of attacks on the confidentiality, integrity and availability of computers and networks, leaving few to focus on digital piracy.
These challenges to effective enforcement of the laws prohibiting digital piracy have not abated. To the contrary, the rapid growth of the Internet has made more types of pirated materials accessible, and made it much easier for an ever increasing audience to obtain such materials.
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Even just a few years ago, most pirated materials were distributed through Bulletin Board Services (BBSs), which operated like private clubs, requiring a password to gain access to the illegally copied software. To obtain a password, and the right to download illegal software, a prospective member would have to provide (or upload) some copyrighted software. Such BBSs, while a significant problem, caused only a finite amount of harm, because they restricted access to the public so substantially.
While some such BBSs still exist, the damage they cause has been dwarfed by websites offering anywhere between a few to a few hundred copyrighted programs for free to anyone able to maneuver a mouse. Now, even a new computer user can use a standard search engine, look for ''warez'' (the term used for illegal software), and find literally thousands of websites offering illegal software for free. (Some search engines, such as Yahoo, are no longer indexing warez sites; we hope the other large search engines will follow suit.) Once on a website, the user simply has to choose the program from a list, and click to download the program right to his or her computer.
Evidence gathered from criminal investigations suggest that even a run-of-the-mill warez site can draw hundreds or even thousands of ''hits'' or downloads every day, with no way to track the number of additional times the downloader then transfers the same program to other users. Some of these sites operate as ''pointer'' sites, storing no illegal software on their site but linking the user (often seamlessly) to sites that do make illegally copied works available. Many websites are ''mirrors''exact duplicatesof other sites, so that even when one site is shut down, many other identical sites remain up and running, some from servers located outside the United States.
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In addition to the greater ease of use, consumers of pirated works now have a larger choice of products: the software companies are now not the only industry being victimized by piracy. The recording industry is facing rampant Internet digital theft; illegally copied video games are widespread; and the movie industry is properly apprehensive about video piracy becoming commonplace in the near future. The problem of digital copyright piracy promises only to increase.
B. LAW ENFORCEMENT INITIATIVES
The Criminal Division and the U.S. Attorneys have been giving considerable attention to the problem of digital piracy. The Criminal Division's Computer Crime and Intellectual Property Section, with its expertise in both computer and copyright crime, has been the focal point for planning and implementing our strategy for combating digital piracy.
Working in particular with the FBI, we have focused on training agents and prosecutors as well as on developing good cases. Our training efforts have included educating agents and prosecutors on the importance of bringing prosecutions in this area, as well as the considerations and techniques unique to these types of crimes. Those training efforts have largely been devoted to agents and prosecutors who are already familiar with computer investigations, particularly the FBI's Computer Crime Squads, and Assistant United States Attorneys designated as ''Computer and Telecommunications Coordinators'' (CTCs) in every judicial district in the United States. These training sessions will be offered to other agents and prosecutors as well, and we are working with victim industries to ensure that law enforcement is fully informed on the types of injuries they are sustaining.
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Besides training, we are continuing to devote much of our resources to investigating and prosecuting ''for profit'' illegal sales of copyrighted goods. That is because copyright pirates who charge for their products instead of giving them away for free tend to run larger operations, make less sympathetic defendants, and offer avenues for investigation (such as bank records) that can be used as evidence to tie an individual to acts of digital piracy and demonstrate intent to violate the copyright laws.
We have also established an initiative with the FBI to develop prosecutions under the NET Act. While we have not yet announced any indictments, we are working closely with the affected industries through an ongoing program to identify serious offenders. Once these offenders are identified, law enforcement conducts an investigation to determine: (i) who is responsible for putting up and maintaining the website; (ii) whether there is sufficient evidence of criminal intent to warrant prosecution; and (iii) the best venue for prosecution. If further investigation is warranted, the case is then referred to the office where venue is appropriate. We are continually fine-tuning this initiative to ensure that investigations are handled as quickly and efficiently as possible.
This initiative has underscored that, although there are many websites on the Internet offering illegal software and other copyrighted materials, investigating and prosecuting the offenders is hardly shooting fish in a barrel. We have terminated federal criminal investigations when we find the perpetrator is a juvenile and therefore not normally subject to federal prosecution, not an infrequent occurrence in these types of crimes. We have seen websites move to an overseas server, immensely complicating investigations. We have closed investigations when we are unable to assemble sufficient evidence to prove beyond a reasonable doubt that a particular person created and maintained the website, And we have closed other investigations because we believed that we could not show the ''willfulness'' necessary to bring criminal charges.
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Despite the difficulties we have encountered in these investigations, we are confident that our investigation strategy is sound, and will result in charges being brought against appropriate defendants under the NET Act in short order. We believe that, while industry is understandably eager to see indictments and convictions, they understand the complexities involved in these investigations, and are supportive of our efforts in this area.
Of course, we are under no illusions that sufficient resources can or should be diverted from other crime areas to support hundreds or even dozens of prosecutions under the NET Act. We also recognize that NET Act defendantsbecause they tend to be young and acting without a profit motivetend to make more sympathetic defendants than those in most criminal cases, and that U.S. Attorney's Offices are naturally reluctant to bring such prosecutions. However, even a handful of appropriate and well-publicized prosecutions under the NET Act is likely to have a strong deterrent impact, particularly because the crime in question is a hobby, and not a means to make a living. If these prosecutions are accompanied by a vigorous anti-piracy educational campaign sponsored by industry, and by technological advances designed to make illegal copying more difficult, we are hopeful that a real dent can be made in the practice of digital piracy.
C. THE SENTENCING GUIDELINES
There is one other serious obstacle to prosecutions that affects not only digital piracy, but also all intellectual property criminal enforcement. That is the current Sentencing Guideline that covers copyright and trademark violations, §2B5.3. That Guideline instructs courts to calculate sentencing based on the retail value of the infringing items. The Guideline's application note makes clear that '' '[i]nfringing items' means the items that violate the copyright or trademark laws (not the legitimate items that are infringed upon).''
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For years, the Sentencing Guideline's exclusive focus on the low retail value of the infringing goods, without regard to the actual value of the legitimate goods, has led courts to impose lower sentences on defendants who commit intellectual property crimes than those who commit other types of fraud. The low sentences lead to a reluctance on the part of law enforcement agencies and prosecutors to commit scarce resources to investigating and prosecuting these cases. The lack of enforcement, in turn, contributes to the all too accurate perception that intellectual property crimes are associated with high profits and low risks, which helps fuel the growth of this crime area.
Recognizing this problem, Congress passed, as part of the NET Act, a directive to the Sentencing Commission. That directive stated as follows:
(g) DIRECTIVE TO SENTENCING COMMISSION.(1) [T]he United States Sentencing Commission shall ensure that the applicable guideline range for a defendant convicted of a crime against intellectual property (including offenses set forth at section 506(a) of title 17, United States Code, and sections 2319, 2319A, and 2320 of title 18, United States Code) is sufficiently stringent to deter such a crime and to adequately reflect the additional considerations set forth in paragraph (2) of this subsection.
(2) In implementing paragraph (1), the Sentencing Commission shall ensure that the guidelines provide for consideration of the retail value and quantity of the items with respect to which the crime against intellectual property was committed.
(Statutory citations omitted and emphasis added.)
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Unfortunately, the Sentencing Commission did not amend the Guideline by May of 1998, as part of its normal amendment cycle. Instead, the Commission asked for further public comment, making clear that it was concerned that a Sentencing Guideline that focused exclusively on the retail value of the infringed upon items may result in disproportionately harsh sentences. In response, the Justice Department sent a letter to the Commission (which we can make available to the Subcommittee) that included a new proposed guideline balancing the concerns of law enforcement with the concerns articulated by the Commission. Despite the intellectual property community's strong support of our approach, the Commission declined to adopt this or any other change, and elected to direct its staff to further study the issue.
That study has been completed, with inconclusive results. We now have, of course, no Sentencing Commissioners and no clear timetable for when this issue will be addressed.
The current Guideline's unfortunate focus only on the retail value of the infringing item has important repercussions in the NET Act cases. We can argue that the retail value of an infringing computer software application or music compact disc is the same as the retail value of the legitimate good, minus the packaging. After all, the consumer is receiving the same item as if he or she had bought it at the store, or downloaded it legitimately.
We recognize, however, that an argument could be made that the retail value of the infringing item should be calculated by the black market price of that item, as it has been in for-profit cases. In NET Act cases, where the goods are given away, the black market price is $0, leading to an offense level at the very bottom of the Sentencing Guideline scale. This, in turn, reduces the incentive to expend investigative and prosecutive resources on NET Act cases. We remain optimistic, however, that our future work with the Sentencing Commission will lead to a more equitable sentencing scheme.
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I would be happy to answer any questions you may have at this time.
Mr. COBLE. Mr. McGrath, if you would, identify your associate.
Mr. MCGRATH. Mr. Chairman, this is John Steer who is the general counsel with the Sentencing Commission.
Mr. COBLE. Good to have you with us, sir.
STATEMENT OF TIMOTHY McGRATH, INTERIM STAFF DIRECTOR OF THE UNITED STATES SENTENCING COMMISSION
Mr. MCGRATH. Thank you, Mr. Chairman.
This is my maiden voyage testifying before Congress. I do appreciate the signals and will try to keep within the time.
I appreciate the opportunity to update the subcommittee on the progress that the Commission has made toward implementing the two legislative directives under the No Electronic Theft Act.
As you know, the Commission has been without any voting members since October 1998 and, as a result, has been prevented from promulgating amendments that respond to the NET Act. However, both the former commissioners and staff have worked diligently to implement the NET Act.
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Today, I would like to review the process that the Commission has undertaken, summarize some of the complicated factors that we have confronted, and briefly highlight some of the Commission's findings. The NET Act contains two directives to the Commission. First, that it ensures that the guideline range for intellectual property offenses is sufficiently stringent to deter such offenses. And second, that the guidelines provide for consideration of the retail value and quantity of the items that were infringed.
Congress passed the NET Act in December 1997. And the very next month the Commission began to act on it. In January 1998, the Commission published a proposal from the Department of Justice as well as a general issue for comment on how to address the directives.
In March 1998, the Commission received public comment and heard testimony from various industry representatives including the Recording Industry Association of America and the International Anticounterfeiting Coalition. The Commission supplemented the formal public comments the next month by conducting informal meetings with the Department of Justice and industry representatives. Our staff also examined the characteristics of all 106 copyright and trademark infringement cases sentenced since 1996.
However, by the end of April the former commissioners agreed that it would not be prudent to force a rushed unanimous consensus on the complicated issues raised by the NET Act, particularly at a time when the seven-member commission was down to merely four members, and it takes all four members to pass any modifications of the guidelines.
Instead they voted to publish for further comment three amendment options. The Commission also directed staff to conduct a more detailed study to assist incoming commissioners in responding to the act. Commission staff subsequently completed an extensive report on the NET Act that was released in February 1999. I know that copies were provided to the subcommittee.
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This report reflects a series of meetings with economists and industry representatives including the Business Software Alliance and the Motion Picture Association both of which are testifying here today, as well as the Software Publishers Association, the Interactive Digital Software Association, and others. Developing an appropriate response to the Act has been a complicated task for several reasons.
First, the legislative history indicates that the Congress's primary purpose in enacting the NET Act was to reverse the practical consequences of the LaMacchia case and criminalize the computer theft of copyrighted works whether or not the defendant derives financial gains or commercial advantage. However, the directives to the Commission sweep far more broadly. They cover not only electronic copyrighted works but all copyrighted works and also trademark infringements. Indeed, the first directive requires the Commission to do nothing less than conduct a comprehensive reassessment of the intellectual property offense guideline.
Another complicating factor is the difficulty in calculating the harm caused by intellectual property offenses. Like the guidelines for other economic crimes, the guidelines for intellectual property offenses provides for increased punishments based on the adjustments that estimates the harm to the victim. However, the relevant guideline covers a variety of infringement crimes and the type and magnitude of harm in infringement cases varies widely depending upon the type of item infringed, the method of infringement, and the quantity of the infringed item.
For example, the sale of obviously counterfeited purses at a deep discount at a flea market and the illegal uploading from an Internet site of high quality pirated software that results in infringed software being made widely available at no cost causes very different types of magnitudes of harm. The Commission faces the challenge of developing a guideline that takes these differences into consideration in attempting to provide proportionality in sentencing.
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Finally, I would like to share some of our findings in the report as supplemented by some updated statistics that we have for this year. First, there were 137 cases sentenced under the intellectual property offense guideline in 1998 compared to 107 in fiscal year 1996. That is a 28 percent increase. Nonetheless, the relatively low number of prosecutions might raise the question of whether increasing the number of cases prosecuted would deter intellectual property offenses as well as changing the penalty structure.
Second, the vast majority of cases sentenced under the guidelines involved the manufacture and distribution of counterfeit goods such as clothing, accessories, handbags, watches, and pens. Copyright violations of videos and recordings have comprised about 25 percent of the cases sentenced under the guidelines. Our study reveals only five cases of on-line infringement.
The Internet poses a unique challenge for setting an appropriate penalty structure because of four factors. One, the relative ease and low cost of software duplication; two, the high quality of pirated articles; three, the difficulty of locating the offender; and, four, the difficulty in ascertaining how many times an illegal copy has been made.
Perhaps our most important finding is that there are no simple formulas that exist for accurately calculating the harm caused by the range of different types of intellectual property offenses. Distinct types of harm can be recognized, but whether and to what degree each harm is present in any given case will depend on the type of item infringed, method of infringement, and the quality of the infringing item.
Page 29 PREV PAGE TOP OF DOC Take, for example, lost sales. The majority of cases sentenced under the relevant guideline involve the sale of trademark goods at a fraction of the price of their legitimate counterparts, often in settings that suggest that the purchasers knew that they were not buying legitimate items. The consumer's willing participation and the large discrepancy between the price of the legitimate and counterfeit goods suggest that the consumer would not or could not have purchased the legitimate goods if the infringing item had not been made available. Thus a one-to-one correlation between sales of infringing items and the displacement of sales of legitimate items generally does not exist in most cases sentenced under the guidelines.
Finally, just to underscore how comprehensive our reassessment of the intellectual property offense guideline has been, the Commission has looked beyond the specifics of the directive for other ways to better measure the seriousness of the offense and the culpability of the defendant. The Commission's staff have identified eight proposals that may warrant consideration by the incoming commissioners. Although I will not go into them specifically, they include such things as sentencing enhancements for defendants who illegally manufacture, import, or upload copyrighted or trademark articles, or for the defendant who breaches special security measures such as encryption. Other suggestions include adding a sentence enhancement for offenses involving the violation of prereleased copyrighted or trademark articles with the conscious or reckless risk of serious bodily injury.
A revised guideline that has these types of enhancements might offer a more proportionate and effective way of accomplishing crime control objectives in this area.
In conclusion, we are confident that the incoming commissioners will be well-prepared to develop, evaluate, and promulgate the appropriate responses to the NET Act in short order.
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Mr. Chairman, if I may move to have our report submitted for the record so that it would be made a part of these proceedings.
Mr. COBLE. Thank you, gentlemen.
[The prepared statement of McGrath follows:]
PREPARED STATEMENT OF TIMOTHY MCGRATH, INTERIM STAFF DIRECTOR OF THE UNITED STATES SENTENCING COMMISSION
Hon. HOWARD COBLE, Chairman,
|United States Sentencing|
|Washington, DC, May 18, 1999.|
Courts and Intellectual Property
Subcommittee, Committee on the Judiciary,
House of Representatives, Washington, DC.
Re: No Electronic Theft Act Hearing of May 12, 1999
DEAR CHAIRMAN COBLE: Thank you for inviting the United States Sentencing Commission to testify before the Courts and Intellectual Property Subcommittee concerning the implementation of the No Electronic Theft Act (the ''NET Act''). During the course of the hearing, several issues were raised by other witnesses that we believe reflect a misunderstanding of the current intellectual property offense sentencing guideline and the NET Act Report issued by Commission staff in February, 1999. As a result, I am writing to provide some clarification and respectfully request that this letter be included as part of the hearing record.
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Several witnesses, including the Department of Justice, claimed that the current intellectual property offense guideline provides insufficient incentive for United States Attorneys to prosecute precisely the type of offenses that the NET Act was designed to address: illegal copying via the Internet of exact duplicates of legitimate software, recordings and videos. The paradigm case provided at the hearing is one in which an infringer illegally makes available on the Internet at no cost to others software that sells in the legitimate market at a retail price of $300. The Department and industry representatives testified that in this scenario, the monetary adjustment provided by the guideline would be SO because the price at which the infringing item is sold is zero. We believe this result is incorrect and reflects a fundamental misunderstanding of the sentencing guideline for intellectual property offenses as it currently exists.
The intellectual property offense guideline currently provides for increasing penalties based on a monetary calculation using, the retail value of the infringing item, not the retail price of that item. In many infringement cases (particularly trademark cases), these amounts may be approximately the same and, therefore, the distinction between the two is immaterial. However, the distinction is very important in cases like the Internet theft case outlined by the Department and industry representatives. Although the retail price at which the infringer may sell the duplicate software may be zero, the retail value of the pirated software is far greater. Indeed, as several witnesses stated, the retail value of infringing software that is an exact duplicate of the legitimate version is virtually the same as the retail value of the infringed version. In other words, in the case above, the monetary adjustment under the guideline as it currently exists should be calculated using, the $300 figure, not zero, as the value of the infringing software. Thus, the assertion by some witnesses that the current intellectual property offense guideline provides insufficient incentive to prosecute this type of case because the monetary adjustment is zero is without merit.
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In fact, several circuit courts have recognized the appropriateness of using the retail value for genuine merchandise to determine the monetary adjustment under the current intellectual property offense guideline when the unauthorized copies are of sufficient quality to permit their distribution through normal retail outlets. See United States v. Cho, 136 F.3d 982 (5th Cir. 1998); United States v. Hicks, 46 F.3d 1128 (4th Cir. 1995); United States v. Kim, 963 F.2d 65 (5th Cir. 1992); United States v. Larracuente, 952 F.2d 672 (2nd Cir. 1992). We have attempted to explain this issue of guideline application to representatives of the Department on a number of occasions, as well as in our NET Act Report. See NET Act Report at pp. 1213, 27. In sum, notwithstanding the NET Act and how the Commission ultimately responds, when properly applied, the sentencing guideline already permits the Department to effectively use the retail value of the infringed software in the type of case specifically targeted by the NET Act.
Moreover, contrary to the implication of some witnesses' testimony, there is widespread agreement among Commission staff that using the retail value of the infringed software is the appropriate result in cases as described above. In addition to being able to use the retail value of the infringed software under the current guideline, under every option analyzed by Commission staff in the NET Act Report, the retail value of the infringed software would be used to calculate the monetary harm adjustment. See NET Act Report at pp. 21 (Method 1), 2526 (Method 2), 27 (Method 3). Thus, it is patently incorrect that Commission staff have issued a report ''rejecting the direct congressional mandate,'' as one witness stated.
Toward the end of the hearing, it was suggested that additional legislation may be required to force the Commission to implement the directives contained in the NET Act. We hope that the Subcommittee will not find this step necessary. As does the Subcommittee, Commission staff anxiously await the appointment of new commissioners, and we have every expect, and have prepared for, their prompt attention to the implementation of the NET Act. That also was the expectation of former Chairman Conaboy and his fellow commissioners for, prior to their leaving, they instructed staff to continue its analysis of the NET Act in order to make sure that incoming commissioners are prepared to respond to the NET Act in short order.
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In preparing, the report, Commission staff tried to anticipate questions that may be raised by incoming commissioners. It has been our experience that, before promulgating any amendments to the guidelines, commissioners request, among other things, a proportionality analysis. Indeed, under the Sentencing Reform Act, commissioners are required to consider proportionality of punishment in setting the guidelines. In the intellectual property offense area, this translates into treating intellectual property infringers similarly to other economic crime offenders. The guidelines for economic crimes generally provide for increasing punishment depending on the amount of harm caused to the victim, and, as a result, the Report is largely devoted to trying to estimate the harm caused by intellectual property offenses. In the theft of real property such as a car, that calculation is easy. However, Commission staff, through extensive discussions with economists, civil lawyers who specialize in intellectual property law, and representatives of the Department of Justice and industry, have found that estimating the harm to the victims of an intellectual property offense is far more complicated. Accordingly, we would welcome further dialogue on that issue with Subcommittee staff, the Department of Justice, and industry representatives.
The staff of the Sentencing Commission stand ready to assist incoming Commissioners in implementing the congressional directives contained in the NET Act and look forward to working more closely with Subcommittee staff. Thank you for the opportunity to supplement our testimony and further clarify how the current guidelines operate and how the Commission to date has responded to the NET Act.
Chairman Coble, members of the Subcommittee, I am Timothy McGrath, Interim Staff Director of the United States Sentencing Commission (the ''Commission''). John Steer, our General Counsel, also is with me and available to answer questions. I appreciate the opportunity to update the Subcommittee on the progress the Commission has made toward implementing the two legislative directives contained in the No Electronic Theft Act (the ''NET Act'').(see footnote 1)
As you know, the Commission has been without any voting members since October 1998, and as a result has been prevented from promulgating amendments that respond to the NET Act. However, both the former Commissioners and staff have worked diligently to implement the NET Act. Today I would like to review the process the Commission has undertaken, summarize some of the complicating factors we have confronted, and briefly highlight some of the Commission's findings.
The NET Act contains two directives to the Commissionfirst, that it ensure that the guideline range for intellectual property offenses is sufficiently stringent to deter such offenses, and second, that the guidelines provide for consideration of the retail value and quantity of the items that were infringed. Congress passed the NET Act in December 1997, and the very next month the Commission began to act on it. In January 1998, the Commission published a proposal from the Department of Justice as well as a general issue for comment on how to address the directives. In March, 1998, the Commission received public comment and heard testimony from various industry representatives, including the Recording Industry Association of America and the International AntiCounterfeiting Coalition. The Commission supplemented the formal public comments the next month by conducting informal meetings with Department of Justice and industry representatives. Our staff also examined the characteristics of all 106 copyright and trademark infringement cases sentenced in fiscal year 1996.
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However, by the end of April, the former Commissioners agreed that it would not be prudent to force a rushed unanimous consensus on the complicated issues raised by the NET Actparticularly at a time when there were only four commissionersand instead they voted to publish for further comment three amendment options. The Commission also directed staff to conduct a more detailed study to assist incoming commissioners in responding to the Act.
Commission staff subsequently completed an extensive report on the NET Act that was released in February, 1999. This report reflects a series of meetings with economists and industry representatives, including the Business Software Alliance and the Motion Picture Association, both of which are testifying today, as well as the Software Publishers Association, the Interactive Digital Software Association, and others.
Developing an appropriate response to the Act has been a complicated task for several reasons. First, the legislative history indicates that Congress's primary purpose in enacting the NET Act was to reverse the practical consequences of the LaMacchia case(see footnote 2) and criminalize the computer theft of copyrighted works, whether or not the defendant derives a financial gain or commercial advantage.(see footnote 3) However, the directives to the Commission sweep far broader. They cover not only electronic copyrighted works, but all copyrighted works, and also trademark infringements. Indeed, the first directive requires the Commission to do nothing less than conduct a comprehensive reassessment of the intellectual property offense guideline.
Another complicating factor is the difficulty in calculating the harm caused by intellectual property offenses. Like the guidelines for other economic crimes, the guideline for intellectual property offenses provides for increasing punishments based on an adjustment that estimates the harm to the victim. However, the relevant guideline covers a variety of infringement crimes, and the type and magnitude of harm in infringement cases varies widely depending on the type of item infringed, the method of infringement, and the quality of the infringing item. For example, the sale of obviously counterfeit purses at deep discounts at a flea market and the illegal uploading to an Internet site of high quality, pirated software that results in the infringed software being made widely available at no cost cause very different types and magnitudes of harm. The Commission faces the challenge of developing a guideline that takes these differences into consideration in attempting to provide proportionality in sentencing.
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Finally, I would like to share some of our findings in the Report as supplemented by an updated data analysis. First, there were 137 cases sentenced under the intellectual property offense guideline in fiscal year 1998, compared to 107 in fiscal year 1996, a 28% increase. Nonetheless, the relatively low number of prosecutions might raise the question of whether increasing the number of cases prosecuted would deter intellectual property offenses as well as changing the penalty structure. Second, the vast majority of cases sentenced under the guideline involve the manufacture and distribution of counterfeit goods such as clothing, accessories, handbags, watches, and pens. Copyright violations of videos and recordings comprise approximately 25% of cases sentenced under the guideline.
Our study revealed only five cases of online infringement. The Internet poses a unique challenge for setting an appropriate penalty structure because of four factors: 1) the relative ease and low cost of software duplication, 2) the high quality of the pirated articles, 3) the difficulty in locating the offender, and 4) the difficulty in ascertaining how many times an illegal copy has been made.
Perhaps our most important finding is that no simple formula exists for accurately calculating the harm caused by the range of different types of intellectual property offenses. Distinct types of harm can be categorized, but whether and to what degree each harm is present in any given case will depend on the type of item infringed, the method of infringement, and the quality of the infringing item. Take, for example, lost sales. The majority of cases sentenced under the relevant guideline involve the sale of trademarked goods at a fraction of the price of their legitimate counterparts, often in settings that suggest the purchasers knew they were not buying legitimate articles. The consumer's complicity and the large disparity between the price of the legitimate and counterfeit good suggest that the consumer would notor could nothave purchased the legitimate good if the infringing item had not been available. Thus, a one-to-one correlation between sales of infringing items and the displacement of sales of legitimate items generally does not exist in most cases sentenced under the guideline.
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Finally, just to underscore how comprehensive our reassessment of the intellectual property offense guideline has been, the Commission has looked beyond the specifics of the directives for other ways to better measure the seriousness of the offense and the culpability of the defendant. Commission staff have identified eight proposals that may warrant consideration by the incoming Commission. Although I cannot go into all of them here, they include sentencing enhancements for defendants who illegally manufacture, import or upload copyrighted or trademarked articles, or for defendants who breach special security measures such as encryption. Other suggestions include adding a sentencing enhancement for offenses involving the violation of pre-release copyrighted or trademarked articles or the conscious or reckless risk of serious bodily injury. A revised guideline that contains these types of enhancements might offer a more proportionate and effective way of accomplishing crime control objectives in this area.
In conclusion, we are confident that incoming Commissioners will be well prepared to develop, evaluate, and promulgate appropriate responses to the NET Act in short order. Mr. Steer and I will be glad to try to answer any questions you may have. Thank you.
Mr. COBLE. Mr. Di Gregory, Mr. Goodlatte and I wrote to Attorney General Reno for more or less a status request. Basically asking, under the NET bill, what steps are being taken to enforce the NET Act? Our letter was dated March 10 of this year. On May 10 we received a fax reply from her.
Mr. Di Gregory, in your statement you discuss the difficulty of being able to track down the location and identity of an operator of an infringing web site. Specifically, how are you all communicating with the intellectual property companies to gather that information in order to assist in the investigation?
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Mr. DI GREGORY. Well, let me begin by telling you, Mr. Chairman, that on the 25th of January of this year, I participated in a meeting that was, I believe, asked for by the industry and that was chaired by assistant attorney Jim Robinson. It was an opportunity for the industry to come to us and discuss with us the problems that they had with respect to not only software piracy but with other types of trademark and copyright infringement.
I think the dialogue that was conducted at that meeting with Mr. Robinson and with members of our computer crime intellectual property section was a good one. It is my understanding that that dialogue is continuing on a fairly regular basis among the lawyers in the Computer Crime Intellectual Property Section, the industry, and the FBI who were responsible in the first instance for initiating investigations with respect to software piracy.
Mr. COBLE. Mr. McGrath, the NET Act explicitly states that the Congress intends to impose strict penalties for copyright infringement in order to deter such conduct and that the Sentencing Commission should institute guidelines that are strict enough to, in fact, serve as a deterrent.
Why did not the Sentencing Commission report address deterrence?
Mr. MCGRATH. Congressman, if you look at the report a little closely, there is a theme that does talk about deterrence generally under the guidelines and then specifically under the NET Act.
Deterrence is a very difficult animal to capture. I think my general counsel, if he could talk about how it applies throughout the guidelines themselves and how we specifically addressed it under the NET Act, I would appreciate it. John.
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Mr. COBLE. Very well. Mr. Steer.
Mr. STEER. Mr. Chairman, as Mr. McGrath indicated, it is hard to measure deterrence. I recall when I first joined the Commission staff back in 1986, the first seven commissioners had been together for a few weeks at that time and they had spent nearly their entire time talking about the purposes of sentencing generally including deterrence. Some were advocates of deterrence and some were advocates of just punishment.
The point is that after they had sat around the table and debated for all of these weeks, they realized that they weren't getting anywhere. So a couple of the more pragmatic of the original commissioners said, look, we have got to write sentencing guidelines. There is no formula in this area that is going to tell us how severe penalties have to be in order to deter crime.
What they tried to do in the white collar crime area generally is to provide that there would be an increase in the number of defendants who would suffer some loss of liberty as a result of the guideline penalties compared to penalties that prevailed before the guidelines. Our measurement showed that even under the existing guidelines that has been achieved.
Before the guidelines, about 70 percent of the defendants convicted of this type of crime got straight probation. Now under the guidelines that figure is down to about 45 percent. It may still be too high. It may be that the penalties need to be increased further. That is a judgment that the incoming commissioners will need to make. With this report I think they will be in a better position to do that.
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Mr. COBLE. Mr. Di Gregory, in the response that I received yesterdaywell, it was sent Monday night, but I didn't get it until yesterdayfrom the Attorney General in response to our request concerning the implementation of the NET Act, it was mentioned that one of the problems with prosecuting Internet infringes was that many web sites only carry a small amount of works.
The NET Act stated that not only the number of infringed works but also the retail value of the works were to be considered for purposes of prosecution. What is the Department of Justice's position on what is the retail value of an infringed work?
Mr. DI GREGORY. Well, Mr. Chairman, first of all, I failed to do so in response to your other question, let me apologize for the tardiness of the response. I am glad that you were able to get the response before the hearing, but I apologize that it was so soon before the hearing.
Mr. COBLE. That is probably not your fault, but I appreciate you saying that.
Mr. DI GREGORY. With respect to retail value, retail value of the item means retail value, or the position that we would take would be that then it would mean the price of the item.
Mr. COBLE. The price of the item?
Page 41 PREV PAGE TOP OF DOC Mr. DI GREGORY. The retail price of the item as it is made available to consumers.
Mr. COBLE. The gentleman from California.
Mr. ROGAN. Mr. Chairman, thank you.
Mr. Di Gregory, good afternoon. Thank you for your testimony.
Let me share with you up front a degree of frustration that I am feeling and I think some of my colleagues are feeling. The NET Act has been on the books now for a year and a half and to date there have been no prosecutions under it. I am trying to understand from your written testimony and your presentation today what exactly has precluded the Department of Justice from proceeding under this law.
If you can summarize that for me in about a minute, if possible, to just help me follow this line of theory.
Mr. DI GREGORY. I will try to do that.
Let me say that I share your frustration. It is, I think, a question of difficulty in identifying the infringers. I think it is a question of selecting, recognizing that there are a limited number of resources that the Department has to bring to bear, recognizing that there are a limited number of resources that each and every United States attorneys office has to bring to bear.
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It is a question of selecting the right cases which would have the most significant deterrent impact perhaps. So a combination of factors have led to this difficulty. I want to stress again that we are working with the FBI; we are conducting investigations. In fact, if I may I can talk to you a little bit about some of the specific problems that we have encountered when we have conducted these investigations.
We, for example, have terminated Federal criminal investigations when web sites move overseas or had complications in our investigations when web sites moved overseas. We closed them, when we haven't been able to assemble sufficient evidence to establish, beyond a reasonable doubt, that a particular person created and maintained the web site. Those are the kinds of difficulties that we encounter but we will persevere and we are going to bring these cases.
Mr. ROGAN. I don't want to give you the wrong impression. I don't intend to shoot the messenger. I understand that you are merely the spokesperson for the Department of Justice, but here is my concern. We have heard from a lot of intellectual property-based industries that there is no shortage of potential prosecutions that could be pursued under the act.
I was reading your prepared testimony. I refer you to page 6 toward the bottom, the last paragraph. Let me just read it.
''We have also established an initiative with the FBI to develop prosecutions under the NET Act. While we have not yet announced any indictments, we are working closely with the affected industries through an ongoing program to identify serious offenders. Once these offenders are identified, law enforcement conducts an investigation to determine'' a number of things.
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Let us just take this one step at a time. I am assuming that irrespective of those isolated incidences where you have difficulty in pursuing an individualized prosecution, there must be a plethora of individuals who, at this point, have been identified by the FBI and by your Department.
Is that a fair statement?
Mr. DI GREGORY. I think it is a fair statement that there are individuals who have been identified. Whether or not with respect to any number of those individuals we have been able to muster the requisite proof to bring an indictment, I don't know.
Mr. ROGAN. Let's just walk through this. If you don't know the answer, please tell me.
Of that universe of individual offenders who have been identified, have you been able to identify who is responsible for putting up and maintaining the particular web site under investigation? Do you have a universe of people that fit into that category?
Mr. DI GREGORY. I don't know the specific answer to that question. I know we have been having difficulty in making such identifications.
Mr. ROGAN. This law has been on the books for a year and a half. Is it your position or is it your understanding that in a one and a half year program with the FBI there hasn't been a single identification that has been made of offenders who were conducting piracy?
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Mr. DI GREGORY. I am not suggesting that at all with my testimony.
Mr. ROGAN. Because if they were pirates, that would certainly put them within the bounds of potential prosecution. Looking at page 7 of your testimony, the next test would be whether there is sufficient evidence of criminal intent to warrant prosecution; then No. 3, the best venue for prosecution.
In summary, I have a concern that you do have out there a universe of potential defendants who have been identified where there is sufficient cause, but there is something that is holding up the prosecution. One suggestion you make is there is a feeling among the local prosecutors that venue isn't what it should be.
Or, as you suggest on page 8 of your testimony, that youthful defendants tend to make more sympathetic defendants than those in most criminal cases. Yet you recognize on page 8, that even a handful of appropriate and well-publicized prosecutions under the NET Act is likely to have a strong deterrent impact.
I guess really that is the point I am trying to make. Congress is waiting for the Department of Justice to act expeditiously on this. I understand that there are difficulties in proving up your case with a lot of these, but I have to believe that after a year and a half and with the resources of the Department of Justice and the FBI, if there had been a real commitment to the prosecution of NET Act offenders, it would be occurring. Despite the importance Congress has put on this issue, not a single indictment has yet been filed.
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I am wondering if you can tell us when such indictments might be imminent?
Mr. DI GREGORY. I can't tell you when they are going to occur. I guess that I learned a long time ago that if you set a deadline, people are going to be knocking on your door a day or two before the deadline.
Mr. ROGAN. We are almost there.
Mr. DI GREGORY. You can knock on my door anytime.
I would be glad to answer and talk to you about it, but we are working toward finding those cases that we think will have the deterrent impact.
Mr. ROGAN. Mr. Chairman, thank you.
Mr. COBLE. Thank you, Mr. Rogan.
Mr. Di Gregory, let me revisit my question and then I will recognize the gentleman from Indiana, if I may.
In my previous question, I asked about the retail value of a work. I was looking for the Department's position on whether the value of the infringed work should be calculated from the value of the infringed work or on the value of the infringed copies. That is where I was headed.
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Mr. DI GREGORY. We think that theif you are referring specifically to the Sentencing Commission and the sentencing guidelines, we have taken the position in the letter that we sent to the Sentencing Commission, I believe it was in August 1998, that the basic premise from which you must operate is that all violations and all calculations be based upon the value of the infringed-upon item.
Mr. COBLE. Furthermore, Mr. Di Gregory, will you respond in writing to those questions that Mr. Rogan put to you to which you didn't know the answer?
Mr. DI GREGORY. I will try to do that, Mr. Chairman.
Mr. COBLE. Gentlemen, Mr. Rogan touched on it. I think we have been pretty patient up here. This is not as if the NET Act was enacted yesterday. There has been several months where we have had this bill on the books and I think inactivity appears to be the rule of the day.
Mr. Pease, the gentleman from Indiana.
Mr. PEASE. Thank you, Mr. Chairman, and thank you to the members of the panel.
I regret that I was late. We have a bill on the floor right now as well. What usually happens and that is the case that has happened here, is that most of the areas that I wanted to address were addressed by Mr. Rogan.
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Let me just ask you in follow-up to his questions because I share the concern also, Mr. Di Gregory. And that is this, whether the Department of Justice believes that there may be problems with the statute that affect your ability to go forward with prosecution and if so, do you have any recommendations to us on that?
Mr. DI GREGORY. I don't think there are problems with the statute. I think that the problemthat one of the stumbling blocks to mounting effective prosecutions which will have a deterrent value is the failure of your directive to the Sentencing Commission to be acted upon.
One of the things that prosecutors look at in determining how to utilize their resources is, for lack of a better way of putting it, the potential return on their investment. And when you look at the sentencing guidelines with respect to this particular kind of crime and when you look at the need to ensure that the punishment is commensurate with the crime. That I would say to you is one of the factors, that is one of the stumbling blocks of mounting that effective group of well-publicized prosecutions.
Mr. PEASE. I guess that I would like to explore that a little further. The sentencing commission has failed to act, though they have done some work and they have made some progress.
Mr. DI GREGORY. They have done a lot of work.
Mr. PEASE. I don't see how that precludes the Justice Department from going forward with prosecution and, in fact, making a case at sentencing in the absence of a recommendation from the Commission on what they think is appropriate unless and until the Commission acts.
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Mr. DI GREGORY. I am not suggesting that it precludes us from going forward. I am just suggesting that in the calculus that a United States attorney would use in determining from the universe of cases out there dealing with all types of criminal activity, including intellectual property crime, that he will or she will consider what the potential sentence will be should the U.S. attorney expend the resources necessary to prosecute this crime and should the U.S. attorney partner up with the FBI and have the FBI expend the resources necessary to investigate that crime.
That U.S. attorney and that special agent in charge of the FBI office are going to look to what are the potential penalties going to be down the road even if they are able to successfully complete the prosecution.
Mr. PEASE. Thank you. Thank you, Mr. Chairman.
Mr. ROGAN. (Presiding.) Thank you, Mr. Di Gregory. Thank you Mr. McGrath. Thank you for your patience this afternoon. We appreciate your testimony.
The Chair at this time will invite up the second panel of witnesses. The first witness on this panel will be Batur Oktay, corporate counsel of Adobe Systems, Inc. Mr. Oktay manages anti-piracy programs for North America, Latin America, Asia, the Pacific, and Japan. He also manages the worldwide trademark and copyright programs and Internet domain, name acquisition and litigation.
Our second witness is Tim Starback of Emigre, Inc. Mr. Starback has over 7 years of experience in the software industry and is currently responsible for the online commerce and general management of Emigre, Inc. One of his primary duties at Emigre has been to reduce Internet piracy. He has authored a site dedicated to educate the software industry on how to track down software pirates and what remedies are currently available.
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Our last witness today is Tod Cohen who serves as vice president and counsel of new technology for the Motion Picture Association of America, otherwise known as MPAA. Mr. Cohen's responsibilities for MPAA include electronic commerce, Internet piracy policy, Internet governance, and on-line privacy of the association's member companies.
We have written statements from the witnesses on this panel. Without objection those will be entered into the record in their entirety.
Gentleman, I welcome you to the committee. If you could keep your statements to about 5-minutes or about when the red light comes on we would appreciate it.
Mr. ROGAN. Mr. Oktay, you are recognized.
STATEMENT OF BATUR OKTAY, CORPORATE COUNSEL, ADOBE SYSTEMS, INC. ON BEHALF OF THE BUSINESS SOFTWARE ALLIANCE
Mr. OKTAY. Good afternoon members of the subcommittee. My name is Batur Oktay. I am corporate counsel with Adobe Systems, Incorporated.
Thank you for giving me the opportunity to testify today on behalf of Adobe and the Business Software Alliance, the BSA. Thank you for holding this hearing to examine the implementation of the NET Act and to discuss Internet piracy overall.
Page 50 PREV PAGE TOP OF DOC As we all know, the success of the software industry in the U.S. is due, in large part, to the historical protections that we have granted to intellectual property owners. But piracy remains a very pervasive problem for members of this industry. It takes many forms. We have end-user copying, we have CD-ROM production, we have counterfeiting, and hard disk loading.
But Internet piracy has emerged as a new and virulent form of piracy that we are having a very difficult time with. In fact, the problem is so vast that it threatens to dwarf all of the other piracy problems that we are dealing with. I will go over a little bit of that today. The same features that makes the Internet very compelling and a tool with unparalleled economic promise make it a problem with the software industry in terms of protecting its intellectual property.
I will just go through a few of these items. First, the number of computer users with access to the Internet has grown substantially. On the Internet, unlike in the physical world, if you will, the Internet operates on a 24-hour basis, 7 days a week, 365 days a year. It is a vast marketplace.
The second item is ease of access to pirated web sites. It is increasing such that pirated software can now be found, located, and downloaded literally in a matter of minutes.
The third item is that it is very difficult for us to identify the persons who are creating and operating these pirate web sites or trafficking in pirate software on the Internet. Many of the people on the Internet who are engaging in piracy seem unconcerned with the prospect of facing civil litigation.
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It doesn't seem to have a deterrent value to them. They are very unresponsive to it in my experience. For this reason Congress passed the NET Act, as we all know, which seeks to bring to bear the deterrent value that only criminal prosecution can bring. Unfortunately, since 1997, Internet piracy has worsened while prosecutions under the NET Act have yet to materialize. I will give you an example of the proliferation of Internet piracy.
Last week, I went onto a search engine, Alta Vista, although you can choose just about any search engine to do this. I typed in the word ''warez,'' W-A-R-E-Z, which is pirate slang for freely downloadable software. I got over 10,000 hits when I typed that word in.
Not all of them were ware sites, but many of them were. I just went to the first screen which had about ten warez hits showing. I selected one, went to the site, and I immediately had access to every major product that my company produces with a nice little picture in color of the product box, double click, and I could download the software immediately. It took me literally less than 5-minutes to do. It is just one example of how pervasive this problem is.
Since the NET Act was passed, the BSA and the member companies have worked closely with the FBI and the DOJ by providing referrals, technical assistance, and training. We are very grateful for the response that we have received particularly from the Computer Crime and Intellectual Property Section and from the FBI's Washington field office.
But of the 97 criminal copyright cases that were brought by DOJ in 1998 only a few, a small handful, involved Internet piracy. We don't need a ton of enforcement in this area, we just need a deterrent level amount of enforcement. The current perception among Internet pirates is that nothing is going to happen to them. Under the current climate that perception is correct.
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Even though there are a few cases in the Internet piracy arena I am told that the DOJ is pursuing, nobody seems to know about them. So it is absolutely necessary that law enforcement activity in this area be broadly communicated so that the public gets the message. Internet piracy will be prosecuted, and it is wrong.
I think one reason that Internet piracy has received little attention is simply a matter of priorities. It seems to be at the bottom of the list. I understand and the members of the industry understand that FBI and DOJ have a variety of very important computer crimes' issues to deal with ranging from child porn to espionage.
Obviously those are very important areas that deserve attention. I am not suggesting that Internet piracy go to the top of the list. But I am suggesting that it shouldn't be at the bottom of the list. Given the economic impact piracy has on this industryas Representative Goodlatte stated this morning, it is a multi-million dollar problem.
I see that the red light is on, so I will try to wrap this up very quickly. In short, this is my experience. I chase pirates. That is what I do for a living. I do it every day on the ground. And we are very successful, as an industry, pursuing pirates who are in your traditional channels of retail distribution or end-user piracy, the businesses that freely load software onto their desktops. I am unable and ineffective in pursuing pirates who are on the Internet.
So I come up here asking for assistance, particularly in this area, because we have tried and been ineffective. Just to wrap this up, I would also like to commend you, Representative Rogan, for your efforts to update the Copyright Act under H.R. 1761, the Copyright Damage Improvement Act, which we feel is extremely important. Mr. Chairman, and members of the subcommittee, we appreciate you in joining us in protecting the intellectual property rights of software industry.
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Mr. ROGAN. Mr. Oktay, thank you.
Although your 5 minutes were up, we also yield additional time to witnesses who wish to commend the Chair for something he has done.
Thank you very much.
[The prepared statement of Mr. Oktay follows:]
PREPARED STATEMENT OF BATUR OKTAY, CORPORATE COUNSEL, ADOBE SYSTEMS, INC. ON BEHALF OF THE BUSINESS SOFTWARE ALLIANCE
Good afternoon, Mr. Chairman and members of the Subcommittee. My name is Batur Oktay, and I am Corporate Counsel at Adobe Systems, Incorporated. I am pleased to have the opportunity to testify today on behalf of the Business Software Alliance (''BSA''). Please allow me at the outset, Mr. Chairman, to express my appreciation to you and the other members of the Subcommittee for holding this hearing to examine the implementation of the No Electronic Theft (''NET'') Act and the problem of Internet piracy. Internet piracy is an issue of particular importance to Adobe and the other BSA member companies as it represents a real threat to U.S. leadership in software development. As you know, Mr. Chairman, BSA, represented by Adobe and Microsoft, appeared before the Subcommittee in September of 1997 supporting enactment of the NET Act. We applaud you for doing so. Now, as I am sure you would agree, it is critical that the law be enforced.
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I would like to begin with a few words about Adobe and the BSA. Founded in 1982, Adobe helped launch the desktop publishing revolution. Today, the company offers a broad range of application software, software development tools, and programming-language products for creating and distributing visually rich communication materials across all media. Adobe's revenue is approaching one billion dollars and the company employs nearly 3,000 people worldwide. Adobe is headquartered in San Jose, California, has a strong presence in Washington State, as well as employees in Massachusetts, Michigan, Texas and ten other states.
The Business Software Alliance represents leading U.S. software publishers and, as such, the fastest-growing industry in the world. BSA works in over 65 countries educating computer users about intellectual property rights; advocating a public policy agenda that fosters innovation and expands trade opportunities; and fighting software piracy. BSA worldwide members include Adobe, Attachmate, Autodesk, Bentley Systems, Corel, Lotus Development, Macromedia, Microsoft, Network Associates, Novell, Symantec, and Visio. Additional members of BSA's Policy Council include Apple Computer, Compaq, IBM, Intel, Intuit, and Sybase.
THE SOFTWARE INDUSTRYAN AMERICAN SUCCESS STORY
The U.S. software industry is one of the great success stories in modern business history. Not only has the industry emerged as one of the fastest-growing segments of the U.S. economy, but it has fueled an information revolution. Today, consumers enjoy unprecedented access to information that is changing the way we live and work.
To illustrate our industry's phenomenal growth, I would like to share a few statistics with you. Between 1980 and 1992, the U.S. domestic economy grew at an average rate of less than 3% a year. During the same period, the U.S. computing and software industry averaged 28% annual growth. From 1980 through 1996, the U.S. economy grew at an average of slightly over 3% a year; the software industry grew at an average annual rate of 12.5% during the same period.
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These numbers are impressivebut what do they mean in real terms? In addition to bringing about productivity gains to businesses and unparalleled access to information for consumers, these numbers mean two things: more jobs and more tax revenue.
Between 1988 and 1994, the U.S. software industry doubled its employment in the United States so that by 1996the most recent year for which figures are available620,000 Americans were directly employed by our industry. This number does not take into account the hundreds of thousands of jobs created by our industry's economic ''multiplier'' effectthe ripple of job creation sent through the economy when our employees purchase new homes, buy second cars, or send their children to college.
These domestic figures are impressive, but they are just part of the picture. Significantly, the software industry has achieved tremendous success in the international marketplace as well, and our industry's future is inextricably linked to our success abroad. Seventy percent of the world software revenue comes from U.S. products, and exports account for approximately half of the U.S. industry's output. As the global market for software continues to grow, international revenue will play an even more important role in our industry's continuing success. Today, international sales account for over 50% of Adobe's revenues, a figure which is typical for BSA's member companies.
IMPACT OF SOFTWARE PIRACY ON INDUSTRY AND U.S. ECONOMY
Mr. Chairman, as you and the other members of the Subcommittee know, the success of the U.S. software industry is due in large part to this country's historical commitment to strong intellectual property protection. It is no coincidence that the United Statesthe world's leading advocate of intellectual property rightsis also home of the world's largest software industry. The software industry's growth and its continued contribution to our economy is directly dependent on our ability as an industry and a nation to reduce software piracy.
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Software piracy is, unfortunately, all too pervasive. Research by the firm, International Planning and Research (''IPR''), estimates that of all the software installed onto computers worldwide in 1997, 40% was illegal. The market value of this stolen software was $11.4 billionup $200 million from the year before. In the United States, IPR estimates the piracy rate at 27%, or $6.5 billion a year.
While our industry is still experiencing significant growth, piracy continues to take a toll on our industry's productivity and output. A multi-year study conducted by Price Waterhouse Coopers (''PWC'') on behalf of BSA, Contributions of the Packaged Software Industry to the Global Economy, a copy of which I will submit for the hearing record, quantifies the economic impact of our industry in the United States and worldwide and shows that software piracy translates directly into lost jobs, lost wages, reduced tax revenues, and diminished investment in new product development.
The PWC study documents the industry's tremendous growth rate which, by 2005, means the software industry:
will double its employment to over two million jobs; and
more than double its tax payments to the government.
But as impressive as these statistics are, they are only half of the picture. The other half consists of the enormous job and revenue losses suffered as a result of piracy. The PWC study estimates that the elimination of software theft in the United States by 2005 would:
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create over 216,000 additional jobs in the United States and;
generate an additional $1.6 billion in additional federal and state corporate and personal income tax revenues in the United States.
Who bears the brunt of these losses? Not just the software industry, but everyone. Reduced employment and lower government revenues manifest themselves throughout the economy. Moreover, software piracy has an additional, corrosive impact. Piracy lowers software developers' incentives to create new products because it raises the cost of doing business and, in so doing, makes it less likely that they can recoup their investment. After all, the vast majority of software productswhich require years of development and great amounts of capital to launchnever see the light of day. The greater the costs of doing business (and hence, the higher the barriers to entry into the industry), the harder it is for small and start-up software businesses to emerge.
Over the years, the software industry has been forced to contend with piracy in many different forms, including end-user copying, hard disk-loading, CDROM production and counterfeiting. Internet piracy, however, has emerged as a new and virulent strain that threatens to make all other forms of piracy appear almost quaint by comparison. Some of the same features that make the Internet a tool of unparalleled economic promise contribute to the problem software companies face in protecting their works from infringement.
Page 58 PREV PAGE TOP OF DOC First, the number of computer users with access to pirated software on the Internet is exponentially larger than the number that can acquire pirated software through more traditional channels. Contrast, for example, the number of people who can crowd around a card table at a flea market with the number that can simultaneously access and download software from the Internet. In the first case, physical space, geographic location and hours of operation limit the traffic in pirated wares. On the Internet, websites reach a border less marketplace, 24 hours a day, seven days a week, 365 days a year.
Second, ease of access to pirate websites and the like is increasing every day. There was a time when a person had to be a relatively sophisticated computer user to find pirated software on the Internet and an extremely patient person to download it. Now, with advances in the technology, everythingincluding downloading from graphical pirate websitesis all ''point and click.'' And with ever-faster transmission speeds, pirated copies of popular software programs can be downloaded in a matter of minutes.
Third, it is simply more difficult to identify the persons responsible for creating and operating pirate websites and otherwise trafficking in pirated software on the Internet. They often exploit the privacy and anonymity that the Internet provides. Faceless transactions replace hand-to-hand exchanges. In short, it is often necessary to employ intensive efforts and advanced investigative techniques to track down Internet pirates and collect the evidence necessary to bring them to justice.
Today, the Internet is literally glutted with auction and software web sites that offer infringing copies of software programs to the tens of millions of Internet users worldwide. Adobe Photoshop, one of our flagship products, seems particularly popular with the new breed of cyberpirates. For example, log files for one pirate website investigated by BSA revealed that Photoshop had been unlawfully downloaded in excess of one hundred thousand times during roughly a six month period of time. Photoshop, by the way, retails for approximately $600. Even if one assumes that not everyone who downloaded the program would have paid for a legal copy, it is obvious that Adobe suffered a significant revenue loss from the activities of this one website alone. There are, I am sorry to say, thousandsif not hundreds of thousandsof pirate websites operating as we speak.
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Of course, software publishers aren't the only victims of piracy on the Internet. Consumers that order or download infringing programs risk acquiring software that is defective or that carries with it a virus that damages their computer and/or vital data.
Let me briefly demonstrate how easily it is to find pirated software on the Internet.
IMPLEMENTATION OF NET ACT
Mr. Chairman, Congress foresaw this situation developing when in 1997 it passed the Net Act. We remain grateful for your efforts and those of Representatives Goodlatte and Cannon and the other members of the Subcommittee for taking that important action. In passing the Net Act, Congress clearly recognized that criminal prosecution of persons usingor perhaps more accurately misusingthe Internet to engage in large-scale copyright infringement is an essential element of any effective strategy for combating software piracy. Many of the people who engage in Internet piracy are impecunious, unconcerned by the prospect of facing a civil judgment and therefore unresponsive to industry efforts to affect their behavior through civil actions. For this reason, Congress sought to bring to bear the deterrence that only criminal prosecution could provide. Unfortunately, since 1997, Internet piracy has predictably worsened while prosecutions under the Act have yet to materialize.
The Net Act was enacted to ensure that persons who illegally traffic in copyrighted works do not escape criminal prosecution simply because they fail to derive a pecuniary benefit from their actions. U.S. v. LaMacchia, 871 F.Supp. 535 (D. Mass. 1994). ''Non-profit'' pirates continue to operateand actually proliferateon the Internet. The Net Act also sought to make criminal prosecutions more likely and more effective by directing that the U.S. Sentencing Commission consider reforming the guidelines that apply to criminal copyright infringement so as to increase their deterrent effect.
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Since the passage of the Net Act, and especially over the past eight months, BSA has worked closely with the Department of Justice and the Federal Bureau of Investigation in providing referrals, technical assistance and training to help generate and ready cases for prosecution. We are grateful for the response we have received, particularly from the Computer Crime and Intellectual Property Section and the FBI's Washington Field Office. We are aware of a few prosecutions brought against individuals who use the Internet to advertise pirated software for sale. These cases, however, have been few and far between. Also, with the exception of the Cyberstrike initiate launched some time ago, there has been seemingly little attention paid to whether these cases are being publicized. It is, in our judgment, absolutely necessary that law enforcement activity in this area be broadly communicated so that the public receives the message that Internet piracy can lead to criminal prosecution.
We are disappointed, in any event, that despite much good work on the part of both the private sector and the law enforcement agencies, there have been no Net Act prosecutions. Left unprosecuted, these types of websiteswhich are brazen about their own illegalitysend the message that Internet pirates can operate with impunity, that there is no effective enforcement, that intellectual property protection on the Internet is unavailable. More domestic enforcement activity would also better position the U.S. to exercise leadership in advocating stronger protections for intellectual property overseas.
BSA stands ready to be of assistance in any way we can. To the extent more training would be of value, BSA stands ready to provide it. To the extent more or better referrals is the answer, we will redouble our efforts. We are fully committed to supporting the agents and prosecutors who handle these cases in any appropriate manner.
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BSA recognizes that the failure of the U.S. Sentencing Commission to act within the timeline set by Congress under the Net Act and the lack of commissioners has directly contributed to the lack of prosecutions. We understand that Congress directed the Commission to undertake guideline reform in part to help generate prosecutions. Until new commissioners are appointed to the Commission, no action can be taken on promulgating sentencing guidelines for enforcement of the NET Act. The BSA has been working with Representatives Goodlatte and McCollum to address this situation. We are hopeful that the Administration will soon send a slate of Commissioner nominations to the Senate for confirmation in the very near future.
PROPOSED AMENDMENTS TO THE COPYRIGHT ACT
Additionally, BSA would like to commend Representative Rogan for his efforts to update the Copyright Act in the enforcement area. Representative Rogan's bill recognizes the critical need to ensure that the Copyright Act is an effective enforcement tool. To be that, it must be kept up-to-date. The changes to the Copyright Act proposed by Representative Rogan would (1) update the current level of statutory damages in the Copyright Act; (2) provide an effective deterrent for persons who engage in a pattern or practice of infringement; and (3) clarify that for bankruptcy purposes a judgment for willful copyright infringement may not be discharged.
The current level of statutory damages in the Copyright Act has not been increased in over a decadesince 1988and is overdue. The establishment of a tier of statutory damages for repeat infringers has precedent in both the Satellite Home Viewer Act, 17 U.S.C. Sec. 119(a)(5)(b), and the Digital Millennium Copyright Act, 17 U.S.C. Sec. 1203(c) (4).
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With respect to the clarification of statutory damages for purposes of bankruptcy proceedings, we believe it is important that it be made clear that this amendment does not change the well-established case law which defines the level of behavior necessary to establish willful copyright infringement.
We also understand the Subcommittee is considering legislation to streamline the process of perfecting security interests in intellectual property. The BSA supports these efforts.
Mr. Chairman, members of the Subcommittee, we appreciate you joining us in protecting American's creativity and ingenuity. The U.S. leads the world in software development and sales. To carry this success into the new information age, we must continue to protect creativity. We commend the members of the Subcommittee for being leaders and appreciate having the opportunity to appear before you today. BSA and Adobe look forward to continuing to work with you in our ongoing efforts to eradicate piracy. Thank you.
Mr. ROGAN. Mr. Starback.
STATEMENT OF TIM STARBACK, EMIGRE, INC., ON BEHALF OF THE SOFTWARE AND INFORMATION INDUSTRY ASSOCIATION
Page 63 PREV PAGE TOP OF DOC Mr. STARBACK. Good afternoon Mr. Rogan and Mr. Pease.
I would like to thank you for inviting me here to testify today on the sentencing guidelines in the No Electronic Theft Act and the Copyright Damages Improvement act of 1999.
My name is Tim Starback. I am the marketing executive at Emigre, Inc. Emigre is a digital type foundry, publisher, and distributor of graphic design related-software and printed material based Sacramento, California. We were originally founded in 1984, and Emigre was one of the first independent type foundries to focus on personal computer technology. We havehold exclusive rights to over 200 original designs.
We have won numerous awards for them including the 1994 Chrysler Award for Innovation in Design. What I am here for today is to testify on behalf of the Software and Information Industry, the SIIA, which is the principal trade association for the software code and information content industry.
The SII represents over 1200 high-tech companies including Emigre that develop and market software and electronic content for business, education, the Internet and entertainment. The SII was formed on January 1, 1999, and was actually a merger between the Software Publishers Association and the Information Industry Association.
Its current member companies account for 85 percent of the U.S. revenue for packaged and online software and hundreds of these companies, including Emigre, look to the SIIA to protect their intellectual property rights around the world.
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As we all know, software piracy committed in the United States is a severe problem. In 1997, piracy of business applications alone in the United States resulted in software publishers suffering losses of close to $3 billion. Since 1994, business software pirated in the United States has cost publishers about $12 billion.
Of the SIIA's over 1200 members, 60 percent of these companies have annual revenue of less than 2 million dollars a year. Piracy seriously damages these companies' ability to compete successfully in the global marketplace and to develop the next generation of cutting edge software.
As an example, Emigre, we are not a very large company. We have five employees. Our annual revenues are significantly less than the larger software companies. Like most small to mid-size software companies, Emigre is hit very hard when any of our software is pirated or infringed upon. Unlike larger software companies that may have the resources to cushion this blow from piracy, the smaller companies are not as resilient because we often don't have the resources or facilities to pick up the pieces after we have had software infringed.
Without adequate copyright protection, companies large and small alike that create valuable software will find that others will copy and distribute their program without permission and without remuneration thereby decreasing the incentive and the ability to continue and create and market their products. This is especially the case with the rapid growth of the Internet.
The two matters before the subcommittee today bear significantly upon the adequacy of the sanctions for copyright infringement under the U.S. Copyright Act and their need in the digital age. First, in regards to the sentencing guideline for the NET Act, steps should be taken immediately to implement Congress's directive to the United States Sentencing Commission.
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Congress directed the Commission to create guidelines sufficiently stringent to deter such a crime and to provide for the consideration of the retail value and quantity of the items. In the directive, the phrase ''total retail value'' should be interpreted to mean ''total infringed upon value'' rather than ''total infringing value.''
To demonstrate why use of this infringed value in lieu of the infringed upon value is problematic. The following example, if I am a software publisher and I have an application that I have created and I charge $300 for it retail value and we catch someone making copies of it and selling it for $2. In this example, the infringed upon value of the software would be my $300, but the infringed value would be $2. At present, the sentencing guidelines for intellectual property offenses specified that the retail value is based on the value of the infringed item.
In the context of the NET Act and the directive to deter such crimes, such an interpretation makes no sense. In this context, the infringed value is often zero because the infringer is giving away the software as was the case of LaMacchia, the case illustrating the need for the NET Act.
Unless the present sentencing guidelines are clarified, it will continue to handcuff law enforcement officials by not providing them with the appropriate tools to punish pirates for their crimes and thus fail to accomplish the NET's goal to deter acts of infringement. The Commission has the authority to clarify this matter by amending the guidelines as necessary.
The Commission cannot act to clarify this matter presently, however, because they have no voting commissioners. It is essential that the seven commissioners be appointed as soon as possible. The SIIA urges the administration and Congress to work expeditiously to appoint commissioners so that they may promptly effectuate the clarifications of these guidelines.
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Secondly, the SIIA strongly supports the amendments proposed in the Copyright Damage Improvement Act of 1999 introduced by Chairman Coble and Congressman Rogan. These amendments are necessary due to inflation and changes in technology and business practices over the past decade. The United States, to continue its leadership in the area of intellectual property protection, it must regularly re-examine laws to ensure that protections remain vibrant. Now is the time to revisit statutory damages to provide deterrents to infringement.
I got a red light, so I will wrap this up.
I would also like to address the factors that support a new tier for statutory damages for repeat offenders. We believe that adding a new tier of statutory damages is applicable to deter these repeat offenders.
In conclusion, I would just like to thank you for letting me testify today. If you have any questions, I would be happy to answer them.
Mr. COBLE. Thank you Mr. Starback.
[The prepared statement of Mr. Starback follows:]
PREPARED STATEMENT OF TIM STARBACK, EMIGRE, INC., ON BEHALF OF THE SOFTWARE AND INFORMATION INDUSTRY ASSOCIATION
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Good afternoon, Mr. Chairman and Members of the Subcommittee, and thank you for inviting me to testify before you today on the sentencing guidelines in the No Electronic Theft (NET) Act and the ''Copyright Damages Improvement Act of 1999,'' introduced by Congressman Rogan and Chairman Coble. My name is Tim Starback and I am a marketing executive at Emigre, Inc.
Emigre, Inc. is a digital type foundry, publisher, and distributor of graphic design-related software and printed materials based in Sacramento, California. Founded in 1984, Emigre was one of the first independent type foundries to focus on personal computer technology. Emigre holds exclusive license to over 200 original typeface designs, for which Emigre has won numerous awards, including the 1994 Chrysler Award for Innovation in Design and the 1996 Publish Magazine Impact Award. Emigre's full line of typefaces, ornaments, and illustrations is available in Type 1 PostScript and TrueType for both the Macintosh and PC.
I am here today to testify on behalf of the Software & Information Industry Association (SIIA)the principal trade association of the software code and information content industry. SIIA represents over 1,200 high-tech companiesincluding Emigrethat develop and market software and electronic content for business, education, consumers, the Internet, and entertainment. SIIA was formed on January 1, 1999, as a result of a merger between the Software Publishers Association (SPA) and the Information Industry Association (IIA). Its member companies account for 85 percent of U.S. revenue for packaged and online software. Hundreds of these companies, including Emigre, look to SIIA to protect their intellectual property rights around the world.
SIIA appreciates the opportunity to testify on the two very important issues that are the subject matter of this hearing today: (1) the sentencing guidelines for criminal copyright infringements under the NET Act, and (2) the ''Copyright Damages Improvement Act of 1999.'' Both these matters address the very real problem of containing and deterring copyright infringement in the digital world. If we do not take the appropriate steps to address this problem expeditiously and meaningfully, copyright infringementof both electronic and traditional materialsthreatens to become an even bigger problem than it is today.
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Emigre is not a large company. We have only five employees and our revenues are significantly less than comparable larger software companies. Like most small or mid-sized software companies, Emigre is hit hard when one of our creations is pirated or infringed. Unlike larger software companies that may have the resources to ''cushion the blow'' from piracy, these smaller companies are not as resilient because we often do not have the resources or facilities to ''pick up the pieces'' left behind after a software pirate does it dirty work.
Emigre spends a significant amount of money, time, and resources on research and development to create and develop new software programs and bring them to the marketplace where consumers can enjoy the fruits of our labors. As is the case with any company largely dependent on research and development and the creation of innovative products for its livelihood, some of the ideasdespite significant investment and effortnever make it past the drawing board. Still others may make it past our front door but for one reason or another do not become commercial successes. That means only a relatively small percentage of Emigre's software products ever can be considered commercial successes.
Because of the discrepancy between the high cost of our software innovations and the low number that become commercial successes, it is essential to the continued viability of small companies that we reinvest much of the ''profit'' made on successful products into the creation of new ones. It is only through reinvesting in ourselves that small companies can remain viable in the highly competitive computer software marketplace.
For Emigre and other companies like it that have successfully fought to carve out a niche in the industry, software pirates can single-handedly destroy the revenue stream essential for development of new software innovations, let alone any potential profit. The inevitable result is that these small companies often become economically unstable and often ''go under''all because software pirates have decided to steal their software and make it available to others.
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Software piracy committed in the United States is a severe problem. In 1997, piracy of business applications alone in the United States resulted in software publishers suffering losses of close to $3 billion in retail sales. Since 1994, business software pirated in the United States has cost publishers about $12 billion.
Piracy is committed in many ways: between friends and co-workers who want to share the latest products or by businesses seeking to reduce costs or through illegal rental, counterfeiting, and increasingly over the Internet. Regardless of how or where it occurs, piracy affects more than just the largest software publishers. Of SIIA's over 1,200 member companies, 60 percent have annual revenues of less than $2 million. Piracy in the United States and abroad seriously damages these companies' ability to compete successfully in the global marketplace and develop the next generation of cutting-edge software.
Without adequate copyright protection, companieslarge and small alikethat create valuable software will find that others will copy and distribute their programs without permission and without remuneration, thereby decreasing the incentive and ability to continue creating and marketing their products. An essential element of adequate copyright protection is the availability of effective remedies to combat piracy. These remedies must be strong enough to remove any financial gain or other non-monetary incentive from the infringing act. They should also be sufficient to deter any future acts of infringement.
The two matters before this Subcommittee today bear significantly upon the adequacy of the sanctions for copyright infringement under the U.S. Copyright Act. With regard to the NET Act sentencing guidelines, the issue that brings us here today is how much monetary damage needs to be inflicted upon the copyright owner before criminal sanctions may be imposed. While this broad issue was raised and resolved when the NET Act was passed, it is necessary to revisit this matter because the sentencing guidelines presently in force do not reflect Congress' intent.
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Steps should be taken immediately to change the sentencing guidelines of the NET Act to reflect Congressional intent namely that the phrase ''total retail value'' in section 506 of the Copyright Act be interpreted to mean ''total infringed upon value'' rather than ''total infringing value.'' To effectuate this change, SIIA further urges that the Administration and Congress work together to appoint expeditiously all seven commissioners to the Sentencing Commission. At the present time, the Commission has no Commissioners.
SIIA also strongly supports the Copyright Damages Improvement Act. SIIA believes it is appropriate and necessary to amend section 504 of the Copyright Act to increase the level of statutory damages and to create a new category of damages applicable to repeat offenders. These amendments are warranted given inflation and changes in business practices and technology that have taken place over the last two decades.
SIIA also supports the provisions in the bill to clarify that an entity may not discharge damages owed for copyright infringement under bankruptcy proceedings where such infringement was willful.
I. NET ACT SENTENCING GUIDELINES
On December 17, 1997, President Clinton signed into law the No Electronic Theft (NET) Act. The legislation criminalizes the willful infringement of copyrighted works, including by electronic means, when the infringing party derives no direct financial benefit from the infringement.
Page 71 PREV PAGE TOP OF DOC The NET Act was a response to the holding in United States v. LaMacchia.(see footnote 4) In LaMacchia, Mr. LaMacchia, an M.I.T. student, loaded copyrighted materials onto the Internet and invited others to download the material. Unlike most cyber-pirates, however, Mr. LaMacchia did not seek to profit from his wrongful activities, because he offered the materials to others free of charge. Under the criminal provisions of the Copyright Act (17 U.S.C. §506) in effect at the time the case was decided, culpability for criminal copyright infringement could only be established when the infringer's acts were both ''willful'' and undertaken for profit. Because Mr. LaMacchia received no direct financial benefit from his wrongful activity, he was able to escape criminal liability through this loophole in the criminal provisions of the Copyright Act.
The Administration and Congress sought to close this loophole by enacting the NET Act. Under the NET Act, even absent any direct financial benefit, individuals risk criminal prosecution for willful, electronic infringement of copyrighted materials when they infringe a party's copyright by reproducing or distributing one or more copyrighted works (during any 180-day period) having a ''total retail value of more than $1,000.'' See 17 U.S.C. §506. The Act further provides for the imposition of penaltiesnamely imprisonment up to six years, and finesdepending upon the seriousness of the infringement and the damage to the copyright holder.
In addition to closing the loophole in the criminal provisions of the Copyright Act, the NET Act falls under the directive to the United States Sentencing Commission (''Commission '') to implement sentencing guidelines ''sufficiently stringent to deter such a crime,'' and ''provide for consideration of the retail value and quantity of the items. . . .'' See 28 U.S.C.A. §994 NOTE.
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An issue has arisen as to whether the phrase ''retail value'' in the NET Act directive is to be measured by the value of the infringed-upon item or the value of the infringed item, in the context of determining criminal culpability under section 506 of the Copyright Act. Unfortunately, this is not a mere issue of semantics. Rather the interpretation of this phrase has real world effects on the ability of copyright owners and law enforcement officials to pursue known pirates. It also adversely affects the extent of punishment that may be imposed against a known pirate under the guidelines.
To demonstrate why use of the ''infringed value,'' in lieu of the ''infringed-upon value,'' is problematic the following example is instructive. Suppose a software company has produced and marketed certain software having a retail value of $300 and that a person is selling pirated copies of the software for $2. In this example, the ''infringed-upon value'' of the software would be $300, but the value of the ''infringed value'' would be only $2.
At present, the sentencing guidelines for intellectual property offenses specify that the retail value is based on the value of the infringed item. In the context of the NET Act and the directive to deter such crimes, however, such an interpretation makes no senseas the infringed value is often zero because the infringer is giving the copyrighted materials away for free, as was the case in LaMacchia.
Therefore, the sentencing guidelines' interpretation of the retail value as the infringed value has a substantive adverse affect on software producers because it allows those the statute was meant to punish to escape criminal culpability for their wrongful acts. This incorrect interpretation also creates a procedural impediment to law enforcement officials who attempt to prosecute software pirates. By requiring law enforcement officials to identify software that totals an infringed retail value of $1,000, the burden on law enforcement officials is increased exponentially.
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For instance, in the example noted above, instead of identifying four (4) infringing programs, the law enforcement officials would need to identify over five hundred (500) infringing programsan increase of 12,500 percentin order to prosecute the offender.(see footnote 5) Thus, this interpretation makes it more difficult for law enforcement officials to prosecute known pirates. Moreover, because the amount of any fine and the length of any sentence imposed on the pirate is determined by the total retail value involved in the infringement, interpreting the ''total retail value'' to mean the ''total infringed value'' also makes it more difficult for law enforcement officials to exact the appropriate punishment. Surely, these consequences were not intended by Congress or the Administration when the NET Act became law.
Unless the present sentencing guidelines are clarified, we will continue to handcuff law enforcement officials by not providing them with the appropriate tools to punish pirates for their crimes, and thus, fail to accomplish the NET Act's goal of deterring acts of infringement. The Commission has the authority to clarify this matter by amending its guidelines as necessary. See 28 U.S.C. §991, et. seq. Currently, the Commission has vacancies for all seven of its voting Commissioners. Without any voting Commissioners, the Commission is unable to make any changes to the sentencing guidelines.
Thus, it is essential that the seven Commissioners be appointed as soon as possible. Until the Commissioners are in place the sentencing guidelines cannot be modified to reflect the true intent of the Congress and the Administration by clarifying that the phrase ''retail value,'' as used in the NET Act directive, means ''infringed-upon value.''
Use of ''infringed value'' to determine criminal culpability is a very real problem in search of a very real solutionquickly. The mere fact that software pirates are not making a profit off the software, as in the example above, does not change the illegal nature of the activity. Nor does the fact that the piracy may take place over the Internet rather than in a non-network environment change the illegal nature of the infraction.
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SIIA urges the Commission to take immediate steps to change the sentencing guidelines of the NET Act to interpret the phrase ''total retail value'' as it appears in section 506 of the Copyright Act to mean ''total infringed upon value'' rather than ''total infringing value.'' SIIA further requests that the Administration and Congress work together to expeditiously appoint Commissioners to the Sentencing Commission so that they may promptly effectuate this change in the sentencing guidelines.
II. THE COPYRIGHT DAMAGES IMPROVEMENT ACT OF 1999
SIIA strongly supports the amendments proposed in the ''Copyright Damages Improvement Act of 1999,'' introduced by Chairman Coble and Congressman Rogan and commends them for recognizing the need for such amendments and for taking the lead in this area of significant importance to the U.S. economy and America's software and information producers.
SIIA believes it is appropriate and necessary to amend the Copyright Act to increase the levels of statutory damages, and to create a new tier of damages applicable to repeat offenders. Such amendments are necessary for several reasons, most notably to account for inflation and other changes in business practices and technology that have taken place over the past decade.
Section 504(c) of the Copyright Act presently provides that a copyright owner may opt to recover statutory damages for infringement in lieu of actual damages and lost profits. The amount of statutory damages that may be awarded by a court range from $500 to $20,000 per copyrighted work infringed. When the infringer is able to establish that its infringement was innocent, however, the court may award statutory damages as low as $200 per work infringed. Conversely, when willful infringement is proven statutory damages may be awarded up to $100,000 per work infringed. These monetary values have remained unaltered since 1988.
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The bill would amend the basic range of statutory damages that may be awarded from its existing range of $500 to $20,000 to a new range of $750 to $30,000. It also would increase the upper threshold for willful infringement from $100,000 to $150,000.
The bill would also create a new tier of statutory damages for repeat infringers. Specifically, the bill provides that when a copyright owner establishes that the defendant has engaged in infringement repeatedly or has engaged in a pattern or practice of infringement, the court may increase the statutory damage award to as high as $250,000 per work infringed.
Given that the levels of statutory damages have not been changed for over ten years and there have been numerous significant changes in the economy, business practices, and technology during that ten-year period, SIIA believes that the time is ripe to increase statutory damage levels. Doing so will ensure that the sanctions provided under U.S. copyright law continue to be sufficient to remove any financial gain from the infringement and to deter future infringements.
There can be no doubt that the United States is the world leader in the production and distribution of intellectual property, and in particular software and information products and services. This growth has been largely due to the high level of protection granted to American innovators and creators and the sanctions that may be imposed under the U.S. copyright law against those who violate those protections.
If the United States is to continue its leadership role in the area of intellectual property protection and products, it must regularly re-examine its laws to determine whether further improvements are needed and whether existing protections remain effective and vibrant. Now is such a time.
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Over the past decade, systematic infringement of software in particular has become of increasing concern to businesses and software developers throughout the world. Recently, the problem has grown much worse. The proliferation of computers and computer networks and the convergence of computer and communications technology has made the illegal reproduction and distribution of copyrighted software much easier to accomplish and more difficult to police.
Software piracy can be committed in a wide variety of ways, including software counterfeiting,(see footnote 6) hard disk loading,(see footnote 7) unauthorized renting,(see footnote 8) uploading and downloading,(see footnote 9) softlifting,(see footnote 10) and OEM unbundling.(see footnote 11) The numerous ways in which software piracy occurs in conjunction with the ease of duplication and the high quality of pirated software presents a problem unique to the software industry. Unlike other products subject to illegal copying, such as audio and videotapes, there is little or no degradation in the quality of software from copy to copy. Even worse, a program that reflects unprecedented technology, years of effort and millions of development dollars can be duplicated in minutes with the touch of a button. Any PC user can duplicate a product priced from $20 to $20,000 for no more than the cost of a few blank diskettes or at no cost, and that user can make one, a dozen or a thousand perfect copies.
These changes in technology and business practices, as well as the need to account for inflation that has taken place over the past ten years, necessitates an increase in the level of statutory damages. In addition, increasing statutory damages as provided in the bill should aid the U.S. government in its attempts to convince countries throughout the world to improve the sanctions for copyright infringement provided for under their copyright laws.
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These factors also support a new tier of statutory damages for repeat offenders. The potential to obtain increased damages against repeat infringers is hardly a novel concept. This concept is codified in many of the copyright laws of our trading partners. Increased damages are also available under U.S. patent and trademark laws. Thus, adding a new tier of statutory damages applicable to repeat offenders will merely make U.S. copyright law consistent with other U.S. intellectual property laws and the copyright laws of other countries. It also expressly recognizes that there are certain individuals in the world that need the threat of stronger punishment to be dissuaded from engaging in software piracy. This is especially true in the electronic world we live in today, where anyone can become a software pirate with the push of a button or click of a mouse. For these reasons, SIIA supports the adjustments to statutory damages in the Copyright Damages Improvement Act.
SIIA also supports the bill's amendment to section 504(c) clarifying that ''willful'' copyright infringement is considered to be ''willful and malicious injury'' under the Bankruptcy Code. The addition of the text proposed by the bill will clarify that copyright infringements that are deemed to be willful may not be discharged in bankruptcy proceedings.
SIIA believes that this amendment is necessary to close yet another loophole used by cunning pirates to avoid having to pay civil damages for copyright infringement. Unfortunately, some courts have allowed willful infringers to avoid sanctions merely by filing for bankruptcy. By amending the copyright law as proposed, this ''bankruptcy loophole'' will be closed.
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SIIA strongly supports efforts to immediately change the sentencing guidelines of the NET Act to interpret the phrase ''total retail value'' in section 506 of the Copyright Act be interpreted to mean ''total infringed upon value'' rather than ''total infringing value'' and urges that the Administration and Congress to expeditiously appoint Commissioners to the Sentencing Commission, so that the Commission can effectuate this change. The Association and its members would welcome the opportunity to work with the Commission in changing the sentencing guidelines in accordance with our recommendations.
SIIA also strongly supports amendments to section 504 of the Copyright Act to increase the level of statutory damages and to create a new category of damages applicable to repeat offenders. These amendments are warranted given inflation and changes in business practices and technology that have taken place over the last decade. SIIA also supports the provisions in the bill to add language to section 504(c) clarifying that an entity may not discharge damages owed for copyright infringement under bankruptcy proceedings where such infringement was willful.
Mr. Chairman, the Association and its members are committed to working with the Subcommittee and your colleagues to see that this important bill becomes law. Thank you again for the opportunity to appear before the Subcommittee. I will be glad to answer any questions.
Mr. COBLE. Mr. Cohen.
STATEMENT OF TOD COHEN, VICE PRESIDENT AND COUNSEL, NEW TECHNOLOGY, MOTION PICTURE ASSOCIATION OF AMERICA
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Mr. COHEN. Mr. Chairman, Mr. Pease, Mr. Rogan, thank you.
My name is Tod Cohen, and I am the vice president and counsel for new technology at the Motion Picture Association of America. Prior to joining the MPAA, I spent 2 years in London working as a BSA European legal counsel where I was responsible for Internet piracy activities in Europe and also general anti-piracy activities in 15 counties.
I appreciate this opportunity to present MPAA's view on Internet piracy and implementation of the NET act. The Internet and electronic commerce create tremendous opportunities for MPAA's member companies. Consumers will have more entertainment options than ever before.
Unfortunately, the Internet threatens to exacerbate already serious problem of piracy that saps resources, cheats consumers, and threatens thousands and thousands of jobs. Today piracy of audiovisual products, movies, videos and television programs is a 2 to $3.5 billion dollar a year problem worldwide and growing.
We are fighting it with hundreds of investigators, technicians, and lawyers at a cost of millions of dollars. Copyright piracy on the Internet, however, threatens to cause far worse damage to our industry.
Audiovisual Internet piracy comes in two varieties, hard goods and downloadable media. Hard goods are physical media such as video cassettes, DVDs, and video compact disks, or VCDs. The Internet provides a worldwide marketing tool for such media by bringing pirate product to a broader audience and making piracy harder to detect. Hard goods pirate products are advertized on web sites through E-mails including spam solicitations and now Internet auction sites such as Ebay.
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The other form of Internet piracy is downloadable media, the ability to download a motion picture from a web site or an FTP site. This problem is one of our greatest threats. When it comes to downloadable media, currently the motion picture industry is protected by one simple factor. Movies are longer and more complex than either songs or most software. It just takes more 0s and 1s to digitize a full-length motion picture than it does to capture a 3-minute song.
Thus, downloading a motion picture using a 28.8 or 56.6 byte modem can take hours. Also, the quality and size of the image are not yet comparable to what one would see on a television set. However, this tenuous technological barricade is being assailed on all sides. More and more consumers are obtaining high speed Internet access via cable modems and DSL lines. Data is being compressed into smaller and smaller packets and both pirates and legitimate developers are enhancing the size and quality of the downloaded image.
While our industry is fighting back with all of the technological, legal, and investigative tools at our disposal, we have very little confidence that this barricade will hold. In response to the threat of Internet piracy, Congress wisely, in 1997, passed the NET Act and last year passed the Digital Millenium Copyright Act. Since the NET Act is less than 2 years old, MPAA has had limited experience in NET Act enforcement.
However, law enforcement's response, both through the Department of Justice, through the U.S. attorneys, and through the FBI has been extremely positive. Just in the past 2 weeks, MPAA has referred four downloadable media cases to the FBI, and we await their response. Unfortunately, the FBI and U.S. attorneys are faced with the problem of establishing the value of the loss suffered as a result of the illegal downloads.
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The failure of the U.S. Sentencing Commission to issue new guidelines as directed by Congress is now apparent. Internet pirates specialize in movies that are not currently released on video or, in many cases, not even in the threaters. This causes losses worldwide. Even films releaseed on video in the United States can cause massive losses.
While the retail value of a video copy is not a perfect way to determine the loss, it is better than using the price of what the pirates sold the pirated product for, or, in some cases on the Internet, free. Unfortunately, even with the agreement of the Department of Justice, the intellectual property industries, and the Congressional sponsors of the NET Act, the Sentencing Commissioners failed to approve the revised Intellectual Property Criminal guideline before their terms ended in October 1998.
Now the Sentencing Commission staff has issued a report opposing this consensus approach, rejecting Congress's mandate, and inserting its own public policy views. Currently, the NET Act is the oldest law before the Commission awaiting a new guideline.
In summary, the promise of the NET Act has not been fulfilled partially because of the Sentencing Commission's failure to revise the guideline. MPAA stands committed to working with Congress, the Commission, and all law enforcement agencies to implement the necessary changes to eliminate Internet piracy.
Thank you for giving me this opportunity to share these views with the subcommittee today.
Page 82 PREV PAGE TOP OF DOC Mr. COBLE. Thank you, gentlemen.
[The prepared statement of Mr. Cohen follows:]
PREPARED STATEMENT OF TOD COHEN, VICE PRESIDENT AND COUNSEL, NEW TECHNOLOGY, MOTION PICTURE ASSOCIATION OF AMERICA
Chairman Coble, Representative Berman and members of the Subcommittee:
My name is Tod Cohen, and I am Vice President and Counsel, New Technology of the Motion Picture Association of America (MPAA).(see footnote 12) I appreciate this opportunity to present MPAA's views on Internet piracy, implementation of the No Electronic Theft (NET) Act, and the need for new Sentencing Guidelines to deter intellectual property theft.
Motion pictures are about entertainment, romance, adventure, excitement, drama, comedy, and mysteryintangibles that no one can put a value on. Motion pictures are also intellectual propertyintangibles that we canand doassign a value to. The Internet and electronic commerce creates tremendous opportunities for MPAA member companies' to use their intellectual property. The Internet also provides vast new viewing opportunities for consumers.
Unfortunately, the Internet also threatens to exacerbate the already serious problem of piracy that saps industry resources and cheats consumers by giving them inferior products. Over the years, MPAA and it members have, to our chagrin, become intimately familiar with trends and developments in the field of copyright piracy. Today, piracy of audio-visual productsmovies, videos, television programsis a $2 billion a year worldwide problem, and growing. We are fighting it with hundreds of investigators, technicians and lawyers, at a cost of millions of dollars, in almost 80 countries around the world.
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Motion picture piracy has been on the rise since the advent of home videotape recorders in the early 1970s made copying cheap and easy. Unfortunately, copyright piracy on the Internet threatens to cause far worse damage to our industry, and to other intellectual property industries.(see footnote 13) If we are not successful in combating the Internet piracy threat, we could soon be faced with losses that dwarf the dollar amounts we lose today.(see footnote 14)
My testimony today is divided into three parts: first, defining what we mean by Internet piracy; second, describing our MPAA's enforcement activities since the enactment of the NET Act; and third, how important it is that new Sentencing Guidelines be enacted to help increase enforcement under the NET Act and halt the spread of Internet piracy.
I. DEFINING INTERNET PIRACY
Internet piracy comes in two varieties: ''hard goods'' and downloadable media. ''Hard goods'' are physical media such as videocassettes, DVDs, video compact disks, or VCDs. The Internet provides a worldwide marketing tool for such media by bringing pirate product to a broader potential audience than ever before and making piracy harder to detect. Hard goods pirate products are advertised on Websites, through e-mails, and now, Internet auction sites. MPAA uses traditional methods to halt this type of piracy.
The other form of Internet piracy is downloadable media. This form of piracy poses a much greater threat. An Internet pirate can load a single copy of a motion picture onto a computer, acting as a ''server,'' and make it available for others to copy onto their own computers at remote locations. This is the same as illegal software downloads or illegal MP3 audio files. Currently, the motion picture industry is protected by one simple factorthe amount of bytes needed for a full-length motion picture. With the increased availability of Broadband Internet access allowing for faster downloads and the companion development of the higher and better levels of compression, the motion picture industry is rapidly approaching the Internet piracy problem confronting the software, video game and music industries.
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Downloadable media piracy has the following unique characteristics:
1. A single pirate with a single copy of a film can allow thousands of copies to be downloaded in a matter of hours. These copies can be ''mirrored'' at sites all over the world, making even more copies possible. Thus, with a single keystroke, a pirate can do millions of dollars worth of damage to the potential market for a motion picture, whether or not the pirate makes a nickel from this effort.
2. The equipment required to be an Internet pirate is widely affordable and costs far less than for other forms of piracy. It is also highly portable, making piracy more difficult to detect.
3. Consumers may obtain pirate product in the privacy of their own homes, rather than in the public marketplace, making it easier for the product to get to the consumer and making detection of transactions even more difficult.
II. CONGRESS RESPONDSPASSAGE OF THE NET ACT AND MPAA ENFORCEMENT ACTIVITIES
In response to the threat of Internet piracy, in 1997 Congress passed the No Electronic Theft (NET) Act.(see footnote 15) Specifically, the NET Act responded to the case of U.S. v. LaMacchia, in which an MIT student set up a site at the university and encouraged others to upload and download over $1 million worth of pirated computer software. The student did not reap a direct financial benefit from his activities, and thus was beyond the reach of the law as it then existed.(see footnote 16)
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The copyright law imposes criminal liability on those who infringe copyrights for purposes of commercial advantage or private financial gain. The NET Act added a definition of ''financial gain'' to include the receipt, or expectation of receipt, of anything of valueincluding the receipt of other copyrighted works.(see footnote 17) Thus, the copyright law now covers the activities of those, such as the MIT student, who engage in piracy as a destructive ''hobby.''
Since the NET Act is less than two years old, MPAA has limited experiences in NET Act enforcement. Since the beginning of the year, MPAA has started interacting with the Department of Justice, the FBI and various U.S. Attorney's around the country. Although no prosecutions have yet occurred, law enforcement's response has been favorable. Just in the past two weeks, MPAA has referred four downloadable media cases to the FBI. Two weeks may be the blink of an eye where the federal government is concerned, but it is an eternity in the Internet world. For example, one known pirate site has received at least 82,000 hits since its' onset.
MPAA has knowledge of one NET Act case based in Eugene, Oregon. After receiving a complaint from the University of Oregon, the FBI obtained a search warrant for the computer of a student who was offering downloads of games, software, movies and music. Prosecution is pending. MPAA has provided the FBI with information regarding the movies offered by the student on the Internet. Unfortunately, the FBI is faced with the problem of establishing the value of the loss caused by the student. The failure of the U.S. Sentencing Commission to follow Congress' mandate and issue new Sentencing Guidelines for intellectual property crimes is now apparent.
III. THE U.S. SENTENCING COMMISSION'S FAILURE TO ENACT NEW SENTENCING GUIDELINES
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The criminal copyright law(see footnote 18) imposes no criminal penalty for non-commercial piracy where fewer than ten copies, with a total retail value less than $1,000, are involved. Thus, an unlimited number of college students, each with a website featuring nine downloadable motion pictures, might arguably be outside the reach of the law. Under the NET Act, a not-for-profit pirate faces a misdemeanor charge where at least 10 copies worth at least $1,000 are involved. For either non-profit or commercial piracy, the pirate faces a felony charge for making 10 copies of one or more works worth at least $2,500.
When Congress passed the NET Act, it understood that revised Sentencing Guidelines were needed to deter intellectual property theft. Congress instructed the Sentencing Commission to modify Sentencing Guideline 2B5.3 to be ''sufficiently stringent to deter'' intellectual property crimes.(see footnote 19) This would be done by ''ensur[ing] that the guidelines provide for consideration of the retail value and quantity of the [infringing] items.''
Under the current federal Sentencing Guidelines, a defendant's offense level is enhanced by, among other factors, the retail value of the pirate goods. Goods worth more than $2,000 merit a one-offense-level increase, more than $5,000 yields a two-level increase, $10,000 a three-level increase, and so forth. Thus, if a video pirate sold 100 illegal videos for $5.00 a piece, his sentence would be determined at the $5,000 sentencing guideline level. This calculation significantly understates the loss to the copyright owner and encourages the pirate to sell the goods cheaply. Therefore, Congress directed the Commission to include the retail value of the infringed goods when calculating the pirate's sentence. This would mean that if the retail value of the 100 illegal videos were $50 a piece, the sentence would be determined at the $50,000 level, rather than the $5,000 level. Such increased sentences would increase deterrence.
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Unfortunately, the Sentencing Commission and its staff have failed to implement Congress' directive. If retail value were used for Internet piracy cases, it would be easier for U.S. attorneys and the FBI to determine loss and prosecute the pirates. Previous cases(see footnote 20) have held that the retail value of videotapes copied by a pirate is the appropriate value to determine the offense level. However, Internet pirates often specialize in movies that are not currently released on video, and may not currently be in the theaters. For a pre-theatrical release movie that has been pirated on the Internet, the loss to the industry can be very significant. The loss levels are also significant if the movie has been released in theatres but not yet on video.
Moreover, even films released on video in the United States can cause massive losses worldwide. It is standard business practice for the motion picture industry to release films at different times for different countries around the worldthis allows for translation, dubbing, foreign language captioning, different vacation and school schedules, etc. Due to the global nature of the Internet, Internet piracy based in the United States can harm international markets. Thus, even using retail value of a video would understate the losses suffered by the motion picture industry. Nevertheless, it would be better than the current scheme of using the infringing value.
Unfortunately, even with the agreement of the Department of Justice, the intellectual property industries and the congressional sponsors of the NET Act, the Sentencing Commissioners failed to approve the revised guideline before their terms ended in October 1998. Now the Sentencing Commission staff has issued a report opposing the change and rejecting the direct congressional mandate. Revising the Sentencing Guidelines to base sentence enhancements on the value of legitimate, rather than pirate, goods would help make these cases more attractive to federal law enforcement agencies. While this approach may not be perfect in all cases, it would be a large step forward. Moreover, it would allow the motion picture industry to come closer to establishing the loss for works that are not yet in theatres or on video.
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In summary, the promise of the NET Act has not yet been fulfilled partially because of the Sentencing Commission's failure to revise the guideline. MPAA stands committed to working with Congress and all law enforcement agencies to implement the necessary changes to eliminate Internet piracy.
Thank you for giving me this opportunity to share these views with the Subcommittee today.
Mr. COBLE. Mr. Cohen, based upon your experience working with the Department of Justice, how has the lack of sentencing guidelines affected the prosecution of copyright computer crimes?
Mr. COHEN. We believe that the Department of Justice has not brought some cases because of the inadequacy of the sentencing guideline as it is currently written.
Mr. COBLE. Mr. Starback, given that much pirated software is either given away or sold at low cost, if the Sentencing Commission does not promulgate guidelines based on the retail value of the work infringed upon, is it your belief that the NET Act loses its usefulness?
Mr. STARBACK. Yes. You have to have the value. Because if they are giving it away for free, how do you evaluate it?
Page 89 PREV PAGE TOP OF DOC Mr. COBLE. That would be my conclusion. I wanted to hear it from you as well.
Mr. Oktay, in your experience, how would adding a new tier or a new section of damages for repeat offenders or parties that engage in a pattern or practice of infringement improve your ability to combat Internet piracy?
Mr. OKTAY. I will answer that question based on the particular examples that I deal with.
If you go up on to an auction site on the Internet, pick any auction site. We monitor several of them on a regular basis. We find that sellers who are selling pirated software on these sites will work with the auction site to pull their site down and they will immediately post again under a different alias or a different name.
In the last 3 months, we have had 653 sites pulled and there were only 250 sellers. That gives you an example of how many are using repeat names. Apparently, they are undaunted by the prospect of being pursued once and taken down once. They will continue to move and shift across the different avenues of the Internet, across different auction sites, the different warez sites because that is what the medium permits.
Mr. STARBACK. I have a similar example where someone was actually vindictive against our company for some reason. You are aware of the free servers, the free web servers out there where you can go and put your stuff, sign up with an alias, sign up on line.
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But he would go in and put up all of our fonts up there. We would get that taken down, and he would put three more up somewhere else. So all we did was chase him around trying to get this taken down.
Mr. COBLE. Thank you, gentlemen.
The gentleman from Indiana, Mr. Pease.
Mr. PEASE. Gentlemen, in the circumstances that you have just described, Mr. Oktay and Mr. Starback, can you identify who the perpetrators are in those cases?
Mr. STARBACK. Most of the time I can, yes.
We can trace it back to the ISP and they can say, oh, yes we know who that is, but we need a subpoena to release that information.
Mr. PEASE. I guess the question that comes to my mind is if you can figure out who the people are, why isn't DOJ acting on that? Are you providing them that information, and they are declining to use it?
Mr. OKTAY. We are talking about two different types of cases here. In one, you have the pure NET Act case in which the pirate is not trying to make any income. In this category you have the warez sites, the crack sites, the inviduals who are breaking the codes and posting the software for free download. Those individuals are very, very difficult to find. I have not been able to identify who the perpetrators are myself using a team of investigators.
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On the other side, you have Internet piracy-like sellers on the auction sites. We are able to locate those.
Mr. PEASE. That is what you were referring to in your earlier testimony when you said that you weren't effective in policing this by yourself?
Mr. OKTAY. That is right.
Actually, I was referring to both. With the warez sites, we are ineffective in locating the perpetrators. With the Internet auction sites, we are ineffective in stopping them because they just shift around from site to site to site very quickly in a period of hours.
Mr. PEASE. In that case, perhaps I am a little more sympathetic to the Department of Justice. If you folks who are specialists in this field can't locate folks, how are we supposed to expect that they will?
Mr. STARBACK. But we can. Nine times out of ten, I can find out if they upload to a news group, if the post is to a web site because these free web sites keep log files.
You can say, hey, when someone logs in under this account and ID, I want the IP number. And with that IP number you can trace it back to his originating ISP, and they can look at their log files. You have to do this very quickly. Some places only keep their log files for 48 hours. You have to be right on it and get the subpaoenas out there. That is the problem, there is a time lag to get these things. Sometimes all of your information is gone.
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Mr. PEASE. Do you have a relationship with DOJ that allows you to do that that quickly or not?
Mr. STARBACK. Well with the Digital Millennium Copyright Act, we have been able to get subpaoenas now without having to file a lawsuit, but still 1 day away to do that and then to get it. But nine times out of ten you can find out who it is.
Mr. PEASE. What is your assessment of the reason? I understand, Mr. Cohen, you said at least part of the reason was the lack of guidelines for the DOJ's lack of action. Do either of you gentlemen have an assessment on why we have not seen action?
Mr. STARBACK. No. We originally contactedwe tried to locate the local FBI office years ago, probably 2 1/2 years ago, and they weren't interested they told us. They basically said, well, if it is National security they were interested, but other than that there was nothing they could do. Normally we try to handle it ourselves because it gets done quicker and the damage is minimized that way.
Mr. OKTAY. I think there are a couple of reasons. As I testified a bit earlier, I really think there is a lack of prioritization of Internet piracy. I think that is pretty clear.
Maybe part of the problem is there aren't appropriations that are earmarked specifically to deal with the Internet piracy issue, and maybe that is something that Congress should explore. I think another problem is the sentencing guidelines. I sat down with an FBI agent about a month ago. He came to my office, and he told me that he was embarrassed to bring some of these cases into a courtroom because of the low dollar value of the cases. It just wouldn't fly in his office.
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I suspect that the U.S. attorneys offices, the FBI offices throughout the country experience the same sort of hesitation in the absence of sentencing guidelines because there is no assurety as to what is going to happen.
Mr. PEASE. Do you know if either of your organizations, SIIA or BSA, andI apologize, I still think of shorts and knee socks when I say BSA.
Now I lost my train of thought. Have you discussed with the DOJ the possibilitylet me back up. If the whole purpose in moving here is some deterrent value, realizing that you can't catch all of these folks, has there been some discussion among the trade associations with the Department of Justice of setting up just a small group to work specifically on finding such cases and maybe only doing it in one of or two of their field offices but enough to take an action that is going to get some publicity that may address the limiteded resources and lack of priority issue?
Mr. OKTAY. We have had those sorts of discussions through the BSA. We actually had this happen about 2 1/2 years ago. There was an operation called cyber strike which was based out of the FBI San Francisco office. In cyber strike, you had several FBI offices throughout the country engaging in a coordinated effort to pull down, I think it was, six sites in eight States.
They indicted and then prosecuted six individuals for doing warez sites. There was PR about it, CNN picked it up, we had National news coverage, and the industry ran with it and got further press out of it. Since then nothing like that has happened. We approached the San Francisco FBI office a couple of months ago and said, when is cyber strike 2 coming? They said, what is cyber strike?
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What had happened is the team that had originally formed cyber strike had disbanded and moved to other offices. There was no one there left who knew what had happened, and we had to recommence the process of training, discussing the issues and trying to get interest to pursue these cases.
I agree with you. The ideal situation is to have a few of these cases brought in a coordinated fashion throughout the country every year on some periodic basis and have coordinated PR efforts which we are certainly prepared to support.
Mr. PEASE. Thank you. Thank you you all.
Mr. COBLE. I thank the gentleman.
The gentleman from California, Mr. Rogan.
Mr. ROGAN. Thank you, Mr. Chairman.
One of the things that distresses me in this entire debate is that apparently, at least within the Department of Justice and apparently also through the Sentencing Commission, there is a differentiation drawn between property in the generic sense and intellectual property.
No agency would hesitate in prosecuting somebody for theft of property such as real estate, an automobile, a mink stole, or jewelry. But there seems to be the bastardization of the word ''property'' when it comes to intellectual property, which is just as tangible and valuable and meaningful to the creator as the house is to the homeowner, or the expensive bracelet is to the owner.
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In reviewing the written testimony of the Department of Justice, the representative here today, Mr. Di Gregory, states, ''the sentencing guidelines instruct the courts to calculate sentencing based on the retail value of the infringing item. The sentencing guidelines exclusive focus on the low retail value of the infringing good, without regard to the actual value of the legitimate good, has led courts to impose lower sentences.''
And then he goes on to say the lower sentences mean that prosecutors don't feel like taking the cases, and therefore there is no real prosecution or use of the NET Act.
Listening to Mr. Starback, you seem to have hit the nail on the head much more directly and much more succinctly than a lot of the legal talk that has been bantered about here. Mr. Starback, you said that you could have some software that you create or sell, and the retail value would be $300. So here that you have a product that would sell in the store for $300 that you have created, but a pirate can take that and post it someplace and sell it, or copy it and sell it, for $2 or $1 or distribute it for free.
And apparently the Sentencing Commission treats that as a $2 or $1 value when prosecuting the thief. This is an unprecedented approach to this former prosecutor and judge. If somebody breaks into a house and steals your wife's mink coat with a retail value of $5,000, and then walks down to the bus depot ''fences'' it for $5s, does anybody seriously think that a prosecutor would charge that as a petty theft of a $5 goods because that is all the thief charged for it!
If we are not treating any other form of property in this way, to thus treat the intellectual propertythe driving economic force in this country for the better part of this decadenot only encourages piracy and encourages loss, but it discourages those who are willing to invest their time and their talents and their energy and their capital to expand our economy in this critical area.
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So I thank you for your testimony today. I think that you get a sense that the Members are very frustrated with the lack of enthusiasm in pursuing NET Act offenses from both the Department of Justice and the Sentencing Commission.
I hope that all of you will keep this committee informed as this winds its way through the process and as you deal with these respective agencies.
Mr. Chairman, I yield back the balance of my time.
Mr. COBLE. I say to the gentleman from California, you excel in understatements when you indicate that we are frustrated. At least I am frustrated. Folks, I am a pretty easy dog with whom to hunt. But I am impatient about this. I think others share my impatience.
I don't have a direct line with the administration. I am not complaining about that, but that may be one of my problems for not knowing the answer to this. Does anyone in the room have any idea when we can expect commissioners to be appointed?
Mr. ROGAN. Mr. Chairman, I would like to help you on that, but regretably I no longer have a very direct line to the White House either.
Mr. COBLE. I would be happy to hear from anyone. Did you say that you had the answer, Mr. Rogan?
Page 97 PREV PAGE TOP OF DOC Mr. ROGAN. Mr. Chairman, if anybody in this room doesn't have access, it is me.
Mr. COBLE. Having said that, I presume no one else here can help me. I guess that I may have to get that from Justice if they know.
Let me ask the panel this: Is it your belief that additional legislative input is necessary to fix the issue of penalizing infringement based on the retail value for the infringed upon work given?
Do you think that we need to insert additional oars into these waters from this Hill?
Mr. STARBACK. I think anything as a deterrent would help. This would just kind of get the ball rolling, I think. Again, we need help. It is frustrateing on our side, too.
Mr. COHEN. Mr. Chairman, we have drafted an amendment that would make it even more clear to the Sentencing Commission what you meant by retail value when Congress asked them to revise the guideline in 1997. The amendment would say to the new commissioners here are what your standards will be when you issue the new guideline.
When the new commissioners come on board, it would speed the process up rather than being confronted with a year or 2 year long process of bringing the new commissioners up to speed. When they would then eventually get around to dealing with this guideline. We would be more than willing to submit that amendment to either Mr. Rogan or you, Mr. Coble, to your bill as a potential way to solve this problem.
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Mr. COBLE. We would happily welcome that. If I appear frustrated, folks, I am frustrated. I am at my wits end on this because I think that we have been very patient about it.
I think it is a good piece of legislation that was enacted to address a problem that obviously exists, but there appears to be a dead end. Let us see if we can negotiate our way out of this one way or another.
I want to thank you all. I want to thank members of the first panel for having been with us. Thank you in the audience for having endured our exercise here today, and the subcommittee does indeed appreciate your participation.
This concludes the oversight hearing on the implementation of the NET Act and enforcement against Internet piracy. The record will remain open for 1 week. I thank you for your cooperation and the subcommittee stands adjourned.
[Whereupon, at 3:47 p.m., the subcommittee was adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
Hon. HOWARD COBLE, Chairman,
Subcommittee on Courts and
Committee on the Judiciary,
House of Representatives, Washington, DC.
DEAR MR. CHAIRMAN: I am writing on behalf of the American Intellectual Property Law Association (AIPLA) to express the support of the Association for H.R. 1752, the ''Copyright Damages Improvement Act of 1999'' and for the efforts of you and Congressman Goodlatte to stimulate the implementation of the ''No Electronic Theft (NET) Act of 1997,'' P.L. No. 105147.
The AIPLA is a national bar association of nearly 10,000 members engaged in private and corporate practice, in government service, and in the academic community. The AIPLA represents a wide and diverse spectrum of individuals, companies and institutions involved directly or indirectly in the practice of patent, trademark, copyright, and unfair competition law, as well as other fields of law affecting intellectual property. Our members represent both owners and users of intellectual property.
COPYRIGHT DAMAGES IMPROVEMENT ACT OF 1999
H.R. 1752, the ''Copyright Damages Improvement Act of 1999,'' would amend section 504(c) of Title 17, United States Code, to adjust the statutory damages for copyright infringement, provide enhanced damages for repeat offenders, and eliminate a loophole in the bankruptcy law as it relates to copyright law.
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The need for sanctions which will effectively deter copyright infringement has increased many fold as we have entered the digital era with the explosive growth of the Internet. The statutory damages of the copyright law were last adjusted in 1988 by Public Law 10580. The legislation which led to this adjustment of the level of statutory damages provisions (H.R. 1623) was originally introduced on March 16, 1987. Since that time, inflation has decreased the deterrent effect of such damages by more than 47% (see Consumer Price IndexAll Urban Areas, 1987 to 1999, Bureau of Labor Statistics). Thus, this legislation merely restores the deterrent effect of such damages to the proportionately comparable level Congress fixed more than a decade ago and is long overdue.
Proposed new subsection 504(c)(2)(B) would permit a Court to award statutory damages of up to $250,000 per work in the case of repeat offenders. The damage which copyright owners can suffer by virtue of the illegal distribution on a global basis of their copyrighted works demands that statutory damages be increased to provide a sanction sufficient in magnitude to be an effective deterrent. In the context of repeat offenders who are shown to persist in a continued pattern of infringement, an award of statutory damages in the amount of $250,000 per work is certainly not excessive.
Section 3 of H.R. 1752 would add a new sentence at the end of Section 504(c) to provide that ''willful'' infringement shall for, the purposes of Chapter 5 of Title 11, United States Code, be considered to be ''willful and malicious injury to the property of another.'' This amendment would preclude a willful copyright infringer from avoiding responsibility for a copyright infringement damages award by declaring bankruptcy. Section 523(a)(6) of Title 11, United States code, specifically provides that an individual debtor may not discharge a debt arising as a result of a willful and malicious injury by such debtor to another entity or the property of another entity. While a number of bankruptcy courts have found intentional copyright infringement qualifies to prevent the discharge in bankruptcy of the related damages judgement (See In re Pineau, 149 B.R. 239 (Bankr. D.Me. 1993); In re Elma, 112 B.R. 148 (Bankr. E.D.La. 1990); In re Gabaldon, 55 B.R. 431 (Bankr. D.N.M. 1985)), others have allowed copyright infringers to avoid the consequences of their behavior by ruling that willful infringement does not, without more, satisfy the willful and malicious standard of section 523(a)(6) (See In re Blankfort, 217 B.R. 138 (Bankr. S.D.N.Y. 1998); see also In re Watson, 117 B.R. 291 (Bankr. W.D.Mo. 1990)). The amendment which H.R. 1752 would make to section 504(c) would prevent copyright infringers from avoiding liability under the bankruptcy laws for their actions by equating willful copyright infringement to ''willful and malicious injury.'' This is a desirable change. Individuals who intentionally infringe the copyright of another should not be able to avoid responsibility for their actions.
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NO ELECTRONIC THEFT (NET) ACT
We applaud your conducting an oversight hearing on the implementation of the NET Act. Not only is the enforcement of authors' exclusive rights vital to ensure that they receive adequate compensation for their creativity in the United States, it is also important to set an example for our trading partners to encourage them to fully implement their enforcement obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights. The Department of Justice has indicated that the current sentencing guidelines which are targeted for strengthening by the NET Act significantly understate the degree of economic harm inflicted on copyright owners by infringers. As the U.S. Sentencing Commission's own data has indicated, most intellectual property criminals are not sentenced to any term of imprisonment, sending the signal that the fines are little more than a cost of doing business. It is past time for the sentencing guidelines to be revised to reflect the directive contained in the NET Act and the AIPLA appreciates and supports your initiatives in this area.
Thank you for your consideration of our views and we look forward to working with you on these important issues.
PREPARED STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
|Michael K. Kirk, Executive Director|
Thank you, Mr. Chairman, for holding this important hearing today. As you know, the No Electronic Theft, or ''NET Act,'' which I sponsored in the last Congress, was passed to ensure that persons who illegally traffic in copyrighted works do not escape criminal prosecution solely because they fail to derive a pecuniary benefit from their actions. I believe then, as now, that closing the loophole that existed in the law was important to preventing an open season on copyrighted works from coming to pass on the Internet.
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Since passage of the NET Act, we have heard from several software publishers, some of whom are represented here today, who are still encountering the problem of their works being offered on a widespread basis on pirate sites on the Internet. While I can gladly say that Congress and the Administration worked together last Congress to take action to strengthen laws in this area, I am disappointed to learn that have been unable to report on law enforcement efforts currently underway based upon this new authority. I am not only unaware of any efforts by the Department of Justice or the FBI to apply resources to address theft of software on the Internet (or through more pedestrian channels), letters inquiring as to the status of these efforts have gone unanswered.
I am looking forward to hearing from our witnesses here today, especially Deputy Assistant Attorney General DiGregory, the kinds of problems that still exist in this area and what steps are being taken to address them, and whether existing resources are adequate to the task. It is critically important that we work to ensure that our country's creators of intellectual property do not find their marketsand their futureliterally stolen out from under them by these new breeds of pirate. We must work together to ensure that U.S. law enforcement is able to meet the challenge. I look forward to hearing from our witnesses today, and I yield back the balance of my time.
(Footnote 1 return)
Pub. L. No. 105147.
(Footnote 2 return)
United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994).
(Footnote 3 return)
See 17 U.S.C. §506(a)(2).
(Footnote 4 return)
871 F. Supp. 535 (D. Mass. 1994).
(Footnote 5 return)
As stated above, only those who infringements reach a total retail value of $1,000 may be prosecuted.
(Footnote 6 return)
Software counterfeiting is the illegal duplication and sale of copyrighted software in a form designed to make it appear to be legitimate.
(Footnote 7 return)
Hard disk loading occurs when one installs unauthorized copies of software onto the hard disks of personal computers, often as an incentive for the end user to buy the hardware from that particular hardware dealer.
(Footnote 8 return)
Unauthorized renting is the unauthorized selling of software for temporary use, like you would a video.
(Footnote 9 return)
Uploading and downloading refers to the making of unauthorized copies of copyrighted software available to end users connected by modem to on-line service providers and/or the Internet.
(Footnote 10 return)
Softlifting occurs when someone purchases a single licensed copy of software and then loads it onto several computers, contrary to the license terms. For example, the sharing software with friends, co-workers and others.
(Footnote 11 return)
OEM unbundling is the selling of stand-alone software that was intended to be sold packaged with specific accompanying hardware.
(Footnote 12 return)
MPAA's member companies include: Buena Vista Pictures Distribution, Inc.; Sony Pictures Entertainment, Inc.; Metro-Goldwyn-Mayer Studios, Inc.; Paramount Pictures Corp.; Twentieth-Century Fox Film Corp.; Universal Studios, Inc.; and Warner Bros.
(Footnote 13 return)
The core U.S. copyright industries (computer software including business software and entertainment software (such as videogames), motion pictures, television programs and home videocassettes; music, records, CDs and audiocassettes; and textbooks, tradebooks, reference and professional publications and journals (in both electronic and print media) accounted for $238.6 billion in value added to the U.S. economy in 1993 (the last year for which full data is available), or approximately 3.7% of the Gross Domestic Product (GDP). These industries have grown at more than twice the rate of the economy as a whole in the last few years and have employed new workers at close to four times the rate of the economy as a whole. Total foreign sales of these industries amounted to an estimated $45.8 billion in 1993. In late February 1997, the International Intellectual Property Alliance updated these figures in the report, The Copyright Industries in the U.S. Economy: The 1996 Report.
(Footnote 14 return)
For 1995, estimated annual losses due to foreign piracy of U.S. copyrighted works in 97 foreign countries was $14.6 billion. Estimated annual losses worldwide are approximately $18$20 billion.
(Footnote 15 return)
No Electronic Theft Act of 1997, Pub. L. 105147.
(Footnote 16 return)
871 F. Supp. 535 (D. Mass. 1994).
(Footnote 17 return)
17 U.S.C. Sec. 506(a)(2).
(Footnote 18 return)
18 U.S.C. Sec.2319.
(Footnote 19 return)
NET Act, Sec. 2(g) (Directive to Sentencing Commission).
(Footnote 20 return)
U.S. v. Larracuente (C.A.2 NY 1992) 952 F2d. 672 (2d Cir. 1992); U.S. v. Cohen (C.A.6 Mich.91) 946 F.2d. 430 (6th Cir. 1991).