Segment 1 Of 2 Next Hearing Segment(2)
SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOC Segment 1 Of 2
76–669 PDF
2002
DIGITAL MILLENNIUM COPYRIGHT ACT
SECTION 104 REPORT
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
DECEMBER 12 AND 13, 2001
Serial No. 52
Page 2 PREV PAGE TOP OF DOC Segment 1 Of 2
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman
HENRY J. HYDE, Illinois
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
LINDSEY O. GRAHAM, South Carolina
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
DARRELL E. ISSA, California
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
Page 3 PREV PAGE TOP OF DOC Segment 1 Of 2
MIKE PENCE, Indiana
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
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
Subcommittee on Courts, the Internet, and Intellectual Property
HOWARD COBLE, North Carolina, Chairman
HENRY J. HYDE, Illinois
Page 4 PREV PAGE TOP OF DOC Segment 1 Of 2
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia, Vice Chair
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
LINDSEY O. GRAHAM, South Carolina
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
RIC KELLER, Florida
DARRELL E. ISSA, California
MELISSA A. HART, Pennsylvania
HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
RICK BOUCHER, Virginia
ZOE LOFGREN, California
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
BLAINE MERRITT, Chief Counsel
DEBRA ROSE, Counsel
CHRIS J. KATOPIS, Counsel
Page 5 PREV PAGE TOP OF DOC Segment 1 Of 2
ALEC FRENCH, Minority Counsel
C O N T E N T S
HEARING DATES
December 12, 2001
December 13, 2001
December 12, 2001
OPENING STATEMENTS
The Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
WITNESSES
The Honorable Marybeth Peters, Register of Copyrights, Copyright Office of the United States, The Library of Congress
Oral Testimony
Prepared Statement
Page 6 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. Carey Ramos, Esq., Paul, Weiss, Rifkind, Wharton & Garrison, on behalf of the National Music Publishers Association
Oral Testimony
Prepared Statement
Mr. Cary Sherman, senior executive vice president and general counsel, Recording Industry Association of America, Inc.
Oral Testimony
Prepared Statement
Mr. Emery Simon, counsel, Business Software Alliance
Oral Testimony
Prepared Statement
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Video Software Dealers Association: Prepared statement
The Honorable Marybeth Peters, Register of Copyrights, Copyright Office of the United States, The Library of Congress: Responses to questions from Representative Bachus
December 13, 2001
OPENING STATEMENTS
Page 7 PREV PAGE TOP OF DOC Segment 1 Of 2
The Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable Howard L. Berman, a Representative in Congress From the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property
The Honorable John Conyers, Jr., a Representative in Congress From the State of Michigan, and Ranking Member, Committee on the Judiciary
WITNESSES
The Honorable Marybeth Peters, Register of Copyrights, Copyright Office of the United States, The Library of Congress
Oral Testimony
Mr. Marvin Berenson, Senior Vice President and General Counsel, Broadcast Music Incorporated
Oral Testimony
Prepared Statement
Mr. Jonathan Potter, Executive Director, Digital Media Association
Oral Testimony
Prepared Statement
Page 8 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. Gary Klein, Counsel, Consumer Electronics Association
Oral Testimony
Prepared Statement
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
American Society of Composers, Authors & Publishers, Broadcast Music, Inc., and the National Music Publishers' Association/Harry Fox Agency: Prepared statement
Intellectual Property Law Professors: Letter
National Association of Recording Merchandisers: Prepared statement
The Honorable Marybeth Peters, Register of Copyrights, Copyright Office of the United States, The Library of Congress: Responses to questions from Representative Cannon
Mr. Carey Ramos, NMPA: Responses to questions from Representative Cannon
APPENDIX
Material submitted for the record
DIGITAL MILLENNIUM COPYRIGHT ACT SECTION 104 REPORT
WEDNESDAY, DECEMBER 12, 2001
Page 9 PREV PAGE TOP OF DOC Segment 1 Of 2
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 2 p.m., in Room 2141, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.
Mr. COBLE. Good afternoon, ladies and gentlemen. Welcome to the hearing.
As the Ranking Member from California knows, we're on a tight leash today. I'm told we're going to have four or five votes at 2:30. That will consume probably 35 to 40 minutes. And there will be a subsequent vote later on, so we're going to pretty inflexibly enforce the 5-minute rule today, both upon the witnesses and upon the Members.
It's good to have all of you with us. Today we will receive testimony regarding the Digital Millennium Copyright Act Section 104 report, submitted by the U.S. Copyright Office.
There's no getting around the fact that the report presents complex and controversial issues. The Ranking Member, the gentleman from California, and I have attempted to organize the hearings in such a way that Members can more easily focus on specific issues.
Page 10 PREV PAGE TOP OF DOC Segment 1 Of 2
While all the witnesses are free to comment on any portion of the report in their written testimony, we've asked them to focus their oral testimony and presentations on their primary issue of concern.
Today we'll hear from the Register of Copyrights, a representative from the Recording Industry Association of America, the Business Software Alliance, and the National Music Publishers Association. These witnesses will focus on the Copyright Office conclusion and recommendations regarding the legal status of temporary copies.
The Copyright Office recommended that Congress enact legislation to preclude any liability for infringement of a copyright owner's reproduction right with respect to temporary buffer copies that are incidental to a licensed digital transmission of a public performance of a sound recording and the underlying musical work.
In other words, when webcasters stream a sound recording over the Internet, incidental buffer copies would not require a separate license from the songwriter for the use of the musical work, or what we would commonly know or refer to as sheet music. The stream would implicate only the songwriter's performance right in the musical work.
We look forward to hearing arguments both for and against this recommendation.
I'm now pleased to recognize the distinguished gentleman from California, the Ranking Member, Mr. Berman.
Page 11 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. BERMAN. Thank you, Mr. Chairman. And thank you for calling these hearings on the Copyright Office report under section 104 of the Digital Millennium Copyright Act.
The quality of the report demonstrates once again the consummate professionalism and dedication of the Copyright Office and its staff.
At issue in today's hearing is the status of temporary copies of copyrighted material, copies made during either the transmission or use of a digital work. Such copies are often the necessary byproduct of the way in which the Internet, computers, and many playback devices function.
At the same time, however, the temporary copy implicates the copyright holder's exclusive right of reproduction. While opposing general legislation dealing with temporary copies, the report recommends a narrow exemption for temporary buffer copies of musical compositions made during audio streams over the Internet.
This hearing provides us with the first opportunity since enactment of the DMCA in 1998 to evaluate the interplay of copyright law and electronic commerce, along with competing claims about its effect on users of copyrighted works.
On the one hand, certain representatives of user groups claimed that the DMCA would stifle traditional uses of copyrighted works and greatly restrict their access to such works.
Page 12 PREV PAGE TOP OF DOC Segment 1 Of 2
On the other hand, representatives of copyright holders claimed that DMCA was necessary to protect against crippling digital infringement, and thus to preserve an incentive to digitally distribute copyrighted works.
I strongly believe consumer privileges and copyright limitations existing in the physical domain, such as fair use and the first sale doctrine, must exist equally in the digital domain.
Furthermore, we must ensure that, in our desire to protect copyrights, we do not over-legislate or create new impediments to accessing the digital world.
We must be equally careful to ensure that the law adequately and appropriately protects copyright holders in the digital environment. Pursuant to careful oversight and debate, Congress should step in where necessary to facilitate the evolution of the copyright system.
It appears that copyright users have not experienced the severe negative effects predicted by their representatives. In fact, the truth seems to be that copyrighted works have become more accessible in more formats and under more varied terms than was the case 3 years ago. Movie DVDs are now widely available at every Blockbuster and Borders Bookstore and have become the fastest-growing consumer electronic platform in history. Downloadable software applications are not only commonplace but are almost automated in their ease of use and access. Multiplayer Internet gaming is now an essential option in most computer games. E-books have been the product of significant experimentation by major authors and publishers and have spawned new consumer electronic devices and software applications. And last, but certainly not least, Internet music is in the midst of a boom. Legal music is now widely available on the Internet through interactive streams, digital downloads, and a variety of other forms.
Page 13 PREV PAGE TOP OF DOC Segment 1 Of 2
While no download or interactive streaming services yet have a license for all major label sound recordings, the recently completed licensing deal between music publishers and record labels should remove the last major obstacle to such services.
The magnificent array of copyrighted content now available online constitutes strong evidence that consumer access to copyrighted works has dramatically increased over the past 3 years.
The fears that the DMCA and electronic commerce would diminish consumer access to copyrighted works have proven unjustified to date. On the other hand, the concerns copyright owners expressed about digital piracy have proven true. Most famously there is Napster, which the Ninth Circuit found to be facilitating infringement on a massive scale.
In all, the experience of the past 3 years demonstrates that the threat of Internet copyright infringement is real and has been realized.
Widespread and growing consumer access to digital copyrighted works, combined with the reality of massive digital copyright infringement indicate, to my way of thinking, that Congress made the right call in enacting the DMCA 3 years ago. And I'm pleased that the Copyright Office implicitly agreed with this conclusion in the reports it conducted pursuant to the DMCA.
Thank you, Mr. Chairman, for indulging my opening statement, and I yield back.
Page 14 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. COBLE. You are indeed welcome.
As you all know, we normally restrict opening statements to the Chairman and the Ranking Member, but I note the presence of the Ranking Member of the full Committee, and if he would like to make a statement, I'll recognize Mr. Conyers.
Mr. CONYERS. Thank you, Mr. Chairman.
Just an observation, I'm thinking about the fallout from the Napster case of a little while ago. While we put the kabash on them, others are still doing it.
So, question: What is the industry doing to make sure that artists will receive their royalties in the digital environment?
I think that's a key question. The creativity writers, composers, songwriters bring to music and computer programs must not be stifled by government regulations that discourage them from sharing their works, unique works, creative works, art, culture.
And it starts with one person, has an idea, puts it down on paper, like Miles Davis used to do. He would bring in creative artists into the studio and pass out little scraps of paper. And he'd say, ''OK, let's see what happens from here.'' And usually what happened became jazz history.
So now we're moving to the computer screen. My view is that we ought to protect creative genius and ensure our artists and creators get financial rewards.
Page 15 PREV PAGE TOP OF DOC Segment 1 Of 2
How many people are there in this industry and can it take of people that can't play one note that are making millions of bucks? I mean, what is this? The artists get crap. The businesspeople hustle them and then come to the Congress and say, ''Cool out, you guys. Let's let the marketplace do its thing.''
As a friend and a comedian used to say, ''I think you get my drift.''
Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentleman.
Mr. Boucher and Mr. Cannon, both of this Committee, have introduced legislation relating to these issues. And Mr. Boucher has requested an opening statement, and I would ask the other Members unanimous consent to have their statements included in the record, if that's agreeable.
Mr. Boucher?
Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I appreciate your indulgence.
I also want to thank you for scheduling hearings to examine a variety of matters relating to the distribution of digital works and, in particular, the distribution of music over Internet.
Page 16 PREV PAGE TOP OF DOC Segment 1 Of 2
I welcome the testimony today from the Copyright Office regarding its recent report on barriers that stand in the way of effective electronic commerce and online music distribution.
I'm pleased to observe that the Copyright Office report confirms the direction that my colleague Chris Cannon and I are taking in legislation that we've introduced, styled the Music Online Competition Act, or MOCA.
Legal uncertainties, which have fueled prolonged licensing disputes, have been the single largest stumbling block holding back the launch of affordable online music distribution services that respect copyrights.
I welcome the report from the Copyright Office that recommends removing a number of these barriers. The Copyright Office report specifically supports three elements of the MOCA legislation that Mr. Con—that Mr. Cannon and I have offered.
We'd welcome Mr. Conyers, too. [Laughter.]
Mr. BOUCHER. First, the Copyright Office report agrees with a provision in MOCA that authorizes temporary copies made during the course of lawful audio streaming. The Copyright Office found that these temporary buffer copies have no independent economic value, are protected by fair use, and should be exempted from copyright liability.
The report is a vindication of fundamental principles that a public performance royalty should be required only when a transmission can be actually performed, and that a reproduction royalty should be required only when the reproduction has economic value that is distinct from the authorized performance it has enabled.
Page 17 PREV PAGE TOP OF DOC Segment 1 Of 2
Secondly, the report agrees with principles set forth in MOCA that multiple server copies made to facilitate lawful webcasting activities should also be exempted from copyright liability. These ephemeral copies have no separate value apart from the performance they enable, for which the copyright owner has already been compensated. Although this is a footnote in the Copyright Office report, it also constitutes a firm recommendation for legislative action.
Third, the report supports MOCA's recognition that consumers should have a clear ability to archive lawfully acquired media files. The report confirms that fair use protects backup copies that people in prudence would make of the digital media that they lawfully acquired.
MOCA also provides for streamlined filing procedures to obtain the section 115 compulsory mechanical license. While I understand that some music publishers and the recording industry have now reached an agreement with regard to the clearance of the mechanical license, I'm very interested in hearing from the witnesses today whether this agreement removes, for all parties, the need to resolve through legislation the cumbersome process for clearing the music publisher and songwriter interests. I rather suspect that the answer is that some additional legislation will be necessary in order to achieve that goal fully.
While the Copyright Office report confirms many elements of the Music Online Competition Act, there other issues that I believe are not satisfactorily examined and answered in the report. I'm particularly disappointed that the Copyright Office did not seize this opportunity to recommend that the first sale doctrine be updated to permit users to transfer electronic copies of books and other electronic files without the risk of liability, just as they can do with paper versions of these works.
Page 18 PREV PAGE TOP OF DOC Segment 1 Of 2
I'm confident that the day will come when we will all see the need to make a change to bring the law into conformity with practices that will promote the growth of electronic commerce and preserve deeply rooted expectations of consumers, libraries, and other users that they can transfer particular copies of works.
Mr. Chairman, I think we can see from this report that legislation is definitely needed to enable the music-consuming public to enjoy the benefit of a robust competitive offering of music for download over the Internet.
The Copyright Office has suggested some needed elements. Mr. Cannon and I have suggested those and other needed elements. And I look forward to working with the Members of this Committee as we seek to meet these challenges.
Thank you, Mr. Chairman.
Mr. COBLE. I thank the gentleman.
Our first witness this afternoon will be the Honorable Marybeth Peters, who is Register of Copyrights for the United States. She has served as acting general counsel of the Copyright Office and is chief of both Examining and Information and Reference divisions. She has served as a consultant on copyright law to the World Intellectual Property Organization and authored ''The General Guide to the Copyright Act of 1976.'' Ms. Peters received her undergraduate degree from Rhode Island College, and her law degree with honors from the George Washington University Law Center.
Page 19 PREV PAGE TOP OF DOC Segment 1 Of 2
And, folks, I apologize for my lengthy introduction, but there may be some of you who are uninformed about our witnesses, and I think it's important that all of you know about their impressive credentials they bring to the table.
Our next witness is Carey Ramos, of the firm Paul, Weiss, Rifkind, Wharton & Garrison. His practice concentrates on intellectual property and technology matters, including litigation transactions and counseling. Mr. Ramos attended the Massachusetts Institute of Technology and Yale College and received a bachelor of arts degree magna cum laude from Yale University in May 1976. In June 1979, he received a doctor of jurisprudence degree from the Stanford School of Law, where he served as a note editor of the ''Stanford Law Review.''
Our third witness is Mr. Cary Sherman, who is the senior executive vice president and general counsel for the Recording Industry Association of America. Mr. Sherman serves as RIAA's chief legal counsel and coordinates the industry's legal, policy, and business objectives. His responsibilities include technology and licensing enforcement and government affairs issues, among others. Mr. Sherman graduated from the Cornell University and the Harvard School of Law in 1971.
Our final witness is Mr. Emery Simon, who is counselor to the board of directors of the Business Software Alliance. He advises BSA on a broad range of policy issues, including copyright law, electronic commerce, trade, and encryption. Mr. Simon has a law degree from Georgetown University, a master's degree in international affairs from the Johns Hopkins University School of Advanced International Studies, and a bachelor's degree in economics from Queens College.
Page 20 PREV PAGE TOP OF DOC Segment 1 Of 2
Good to have all of you with us. We have written statements from each of you, which have been examined. And I ask unanimous consent to submit them into the record in their entirety.
Folks, I hate to put you on short leashes, but in view of the imminent vote that will be forthcoming, I would ask you to keep a sharp lookout upon that red light, because when it illuminates in your eye, that tells you your 5 minutes have elapsed.
Ms. Peters, why don't we start with you?
STATEMENT OF THE HONORABLE MARYBETH PETERS, REGISTER OF COPYRIGHTS, COPYRIGHT OFFICE OF THE UNITED STATES, THE LIBRARY OF CONGRESS
Ms. PETERS. Thank you, Mr. Coble.
I'm pleased to present the Copyright Office's views as outlined in its section 104——
Mr. COBLE. Ms. Peters, pull that mike a little closer to you, if you don't mind.
Ms. PETERS. All right.
Page 21 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. COBLE. I guess you're activated, is the mike activated?
Ms. PETERS. I'm getting over a cold.
What I was saying is that we are pleased to present our views on our section 104 of the DMCA report, and I would specifically like to thank you, Mr. Coble, and you, Mr. Berman, as the Ranking Member, for holding this hearing.
In the DMCA, Congress asked us to focus on two provisions of the Copyright Act: section 109, which codified the first sale doctrine; and section 117, which includes, among other provisions, an exception permitting the reproduction of computer programs that are incidental to the use of programs in a machine.
Tomorrow I will have opportunity to testify on the first sale doctrine and on archival copying. Today the focus, of course, is temporary copies.
Obviously, in coming to our conclusions, it was a difficult task. The issues are complex, and we did have the benefit of many written comments and the testimony at a public hearing. And of course, my staff conducted extensive legal research.
With respect to temporary copies, the issue really stemmed from a provision in the Boucher-Campbell bill of 1997, which contained an exemption for incidental copies. Many who participated in our study supported the proposal in the Boucher-Campbell bill; however, we focused the inquiry on what were the real-world problems that were impeding electronic commerce.
Page 22 PREV PAGE TOP OF DOC Segment 1 Of 2
The responses to that question uniformly centered on online music services. The issue that was identified was the legal status of buffer copies of portions of a music file that are made in a computer's random access memory to facilitate the streaming of that music file to a listener.
Online music services told us that despite the fact that they were delivering to the public an audio performance through streaming technology, and despite the fact that they had licenses from performing rights organizations to publicly perform the musical compositions delivered through the stream, music publishers were seeking compensation for the incidental buffer copy created temporarily in RAM.
They, not the Copyright Office, characterize this is double dipping because the use—in other words, the stream—was already fully licensed. They saw paying for this incidental, temporary copy as duplicative. They argued that music publishers and composers and lyricists were already paid for the activity; that is, delivering performance.
We also heard the flip side. Performance rights organizations were demanding licenses when the activity was a pure digital download; in other words, a DPD.
In analyzing the issues, we looked at the issue of temporary copies in general and specifically at the issue of the buffer copy. We looked at the copyright law, its legislative histories, and the policies that underlie it.
This led us to conclude that the making of a temporary copy of a work in RAM implicates the reproduction right as long as the reproduction persists long enough to be perceived, copied, or communicated. In other words, the temporary copy made in streaming audio does in fact implicate the reproduction right.
Page 23 PREV PAGE TOP OF DOC Segment 1 Of 2
Our conclusion is in keeping with every case that has examined the issue of temporary copies.
The next issue is whether this reproduction was subject to liability under the current law. Or to put it another way, was there any provision in the law—for example, a specific exemption or fair use—that removed liability for the creation of this copy?
Obviously, there are a number of specific exemptions for temporary copies in the law. Sqection 117 has two. Section 512 has some. But there is no specific exemption for this type of activity, so we turn to fair use. And as you already know, based on a detailed analysis of the making of the buffer copy in streaming, we concluded that, under fair use, there was a strong case that could be made that this activity was a fair use.
But because fair use is determined on a case-by-case basis, we believed that it may be too uncertain to form the basis of a business decision. Because we believe there should be no liability for a buffer copy made in the course of a licensed stream of an audio file, we recommended that a narrow statutory provision be added to the law to solve this real-world problem.
We rejected the broader solution because no one identified any additional problem, and we were concerned about unintended consequences. We also took note of the fact that since 1980 Congress had been dealing with temporary copy issues and had dealt with these narrowly. They identified a problem, and they solve that problem. And while this may result in amending the law more than once, we believe that this is better than legislating broadly where you could have an impact that was negative on e-commerce.
Page 24 PREV PAGE TOP OF DOC Segment 1 Of 2
We then turned to the symmetrical problem, the delivery of downloads of audio files and the statement by performance rights organizations that all transmissions, even those that facilitate and are incidental to the delivery of a phonorecord, needed a public performance license. We concluded that in this narrow situation, the equivalent of going to a record store and buying a CD, the transmission has no separate economic significance, apart from the sale of phonorecord. And, therefore, there should be no liability for this transmission.
Finally, as you know, the National Music Publishers Association and RIAA have concluded an agreement; that was concluded on October 5th. This agreement is a positive step, but it does not, in fact, affect our analysis or our recommendation.
Thank you.
[The prepared statement of Ms. Peters follows:]
PREPARED STATEMENT OF MARYBETH PETERS
Mr. Chairman, Congressman Berman, Members of the Subcommittee, thank you for inviting me to appear before the Subcommittee today. It is always a pleasure to testify before this Subcommittee, and I appreciate the opportunity to discuss the Office's Digital Millennium Copyright Act (DMCA) Section 104 Report.
The DMCA was the foundation of an effort by Congress to implement United States treaty obligations and to move the nation's copyright law into the digital age. But as Congress recognized, the only thing that remains constant is change. The enactment of the DMCA was only the beginning of an ongoing evaluation by Congress on the relationship between technological change and U.S. copyright law. The Report we are discussing today was mandated in the DMCA to assist Congress in that continuing process.
Page 25 PREV PAGE TOP OF DOC Segment 1 Of 2
Our mandate was to evaluate ''the effects of the amendments made by [title I of the DMCA] and the development of electronic commerce and associated technology on the operation of sections 109 and 117 of title17, United States Code; and the relationship between existing and emergent technology and the operation of sections 109 and 117. . . .'' Specifically, this Report focuses on three proposals that were put forward during our consultations with the public: creation of a ''digital first sale doctrine;'' creation of an exemption for the making of certain temporary incidental copies; and the expansion of the archival copying exemption for computer programs in section 117 of the Act.
Part I of the Report describes the circumstances leading up to the enactment of the DMCA and the genesis of this study. Part I also examines the historical basis of sections 109 and 117 of the Act. Part II discusses the wide range of views expressed in the public comments and testimony. This input from the public, academia, libraries, copyright organizations and copyright owners formed the core information considered by the Office in its evaluation and recommendations. Part III evaluates the effect of title I of the DMCA and the development of electronic commerce and associated technology on the operations of sections 109 and 117 in light of the information received and states our conclusions and recommendations regarding the advisability of statutory change.
I. BACKGROUND
A. The Digital Millennium Copyright Act
The World Intellectual Property Organization (WIPO) treaties were the impetus for the U.S. legislation. In order to facilitate the development of electronic commerce in the digital age, Congress implemented the WIPO treaties by enacting legislation to address those treaty obligations that were not adequately addressed under existing U.S. law. Legal prohibitions against circumvention of technological protection measures employed by copyright owners to protect their works, and against the removal or alteration of copyright management information, were required in order to implement U.S. treaty obligations.
Page 26 PREV PAGE TOP OF DOC Segment 1 Of 2
The congressional determination to promote electronic commerce and the distribution of digital works by providing copyright owners with legal tools to prevent widespread piracy was tempered with concern for maintaining the integrity of the statutory limitations on the exclusive rights of copyright owners. In addition to the provisions adopted by Congress in 1998, there were other proposals—including amendments to sections 109 and 117, that were not adopted, but were the subjects of a number of studies mandated by the DMCA. Section 104 of the DMCA requires the Register of Copyrights and the Assistant Secretary for Communications and Information to report on the effects of the DMCA on the operation of sections 109 and 117 and the relationship between existing and emergent technology on the operation of sections 109 and 117 of title 17 of the United States Code.
The inclusion of section 109 in the study has a clear relationship to the digital first sale proposal contained in a bill introduced in 1997 by Congressmen Rick Boucher and Tom Campbell. The reasons for including section 117 in the study are less obvious. While there is no legislative history explaining why section 117 is included in the study, it appears that the reference was intended to include within the scope of the study a proposed exemption for incidental copies found in the Boucher-Campbell bill, which would have been codified in section 117 of the Copyright Act.
B. Section 109(a) and the First Sale Doctrine
The common-law roots of the first sale doctrine allowed the owner of a particular copy of a work to dispose of that copy. This judicial doctrine was grounded in the common-law principle that restraints on the alienation of tangible property are to be avoided in the absence of clear congressional intent to abrogate this principle. This doctrine appears in section 109 of the Copyright Act of 1976. Section 109(a) specified that this notwithstanding a copyright owner's exclusive distribution right under section 106 the owner of a particular copy or phonorecord that was lawfully made under title 17 is entitled to sell or further dispose of the possession of that copy or phonorecord.
Page 27 PREV PAGE TOP OF DOC Segment 1 Of 2
C. Section 117 Computer Program Exemptions
Section 117 of the Copyright Act of 1976 was enacted in the Computer Software Copyright Amendments of 1980 in response to the recommendations of the National Commission on New Technological Uses of Copyrighted Works' (CONTU). Section 117 permits the owner of a copy of a computer program to make an additional copy of the program for purely archival purposes if all archival copies are destroyed in the event that continued possession of the computer program should cease to be rightful, or where the making of such a copy is an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner.
II. VIEWS OF THE PUBLIC
Section II of the report summarizes the views received from the public through comments, reply comments and hearing testimony. The summaries are grouped into three categories: views concerning section 109, views concerning section 117, and views on other miscellaneous issues.
A. Views Concerning Section 109
Most of the comments dealt with section 109 whether of not they addressed section 117. While there was a broad range of views on the effect of the DMCA on the first sale doctrine, most of the commenters believed that the anticircumvention provisions of 17 U.S.C. section 1201 allowed copyright owners to restrict the operation of section 109. Of particular concern to many commenters was the Content Scrambling System (CSS) and the ''region coding'' used to protect motion pictures on Digital Versatile Disks (DVDs). They argued that use of CSS forces a consumer to make two purchases in order to view a motion picture on DVD: the DVD and the authorized decryption device. In the view of these commenters, this system reduces or eliminates the value of and market for DVDs by interfering with their free alienability on the market. A similar argument was advanced for the region coding on DVDs in that the geographic market for resale is restricted by this technological protection measure.
Page 28 PREV PAGE TOP OF DOC Segment 1 Of 2
Another concern expressed by a number of commenters was the growing use of non-negotiable licenses accompanying copyrighted works that are written to restrict or eliminate statutorily permitted uses, including uses permitted under section 109. In some cases, these license restrictions are enforced through technological measures. It was argued that these licensing practices and the prohibition on circumvention frustrate the goals of the first sale doctrine by allowing copyright owners to maintain control on works beyond the first sale of a particular copy. These commenters stated that this interference with the operation of the first sale doctrine has the capacity to inhibit the function of traditional library operations, such as interlibrary loan, preservation, and use of donated copies of works.
Other commenters rebutted these claims, arguing that over-restrictive technological protection measures or licenses would not survive in the marketplace, since competition would be a limiting principle. It was also argued that the effect of licensing terms on the first sale doctrine is beyond the scope of this study.
Commenters generally viewed section 1202 of the DMCA, which prohibits the alteration or removal of copyright management information, as having no impact of the operation of the first sale doctrine.
The greatest area of contention in the comments was the question of whether to expand the first sale doctrine to permit digital transmission of lawfully made copies of works. Although some proponents argued that such transmissions are already permitted by the current language of section 109, most thought that clarification of this conclusion by Congress would be advisable since the absence of express statutory language could lead to uncertainty.
Page 29 PREV PAGE TOP OF DOC Segment 1 Of 2
The proponents of revising section 109 argued that the transmission of a work that was subsequently deleted from the sender's computer is the digital equivalent of giving, lending, or selling a book. Allowing consumers to transfer the copy of the work efficiently by means of online transmission would foster the principles of the first sale doctrine. These principles have promoted economic growth and creativity in the analog world and should be extended to the digital environment. Proponents of this argument sought amendment to section 109 to allow a person to forward a work over the Internet and then delete that work from his computer.
Others opposed such an amendment for a number of reasons. Opponents pointed out that the first sale doctrine is a limitation on the distribution right of copyright owners and has never implicated the reproduction right which is, in their view, a ''cornerstone'' of copyright protection. In addition, the impact of the doctrine on copyright owners was also limited in the off-line world by a number of factors, including geography and the gradual degradation of books and analog works. The absence of such limitations would have an adverse effect on the market for digital works. Opponents also believed that proposals that depend on the user deleting his copy would be unverifiable, leading to virtually undetectable cheating. Given the expanding market for digital works without a digital first sale doctrine, opponents questioned the consumer demand for such a change in the law.
B. Views Concerning Section 117
The comments related to section 117 fell into two main categories: those addressing the status of temporary copies in RAM and those concerning the scope of the archival exemption.
Page 30 PREV PAGE TOP OF DOC Segment 1 Of 2
Many commenters advocated a blanket exemption for temporary copies that are incidental to the operation of a device in the course of use of a work when that use is lawful under title 17. Such an exemption was originally proposed in the Boucher-Campbell bill as an amendment to section 117.
Other commenters vigorously opposed any exemption for incidental copies at this time. They argued that such an exemption would dramatically expand the scope of section 117 in contrast to the carefully calibrated adjustment made to section 117 in the DMCA to address the problems experienced by independent computer service organizations at issue in MAI Systems Corp. v. Peak Computer, Inc. These commenters stated that Congress' narrow adjustment to section 117 in the DMCA reaffirmed the conclusion that temporary copies in random access memory (RAM) are copies that are subject to the copyright owner's exclusive reproduction right. Further change would undercut the reproduction right in all works and endanger international treaty obligations.
There was disagreement on the economic value of temporary copies. Proponents of an amendment argued that temporary buffer copies are necessary to carry out streaming of performances of works on the Internet and have no value apart from that performance. They argued that the limitations under other sections of the Copyright Act, including sections 107 and 512, were insufficient to sustain the operation of businesses that stream audio performances to the public.
Opponents, on the other hand, argued that these copies are within the scope of the copyright owner's exclusive rights and do possess value. Particular emphasis was placed on the value of temporary copies of computer programs. It was also argued that as streaming performances become more common, these temporary copies will increase in value because of the adverse effect of the performances on the market for purchases of copies of these works. Opponents believed it would be premature to change the law because of the absence of specific evidence of harm and the high potential for adverse unintended consequences. It was noted that when Congress was presented with concrete evidence of harm to independent service organizations after the MAI v. Peak decision, Congress took steps to remedy the situation. Similarly, section 512 of the DMCA created limitations on the remedies available against Internet service providers for incidental copying that is essential to the operation of the Internet.
Page 31 PREV PAGE TOP OF DOC Segment 1 Of 2
The other major concern involving section 117 concerned the scope of the archival exemption. Proponents of amending section 117 raised two primary points. First, they argued that the policy behind the archival exemption needs to be updated to encompass all digital works rather than just computer programs. Since computers are vulnerable to crashes, viruses, and other failures, downloaded music, electronic books and other works face the same risks that precipitated the exemption for computer programs. Some argued that all digital media is susceptible to accidental deletion or corruption. Consumers should be permitted to protect their investments in works.
Proponents of expansion of the archival exemption offered another argument—section 117 does not comport with reality. Systematic backup practices do not fit the structure of section 117, which is limited to making a copy of an individual program at the time the consumer obtains it. It was argued that such a discrepancy between the law and commonly accepted practices undermines the integrity of the law. Such a fundamental mismatch creates the perception that the law need not be literally followed, thereby creating a slippery slope.
Opponents of an expansion of the archival exemption countered that the justification behind section 117 no longer exists. Most software is distributed on CD-ROM, which is far more robust than floppy disks. Consumers need merely retain the original CD as a backup, since it is a simple operation to reinstall software that is compromised. In addition, these opponents argued that there is currently an inaccurate public perception of the scope of the backup copy exception. These commenters argue that many invoke the archival exception as a shield to commercial piracy.
Page 32 PREV PAGE TOP OF DOC Segment 1 Of 2
Opponents of an amendment to section 117 asserted that even if there is a mismatch between actual backup practices and the current exception, no one has been harmed by it. Commenters noted that no one has been sued as a result of backing up material outside the scope of section 117, and no one has stopped performing backups. It was also argued that if a particular activity does not fall within the terms of section 117, it may nevertheless be privileged under the fair use doctrine.
C. Views Concerning Other Miscellaneous Issues
There were assorted other comments and testimony on a range of issues. There were concerns raised about the potential adverse effects of sections 1201 and 1202 on the traditional concepts of first sale, fair use, and the archival and preservation exemptions. It was argued that these prohibitions are likely to diminish, if not eliminate, otherwise lawful uses. It was asserted that copyright management information may also have the capacity to reveal user information in a manner that would chill legitimate uses of copyrighted works.
Another prevalent concern was that licenses are being used increasingly by copyright owners to undermine the first sale doctrine and restrict other user privileges under the copyright law. These commenters argue that this trend is displacing the uniformity of federal copyright law with a wide variation of contract terms that must be evaluated and interpreted. This poses a particular challenge to large institutions, such as universities and libraries, in determining legal and acceptable use in any given work. A number of commenters argued that federal copyright law should preempt such license terms.
Other commenters argued that Congress did not intend copyright law broadly to preempt contract provisions. They argue that the freedom to contract serves the interests on both copyright owners and the public by allowing greater flexibility in determining pricing, terms and conditions of use, and other options.
Page 33 PREV PAGE TOP OF DOC Segment 1 Of 2
III. EVALUATION AND RECOMMENDATIONS
We are not persuaded that title I of the DMCA has had a significant effect on the operation of sections 109 and 117 of title 17. The adverse effects that section 1201, for example, is alleged to have had on these sections cannot accurately be ascribed to section 1201. The causal relationship between the problems identified and section 1201 are currently either minimal or easily attributable to other factors such as the increasing use of license terms. Accordingly, none of our legislative recommendations are based on the effects of section 1201 on the operation of sections 109 and 117.
A. The Effect of Title I of the DMCA on the Operation of Sections 109 and 117
The arguments raised concerning the adverse effects of the CSS technological protection measure on the operation of section 109 are flawed. The first sale doctrine is primarily a limitation on copyright owner's distribution right. Section 109 does not guarantee the existence of secondary markets for works. There are many factors which could affect the resale market for works, none of which could be said to interfere with the operation of section 109. The need for a particular device on which to view the work is not a novel concept and does not constitute an effect on section 109. VHS videocassettes for example, must be played on VHS VCRs.
A plausible argument can be made that section 1201 may have a negative effect on the operation of the first sale doctrine in the context of works tethered to a particular device. In the case of tethered works, even if the work is on removable media, the content cannot be accessed on any device other than the one on which it was originally made. This process effectively prevents disposition of the work. However, the practice of tethering a copy of a work to a particular hardware device does not appear to be widespread at this time, at least outside the context of electronic books. Given the relative infancy of digital rights management, it is premature to consider any legislative change at this time. Should this practice become widespread, it could have serious consequences for the operation of the first sale doctrine, although the ultimate effect on consumers is unclear.
Page 34 PREV PAGE TOP OF DOC Segment 1 Of 2
We also find that the use of technological measures that prevent the copying of a work potentially could have a negative effect on the operation of section 117. To the extent that a technological measure prohibits access to a copyrighted work, the prohibition on the circumvention of measures that protect access in section 1201(a)(1) may have an adverse impact on the operation of the archival exception in section 117. Again, however, the current impact of such a concern appears to be minimal, since licenses generally define the scope of permissible archiving of software, and the use of CD-ROM reduces the need to make backup copies.
Given the minimal adverse impact at the present time, we conclude that no legislative change is warranted to mitigate any effect of section 1201 on section 117.
B. The Effect of Electronic Commerce and Technological Change on Sections 109 and 117
There is no dispute that section 109 applies to works in digital form. Physical copies of works in a digital format, such as CDs or DVDs, are subject to section 109 in the same way as physical copies in analog form. Similarly, a lawfully made tangible copy of a digitally downloaded work, such as a work downloaded to a floppy disk, ZipTM disk, or CD-RW, is clearly subject to section 109. The question we address here is whether the transmission of a work to another person falls within—or should fall within—the scope of section 109.
1. The First Sale Doctrine in the Digital World
a. Evaluation of Arguments Concerning First Sale
Page 35 PREV PAGE TOP OF DOC Segment 1 Of 2
The first sale doctrine is primarily a limitation on the copyright owner's exclusive right of distribution. It does not limit the exclusive right of reproduction. While disposition of a work downloaded to a floppy disk would only implicate the distribution right, the transmission of a work from one person to another over the Internet results in a reproduction on the recipient's computer, even if the sender subsequently deletes the original copy of the work. This activity therefore entails an exercise of an exclusive right that is not covered by section 109.
Proponents of expansion of the scope of section 109 to include the transmission and deletion of a digital file argue that this activity is essentially identical to the transfer of a physical copy and that the similarities outweigh the differences. While it is true that there are similarities, we find the analogy to the physical world to be flawed and unconvincing.
Physical copies degrade with time and use; digital information does not. Works in digital format can be reproduced flawlessly, and disseminated to nearly any point on the globe instantly and at negligible cost. Digital transmissions can adversely effect the market for the original to a much greater degree than transfers of physical copies. Additionally, unless a ''forward-and-delete'' technology is employed to automatically delete the sender's copy, the deletion of a work requires an additional affirmative act on the part of the sender subsequent to the transmission. This act is difficult to prove or disprove, as is a person's claim to have transmitted only a single copy, thereby raising complex evidentiary concerns. There were conflicting views on whether effective forward and delete technologies exist today. Even if they do, it is not clear that the market will bear the cost of an expensive technological measure.
Page 36 PREV PAGE TOP OF DOC Segment 1 Of 2
The underlying policy of the first sale doctrine as adopted by the courts was to give effect to the common law rule against restraints on the alienation of tangible property. The tangible nature of a copy is a defining element of the first sale doctrine and critical to its rationale. The digital transmission of a work does not implicate the alienability of a physical artifact. When a work is transmitted, the sender is exercising control over the intangible work through its reproduction rather than common law dominion over an item of tangible personal property. Unlike the physical distribution of digital works on a tangible medium, such as a floppy disk, the transmission of works interferes with the copyright owner's control over the intangible work and the exclusive right of reproduction. The benefits to further expansion simply do not outweigh the likelihood of increased harm.
Digital communications technology enables authors and publishers to develop new business models, with a more flexible array of products that can be tailored and priced to meet the needs of different consumers. We are concerned that these proposals for a digital first sale doctrine endeavor to fit the exploitation of works online into a distribution model—the sale of copies—that was developed within the confines of pre-digital technology. If the sale model is to continue as the dominant method of distribution, it should be the choice of the market, not due to legislative fiat.
We also examined how other countries are addressing the applicability of the first sale—or exhaustion—doctrine to digital transmissions. We found that other countries are addressing digital transmissions under the communication to the public right and are not applying the principle of exhaustion, or any other analog thereof, to digital transmissions.
b. Recommendation Concerning the Digital First Sale Doctrine
Page 37 PREV PAGE TOP OF DOC Segment 1 Of 2
We recommend no change to section 109 at this time. Although speculative concerns have been raised, there was no convincing evidence of present-day problems. In order to recommend a change in the law, there should be a demonstrated need for the change that outweighs the negative aspects of the proposal. The Copyright Office does not believe that this is the case with the proposal to expand the scope of section 109 to include digital transmissions. The time may come when Congress may wish to address these concerns should they materialize.
The fact that we do not recommend adopting a ''digital first sale'' provision at this time does not mean that the issues raised by libraries are not potentially valid concerns. Similarly, our conclusion that certain issues are beyond the scope of the present study does not reflect our judgment on the merits of those issues.
The library community has raised concerns about how the current marketing of works in digital form affects libraries with regard to five specifically enumerated categories: interlibrary loans, off-site accessibility, archiving/preservation, availability of works, and use of donated copies. Most of these issues arise from terms and conditions of use, and costs of license agreements. One arises because, when the library has only online access to the work, it lacks a physical copy of the copyrighted work that can be transferred. These issues arise from existing business models and are therefore subject to market forces. We are in the early stages of electronic commerce. We hope and expect that the marketplace will respond to the various concerns of customers in the library community. However, these issues may require further consideration at some point in the future. Libraries serve a vital function in society, and we will continue to work with the library and publishing communities on ways to ensure the continuation of library functions that are critical to our national interest.
Page 38 PREV PAGE TOP OF DOC Segment 1 Of 2
2. The Legal Status of Temporary Copies
a. RAM Reproductions as ''Copies'' under the Copyright Act
All of the familiar activities that one performs on a computer, from the execution of a computer program to browsing the World Wide Web, necessarily involve copies stored in integrated circuits known as RAM. This information can remain in memory until the power is switched off or the information is overwritten. These reproductions generally persist only for as long as the particular activity takes place.
The legal status of RAM reproductions has arisen in this study almost exclusively in the context of streaming audio delivery, including webcasting. In order to render the packets of audio information in an audio ''stream'' smoothly, in spite of inconsistencies in the rate of delivery, packets of audio information are saved in a portion of RAM called a buffer until they are ready to be rendered.
Based on an the text of the Copyright Act—including the definition of ''copies'' in section 101—and its legislative history, we conclude that the making of temporary copies of a work in RAM implicates the reproduction right so long as the reproduction persists long enough to be perceived, copied, or communicated.
Every court that has addressed the issue of reproductions in RAM has expressly or impliedly found such reproductions to be copies within the scope of the reproduction right. The seminal case on this subject, MAI, Sys. Corp. v. Peak Computer, Inc., found that the loading of copyrighted software into RAM creates a ''copy'' of that software. At least nine other courts have followed MAI v. Peak in holding RAM reproductions to be ''copies'' and several other cases have held that loading a computer program into a computer entails making a copy, without mentioning RAM specifically.
Page 39 PREV PAGE TOP OF DOC Segment 1 Of 2
b. Evaluation of Arguments Concerning Temporary Incidental Copy Exceptions
In the course of this study, arguments were advanced in support of a blanket exemption for incidental copies similar to that proposed in the Boucher-Campbell bill. Most of the arguments advanced on such a proposal focused exclusively on the specific issue of buffer copies made in the course of audio streaming, rather than the broader issue of incidental copying generally. This focus suggests that legislation tailored to address the specific problems raised in the context of audio streaming should be examined. This focus is particularly appropriate since there was no compelling evidence presented in support of a blanket exemption for incidental copies and there was evidence that such an exemption could lead to unintended adverse consequences for copyright owners.
There was compelling evidence presented, however, on the uncertainty surrounding temporary buffer copies made in RAM in the course of rendering a digital musical stream. Specifically, webcasters asserted that the unknown legal status of buffer copies exposes webcasters to demands for additional royalty payments from the owner of the sound recording, as well as potential infringement liability.
The buffer copies identified by the webcasting industry exist for only a short period of time and consist of small portions of the work. Webcasters argue that these reproductions are incidental to the licensed performance of the work and should not be subject to an additional license for a reproduction that is only a means to an authorized end. Buffer copies implicate the reproduction right, thus potentially resulting in liability. There is, therefore, a legitimate concern on the part of webcasters and other streaming music services as to their potential liability.
Page 40 PREV PAGE TOP OF DOC Segment 1 Of 2
We believe that there is a strong case that the making of a buffer copy in the course of streaming is a fair use. Fair use is a defense that may limit any of the copyright owner's exclusive rights, including the reproduction right implicated in temporary copies. In order to assess whether a particular use of the works at issue is a fair use, section 107 requires the consideration and balancing of four mandatory, but nonexclusive, factors on a case-by-case basis.
In examining the first factor—the purpose and character of the use—it appears that the making of buffer copies is commercial and not transformative. However, the use does not supersede or supplant the market for the original works. Buffer copies are a means to a noninfringing and socially beneficial end—the licensed performance of these works. There is no commercial exploitation intended or made of the buffer copy in itself. The first factor weighs in favor of fair use.
The second factor—the nature of the copyrighted work—weighs against a finding of fair use because musical works are generally creative. The third factor—the amount and substantiality of the portion used in relation to the copyrighted work as a whole—would also be likely to weigh against fair use since, in aggregate, an entire musical work is copied in the RAM buffer. Since this is necessary in order to carry out a licensed performance of the work, however, the factor should be of little weight.
In analyzing the fourth factor—the effect of the use on the actual or potential market for the work—the effect appears to be minimal or nonexistent. This factor strongly weighs in favor of fair use.
Page 41 PREV PAGE TOP OF DOC Segment 1 Of 2
Two of the four statutory factors weigh in favor of fair use, but fair use is also an ''equitable rule of reason.'' In the case of temporary buffer copies, we believe that the equities unquestionably favor the user. The sole purpose for making the buffer copies is to permit an activity that is licensed by the copyright owner and for which the copyright owner receives a performance royalty. In essence, copyright owners appear to be seeking to be paid twice for the same activity. Additionally, it is technologically necessary to make buffer copies in order to carry out a digital performance of music over the Internet. Finally, the buffer copies exist for too short a period of time to be exploited in any way other than as a narrowly tailored means to enable the authorized performance of the work. On balance, therefore, the equities weigh heavily in favor of fair use.
c. Recommendation Concerning Temporary Incidental Copies
Representatives of the webcasting industry expressed concern that the case-by-case fair use defense is too uncertain a basis for making rational business decisions. We agree. While we recommend against the adoption of a general exemption from the reproduction right to render noninfringing all temporary copies that are incidental to lawful uses, a more carefully tailored approach is desirable.
We recommend that Congress enact legislation amending the Copyright Act to preclude any liability arising from the assertion of a copyright owner's reproduction right with respect to temporary buffer copies that are incidental to a licensed digital transmission of a public performance of a sound recording and any underlying musical work.
Page 42 PREV PAGE TOP OF DOC Segment 1 Of 2
The economic value of licensed streaming is in the public performances of the musical work and the sound recording, both of which are paid for. The buffer copies have no independent economic significance. They are made solely to enable the performance of these works. The uncertainty of the present law potentially allows those who administer the reproduction right in musical works to prevent webcasting from taking place—to the detriment of other copyright owners, webcasters and consumers alike—or to extract an additional payment that is not justified by the economic value of the copies at issue. Congressional action is desirable to remove the uncertainty and to allow the activity that Congress sought to encourage through the adoption of the section 114 webcasting compulsory license to take place.
Although we believe that the fair use defense probably does apply to temporary buffer copies, this approach is fraught with uncertain application in the courts. This uncertainty, coupled with the apparent willingness of some copyright owners to assert claims based on the making of buffer copies, argues for statutory change. We believe that the narrowly tailored scope of our recommendation will minimize, if not eliminate, concerns expressed by copyright owners about potential unanticipated consequences.
Given our recommendations concerning temporary copies that are incidental to digital performances of sound recordings and musical works, fairness requires that we acknowledge the symmetrical difficulty that is faced in the online music industry: digital performances that are incidental to digital music downloads. Just as webcasters appear to be facing demands for royalty payments for incidental exercise of the reproduction right in the course of licensed public performances, it appears that companies that sell licensed digital downloads of music are facing demands for public performance royalties for a technical ''performance'' of the underlying musical work that allegedly occurs in the course of transmitting it from the vendor's server to the consumer's computer.
Page 43 PREV PAGE TOP OF DOC Segment 1 Of 2
Although we recognize that it is an unsettled point of law that is subject to debate, we do not endorse the proposition that a digital download constitutes a public performance even when no contemporaneous performance takes place. If a court were to find that such a download can be considered a public performance within the language of the Copyright Act, we believe the that arguments concerning fair use and the making of buffer copies are applicable to this performance issue as well. It is our view that no liability should result from a technical ''performance'' that takes place in the course of a download.
3. Archival Exemption
a. Evaluation of Arguments Concerning the Scope of Section 117(a)(2)
Currently the archival exemption under section 117(a)(2) is limited to computer programs. This section allows the owner of a copy of a computer program to make or authorize the making of an additional copy of the program ''for archival purposes,'' provided that ''all archival copies are destroyed in the event that continued possession of the computer program should cease to be rightful.'' A number of arguments were advanced in the course of this study for an expansion of this archival exemption in order to cover the kind of routine backups that are performed on computers and to allow consumers to archive material in digital format other than computer programs.
Commenters asserted that consumers need to backup works in digital form because they are vulnerable. That was CONTU's rationale for recommending that Congress create an exemption to permit archival copies of computer programs. In both cases, the vulnerability stems from the digital nature of the works. It would be perfectly consistent with the rationale of CONTU's recommendations and Congress' enactment of section 117 to extend the archival exemption to protect against the vulnerabilities that may afflict all works in digital format.
Page 44 PREV PAGE TOP OF DOC Segment 1 Of 2
Evidence was presented to us noting that the archival exemption under section 117 does not permit the prevailing practices and procedures most people and businesses follow for backing up data on a computer hard drive. There is a fundamental mismatch between accepted, prudent practices among most system administrators and other users, on the one hand, and section 117 on the other. As a consequence, few adhere to the law.
While there is no question that this mismatch exists, nobody was able to identify any actual harm to consumers as a result of the limited scope of the archival exemption. Additionally, it was argued that the need to make archival copies of computer programs has diminished, because almost all software sold in the United States is distributed on CD-ROM, which itself serves as an archival copy in the event of hard drive problems or upgrades.
b. Recommendations Concerning the Archival Exemption
Although there has been a complete absence of any demonstrated harm to the prospective beneficiaries of an expanded archival exemption, and although we believe that a strong case could be made that most common archival activities by computer users would qualify as fair use, we have identified a potential concern—the interplay between sections 107 and 109. It appears that the language of the Copyright Act could lead a court to conclude that copies lawfully made under the fair use doctrine may be freely distributed under section 109.
Section 109 permits ''the owner of a particular copy or phonorecord lawfully made'' under title 17 to distribute that copy without the copyright owner's permission. To the extent that section 107 permits a user to make a backup copy of a work stored on a hard drive, that copy is lawfully made and the user owns it. Section 109, on its face, appears to permit the user to sell or otherwise dispose of the possession of that backup copy. The legislative history can be read to support either view.
Page 45 PREV PAGE TOP OF DOC Segment 1 Of 2
We conclude that a statutory change is desirable, and recommend that Congress amend the copyright law in one of two ways.
Given the uncertain state of authority on the issue, we cannot conclude with a satisfactory level of certainty that a court will not, in the future, find a backup copy made by virtue of section 107 to be eligible for distribution under section 109. We believe that such a result is contrary to the intent of Congress and would have the capacity to do serious damage to the copyright owner's market. We therefore recommend that Congress either (1) amend section 109 to ensure that fair use copies are not subject to the first sale doctrine or (2) create a new archival exemption that provides expressly that backup copies may not be distributed. We express no preference as between the two options, and note that they are not mutually exclusive.
The first option would entail amending section 109(a) to state that only copies lawfully made and lawfully distributed are subject to the first sale doctrine. This proposed change would not preclude the distribution of copies made pursuant to the fair use doctrine since the exclusive right of distribution is equally subject to the fair use doctrine. It would, however, require that a separate fair use analysis be applied to the distribution of that copy.
The second option entails creating a new exemption for making backups of lawful copies of material in digital form, and amending section 117 to delete references to archival copies. The new exemption should follow the general contours of section 117(a)(2) and (b), and include the following elements: it should permit the making of one or more backup copies of a work. The copy from which the backup copies are made must be in digital form on a medium that is subject to accidental erasure, damage, or destruction in the ordinary course of its use. It should stipulate that the copies may be made and used solely for archival purposes or for use in lieu of the original copy. It should also specify that, notwithstanding the provisions of section 109, the archival copy may not be transferred except as part of a lawful transfer of all rights in the work. Finally, it should specify that the archival copies may not be used in any manner in the event that continued possession of the work ceases to be rightful.
Page 46 PREV PAGE TOP OF DOC Segment 1 Of 2
4. Contract Preemption
The question of contract preemption was raised by a number commenters who argued that the Copyright Act should be amended to insure that contract provisions that override consumer privileges in the copyright law, or are otherwise unreasonable, are not enforceable. Although the general issue of contract preemption is outside the scope of this Report, we do note that this issue is complex and of increasing practical importance, and thus legislative action appears to be premature. On the one hand, copyright law has long coexisted with contract law. On the other hand, the movement at the state level toward resolving questions as to the enforceability of non-negotiated contracts coupled with legally-protected technological measures that give right holders the technological capability of imposing contractual provisions unilaterally, increases the possibility that right holders, rather than Congress, will determine the landscape of consumer privileges in the future. Although market forces may well prevent right holders from unreasonably limiting consumer privileges, it is possible that at some point in the future a case could be made for statutory change.
Mr. COBLE. Thank you, Ms. Peters. In a sense of fairness and equity, Ms. Peters consumed 6 minutes, so I will allow you all 6 minutes as well.
Mr. Ramos?
STATEMENT OF CAREY RAMOS, ESQ., PAUL, WEISS, RIFKIND, WHARTON & GARRISON, ON BEHALF OF THE NATIONAL MUSIC PUBLISHERS ASSOCIATION
Page 47 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. RAMOS. Thank you, Mr. Chairman, and Members of the Subcommittee. My name is Carey Ramos.
I appreciate the opportunity to express the views of the National Music Publishers Association and its licensing affiliate, the Harry Fox Agency, concerning the section 104 report.
There has been a reference to a recent agreement between the NMPA and Harry Fox and the RIAA, and I would like to initially address that, because I think it's directly relevant to the subject of today's hearing.
We worked hard, since the Subcommittee's hearings last spring, to develop marketplace arrangements that will assist the launch of legitimate Internet music services. I am pleased to report that those efforts have borne fruit.
In October, we concluded a breakthrough agreement with the RIAA to provide a mechanism for Internet music businesses to obtain licenses to copyrighted musical works for use in subscription music services. In our negotiations, we were able to reach a compromise under which we have agreed to issue licenses to the RIAA's members, to enable them lawfully to use our works on their subscription music services without having to make royalty payments on a current basis, as the law requires.
We agreed to forego receiving royalty payments today on the understanding that the licensees will pay the full amount of royalties due once the rates are set on a retroactive basis.
Page 48 PREV PAGE TOP OF DOC Segment 1 Of 2
For radio-style webcasting—and I want to emphasize this—we have expressly agreed not to seek mechanical licenses. The reason we believe on-demand streaming requires a mechanical license is that it involves the making of copies and it displaces record sales. Common sense says that if consumers are able to hear a song on demand—that is, whenever they want—they are less likely to go out and buy that record. This displacement will have a direct and substantial effect on songwriters' and music publishers' income.
We have publicly stated that is our policy to license not only RIAA members but also other digital musical services that wish to negotiate comparable agreements. We have already concluded our first such agreement with Listen.com last month and are currently negotiating with other prospective licensees that are not affiliated with the RIAA.
Although the agreement does not establish a royalty rate for on-demand streams or limited downloads, it incorporates the framework already established by Congress for doing so. We will engage in good-faith negotiations to agree on industry rates. If negotiations do not result in agreement, the applicable rates will be established through arbitration, as provided by law.
Our agreements with the RIAA and Listen.com show that marketplace solutions work. We have reached a compromise that benefits the creators of music, the distributors of music, and the consumers of music by making a diverse catalog of music available to subscription services offering on-demand streams and limited downloads.
While there is much that we agree with in the Copyright Office report, I do wish to address one part of the report; that is the recommendation that Congress exempt so-called buffer copies of musical works that are made in the streaming process, because they supposedly have no economic value separate from a performance.
Page 49 PREV PAGE TOP OF DOC Segment 1 Of 2
The report predates our recent agreements with RIAA and Listen.com and, unlike those agreements, does not distinguish between on-demand and radio-style streaming. This is a critical distinction. To the extent that the report recommends a statutory exemption from mechanical licensing for radio-style streaming, we respectively submit that no exemption is necessary.
Publishers have never required and have now expressly agreed not to require mechanical licenses for such streaming. To the extent, however, that the report may be construed to seek a statutory exemption for on-demand streaming, such legislation would seriously impair the copyright in musical works and deprive songwriters and music publishers of a vital source of licensing income.
The potential for the online delivery of music to displace record sales in fact was Congress' principal concern in enacting the DPRA in 1995. The legislative history of the DPRA makes clear that the act was intended to respond to a concern that ''certain types of subscription and interactive audio services might adversely affect sales of sound recordings and erode copyright owners' ability to control and be paid for the use of their work.''
An exemption for buffer copies made in on-demand streams would have just such an adverse effect. The resulting loophole in the law, moreover, would create an artificial incentive for the market to favor the streaming model, regardless of whether streaming is the optimal musical delivery technology from an efficiency or consumer standpoint.
It would be as though Congress determined in the 1960's that, in order to promote the nascent 8-track industry, the production of 8-track tapes should be exempt from mechanical royalties.
Page 50 PREV PAGE TOP OF DOC Segment 1 Of 2
There is simply no reason to favor one technology over another by creating a particular statutory exemption, whereas here the technology chosen for exemption is one of several alternative technologies that are still evolving.
In closing, I want to thank the Subcommittee for considering the views of the NMPA and HFA. We hope this testimony has demonstrated the effectiveness of the marketplace in meeting the unique challenges faced by copyright owners and users in developing fair licensing and business models for Internet music delivery.
Thank you.
[The prepared statement of Mr. Ramos follows:]
PREPARED STATEMENT OF CAREY RAMOS
INTRODUCTION
Mr. Chairman and members of the Subcommittee, my name is Carey Ramos. I am here on behalf of the National Music Publishers' Association (''NMPA'') and its licensing affiliate, The Harry Fox Agency (''HFA'').
NMPA is the principal trade association representing the interests of music publishers in the United States. The more than 600 music publisher members of NMPA, along with their subsidiaries and affiliates, own or administer the majority of U.S. copyrighted musical works. For more than eighty years, NMPA has served as the leading voice of the American music publishing industry before Congress and in the courts.
Page 51 PREV PAGE TOP OF DOC Segment 1 Of 2
HFA is the licensing affiliate of the NMPA. It provides an information source, clearing house and monitoring service for licensing musical copyrights, and acts as licensing agent for more than 27,000 music publisher principals, which in turn represent the interests of more than 160,000 songwriters.
I will address two subjects in my testimony: first, the deals that we have recently reached with the Recording Industry Association of America (''RIAA'') and with Listen.com, an independent Internet music service and, second, the Copyright Office's Section 104 Report.
THE LANDMARK NMPA/HFA/RIAA AGREEMENT
We have worked hard since the Subcommittee's hearings last Spring to develop marketplace arrangements that will assist the launch of legitimate Internet music services. I am pleased to report that those efforts have borne fruit. On October 5, 2001, we concluded a breakthrough agreement with the RIAA for participating songwriters and publishers to provide a mechanism for Internet music businesses to obtain licenses to copyrighted musical works for use in subscription music services.
In our negotiations, we were able to reach a compromise under which we have agreed to issue licenses to the RIAA's members to enable them lawfully to use our works on their subscription music services, in the absence of a rate, without having to make royalty payments on a current basis as the law requires. We agreed to forego receiving royalty payments on a current basis, and to issue licenses nonetheless, on the understanding that the licensees will pay the full amount of royalties due once the rates are finally determined, on a retroactive basis.
Page 52 PREV PAGE TOP OF DOC Segment 1 Of 2
We also agreed to settle the issue of rights by agreeing that ''on-demand streams'' and ''limited downloads'' are processes that entail the making and distribution of copies of musical works and, accordingly, constitute digital phonorecord deliveries (or ''DPDs'') within the meaning of Section 115 of the Copyright Act. An ''on-demand stream,'' under the agreement, is a real-time digital transmission of a song using streaming technology (such as Real Audio or Windows Media Player) to a consumer who requests that song. A ''limited download'' is a download that can be played for a limited period of time or a limited number of plays. We anticipate that on-demand streams and limited downloads will take their place in the digital music marketplace alongside full downloads (for which compulsory licenses are already available at the current statutory mechanical rate). We expect some music service providers will choose to offer several—or all—of these services to their subscribers.
For radio-style webcasting, we have agreed not to seek mechanical licenses.(see footnote 1)
The reason we believe on demand streaming requires a mechanical license is that it involves the making of copies and it displaces record sales. Common sense says that, if consumers are able to hear a song on-demand—that is, whenever they want, and as many times as they want—they are less likely to go out and buy that record. This displacement will have a direct and substantial impact on songwriters' and music publishers' income.
By settling the question of rights, the agreement will make licenses immediately available to new services and thus promote competition in the delivery of music over the Internet. To encourage such services to enter the on-line music marketplace, we have publicly stated that it is our policy to license not only RIAA members but also other digital music services that wish to negotiate comparable agreements. We have already concluded our first such agreement, with Listen.com, last month, and are currently negotiating with other prospective licensees.(see footnote 2)
Page 53 PREV PAGE TOP OF DOC Segment 1 Of 2
Under the agreement, we also have agreed to simplify and expedite the mechanical rights licensing process. The agreement provides for electronic ''bulk'' licensing to allow companies to obtain mechanical licenses quickly. The procedures will allow a potential licensee to request licenses for multiple titles at the same time. In order to facilitate the launch of services, licenses issued will be retroactive to the date of request. Moreover, for musical works owned by multiple copyright owners, HFA will issue a license if it represents any one of those owners. As a further undertaking, HFA also will attempt to arrange licenses of songs even when it does not represent any of the copyright owners. HFA's ability to serve as an information clearinghouse and as licensing agent for thousands of publishers will provide substantial benefits for licensees.
The agreement is non-exclusive—record companies and Internet music services are free to obtain compulsory licenses other than through HFA, and, while record companies that take licenses under the agreement may exercise their statutory authority to authorize Internet music services to distribute digital recordings of musical works, HFA and individual music publishers are also free to grant licenses directly to Internet music services.
Although the agreement does not establish a royalty rate for on-demand streams or limited downloads, it incorporates the framework already established by Congress for doing so.(see footnote 3) We will engage in good faith negotiations with the record companies aimed at establishing such a rate, or rates. If negotiations fail, the applicable rate or rates will be established by a Copyright Arbitration Royalty Panel (or ''CARP'') convened by the Copyright Office. In the interim, however, the agreement allows licensees to launch their services now and pay the royalties due once rates are established.
Page 54 PREV PAGE TOP OF DOC Segment 1 Of 2
Our agreements with the RIAA and Listen.com show that marketplace solutions work. We have reached a compromise that benefits the creators of music, by confirming their rights in on-demand streams and limited downloads and guaranteeing that royalties will be paid to them for the use of their works on a retroactive basis when rates are finally set. That compromise also benefits the licensees of the music by allowing them to launch and operate new businesses immediately with the comfort that they are fully licensed and will not be subject to claims of copyright infringement by participating music publishers. Consumers benefit, because the agreement makes a diverse catalogue of music available to subscription services offering on-demand streams and limited downloads.
THE SECTION 104 REPORT
In August 2001, the Copyright Office published a report (the ''Report'') in which it recommended that Congress exempt so-called ''buffer'' copies of musical works that are made in the streaming process from the compulsory license provisions of the Copyright Act, because such copies have ''no economic value independent of the performance that [they] enable[].''(see footnote 4)
The Report predates our recent agreements with RIAA and Listen.com and unlike those agreements does not distinguish between on-demand and radio-style streaming. This is a critical distinction. To the extent that the Report recommends a statutory exemption from mechanical licensing for radio-style streaming, we respectfully submit that no exemption is needed. Publishers have never required, and have now expressly agreed not to require, mechanical licenses for such streaming. To the extent that the Report may be construed to seek a statutory exemption for on-demand streaming, however, such legislation would seriously impair the copyright in musical works and deprive songwriters and music publishers of a vital source of licensing income.
Page 55 PREV PAGE TOP OF DOC Segment 1 Of 2
The Report correctly concludes that streaming involves the copying of musical works. The ''aggregate effect'' of streaming, it states, ''is the copying of the entire [musical] work.''(see footnote 5)
The Report, however, then proceeds to consider whether so-called ''buffer'' copies made in the course of streaming are nevertheless a ''fair use'' of copyrighted music. Applying the factors codified in Section 107 of the Copyright Act, the Report concludes that, because two of the four factors (the transformative nature and economic value of the use) favor the user rather than the copyright owner, a ''strong case'' could be made that the making of a ''buffer'' copy in the course of streaming is a fair use not subject to the payment of royalties.(see footnote 6) The law is crystal-clear, however—and the Report acknowledges—that the doctrine of fair use ''is limited to copying by others which does not materially impair the marketability of the work which is copied.''(see footnote 7) In conducting the fair-use analysis, the law requires that consideration be given to whether, ''if [the use] should become widespread, it would adversely affect the potential market for the copyrighted work.''(see footnote 8) Here, there can be no question that on-demand streams—which allow consumers to choose the songs they want, when they want to hear them—will displace record sales, and therefore directly affect ''the marketability of the work that is being copied,'' or the ''potential market for the copyrighted work,'' so as not to qualify as a fair use. Under these circumstances, it defies economic reality to say that ''buffer'' copies are fair use. Indeed, it would do violence to the fair use doctrine to do so.
Page 56 PREV PAGE TOP OF DOC Segment 1 Of 2
The potential for the on-line delivery of music to displace record sales, in fact, was Congress's principal concern in enacting the Digital Performance Right in Sound Recordings Act of 1995 (the ''DPRA''). The legislative history of the DPRA states that the Act was intended to respond to the concern that ''certain types of subscription and interactive audio services might adversely affect sales of sound recordings and erode copyright owners' ability to control and be paid for the use of their work.''(see footnote 9) Or, in the words of then-Register of Copyrights Ralph Oman, ''[W]ill what you call the 'celestial jukebox' replace Tower Records and the corner outlet stores and their glitzy stock of CD's, tapes, and records?''(see footnote 10)
Chairman Sensenbrenner put it this way: ''[N]ew interactive services are being created which allow consumers to use their TV's and computers to order any recording at any time. These subscriber services threaten sales of CD's, records and tapes.''(see footnote 11)
The Report did not consider on-demand streams in its analysis. It appeared to address only radio-style webcasting (for which, as noted, we do not seek mechanical licenses in our agreements with the RIAA and Listen.com). Given the direct and substantial impact that on-demand streaming will have on record sales, there is no basis for concluding that ''buffer'' copies made in the course of streaming a song on demand are a fair use of the underlying copyrighted work.
Finally, the fair use doctrine is ill-suited to the inquiry and analysis undertaken by the Report here. It is an equitable doctrine, to be applied in fact-specific circumstances. To apply it broadly, without the benefit of a fully developed factual record, as the Report does, is inconsistent with the terms of Section 107.
Page 57 PREV PAGE TOP OF DOC Segment 1 Of 2
The Report Does Not Take Into Account Recent Technical and Business Developments In Internet Music Delivery
Because it was not based on testimony from economists or experts in streaming, the Report also fails to consider the economic impact of new methods of on-line music delivery on the mechanical right. The Report assumes the existence of only two methods of on-line music delivery: radio-style streaming (or ''webcasting'' in the Report) and full downloads, by which a song is downloaded to the consumer's hard-drive and stored there permanently.
But these are only two methods of on-line distribution in a rapidly-expanding industry. Today, there are services poised to offer on-demand streams as well as radio-style webcasting. In addition, there are technologies that combine aspects of downloading and streaming. Certain media players make and store a complete copy of the streamed song in a file that remains accessible on the consumer's computer for an indefinite period of time. In addition, regardless of whether the consumer's PC automatically creates a stored version of the song, widely available software such as Total Recorder permits even the most unsophisticated consumer to make a perfect digital copy of a streamed song on his hard drive or a CD. (Total Recorder can be downloaded over the Internet for $11.95.(see footnote 12)
Listen.com—one of the services that we have agreed to license—uses a new technology that downloads approximately 99% of a song to a user's hard drive, then streams the remaining 1% on demand. Other new technology allows consumers to listen to a song while it is downloading, implicating not only a copyright owner's reproduction right, but also his or her right to be compensated for the public performance of the work.
Page 58 PREV PAGE TOP OF DOC Segment 1 Of 2
As these examples demonstrate, the line of demarcation between downloads and streams is already far from clear, and is likely to be further blurred as new technologies and business models develop. It would be unwise to codify an exception for a technology that is rapidly changing.
The resulting loophole in the law, moreover, would create an artificial incentive for the market to favor the streaming model, regardless of whether streaming is the optimal music delivery technology from an efficiency or consumer standpoint. It would be as though Congress determined in the 1960s, that, in order to promote the nascent 8-track industry, that production of 8-track tapes would not be subject to mechanical royalty payments. There is no reason to favor one technology over another by creating a particular statutory exemption where, as here, the technology on which the exemption is based is one of several alternative technologies that are still evolving.
THERE IS NO RISK OF ''DOUBLE-DIPPING''
Those who would prefer to avoid payment for the on-line use of copyrighted musical works have been heard to assert that songwriters and music publishers are ''double dipping'' because they seek to be compensated for both the mechanical and the public performance value of their works. This argument ignores the express terms of the Copyright Act, which has long recognized that songwriters and music publishers possess several distinct rights in their works—including the right to reproduce and distribute copies of their songs (the mechanical right) and, separately, the right to perform those songs publicly. The Copyright Act also expressly entitles songwriters and music publishers to receive a royalty—a separate royalty—for the licensing of each of these rights.
Page 59 PREV PAGE TOP OF DOC Segment 1 Of 2
In amending section 115 in 1995, Congress was concerned that digital transmissions of music would displace sales of physical phonorecords. Congress correctly determined that, apart from any performance value, consumers' ability to listen to particular songs on demand would be an effective substitute for purchasing those songs for their permanent collections. Thus, section 115 specifically defines a DPD as each individual delivery of a phonorecord, ''regardless of whether the digital transmission is also a public performance of the sound recording or any nondramatic musical work embodied therein.''(see footnote 13)
The ''double dipping'' charge, therefore is seriously misleading. The rights to reproduce, distribute and publicly perform a work are separate and distinct rights under section 106 of the Copyright Act and have long been recognized as rights that may be independently owned and exercised. Indeed, the Act expressly provides that
[a]ny of the exclusive rights comprised in a copyright, including any subdivision of any of the rights specified by section 106, may be transferred as provided by clause (1) and owned separately. The owner of any particular exclusive right is entitled, to the extent of that right, to all of the protection and remedies accorded to the copyright owner by this title.(see footnote 14)
Regardless of whether the rights are held by different owners or the same owner, there are independent income streams flowing from the reproduction and distribution rights licensed under Section 115, on the one hand, and the separately licensed performance right, on the other. Congress did not alter this basic principle of music copyright law in amending Section 115 to cover digital transmissions—in fact, as noted above, it explicitly preserved the distinct income streams by providing that a digital transmission can constitute a DPD regardless of whether it also constitutes a performance. As Congress explained then,
Page 60 PREV PAGE TOP OF DOC Segment 1 Of 2
[t]he intention in [amending Section 115 to cover DPDs] is not to substitute for or duplicate performance rights in musical works, but rather to maintain mechanical royalty income and performance rights income for writers and music publishers.(see footnote 15)
The separate exercise of the rights of reproduction, distribution and public performance is not unique to the music industry. The motion picture industry, for example, provides separate licenses for public display in theater, for pay-per-view and for DVD or video sales and rental. A person who pays to see a public performance of a movie in a theater is not entitled to a DVD or video copy of the movie without additional charge. Moreover, to include music in a motion picture or television program, a synchronization license to record the music on the soundtrack must be obtained; when the movie or the TV show is broadcast, a separate performance license—in addition to the synch license—is required.
The technology of the Internet allows on-line services to render a public performance at the same time that a song is reproduced and distributed to the consumer, in which case the reproduction and distribution rights and the public performance right are all implicated. That each of these rights may be involved in a single transaction should not deprive song owners of the benefits of each right.
CONCLUSION
In closing, I want to thank the Subcommittee for considering the views of the NMPA and HFA. And I am pleased to report the substantial progress that has been made toward launching fully licensed music services on the Internet. That progress is a direct result of the agreements we have reached with RIAA, Listen.com and others. The licenses we grant under the agreements will enable legitimate Internet music services to offer their customers the music that they love best—and will provide customers a legitimate alternative to unlicensed pirate services. At the same time, by confirming that on-demand streaming and limited downloads result in the creation of DPDs, the parties have ensured that songwriters and music publishers will be compensated at a reasonable rate for the value of their creative contributions. Under these agreements, the question of what rates Internet services should pay for the music will be determined through negotiations or, if necessary, in a CARP, under the auspices of the Copyright Office.
Page 61 PREV PAGE TOP OF DOC Segment 1 Of 2
We hope this testimony has demonstrated the effectiveness of the marketplace in meeting the unique challenges faced by copyright owners and users in developing fair licensing and business models to provide consumers on-line access to copyrighted music, while ensuring that songwriters and music publishers receive reasonable compensation for the value of that music.
Mr. COBLE. Thank you, Mr. Ramos.
Mr. Sherman?
STATEMENT OF CARY SHERMAN, SENIOR EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, RECORDING INDUSTRY ASSOCIATION OF AMERICA, INC.
Mr. SHERMAN. Good afternoon. I am Cary Sherman, senior executive vice president and general counsel of the Recording Industry Association of America. And I'm grateful for the opportunity to present our views on the Copyright Office's study under section 104 of the Digital Millennium Copyright Act.
I would like to begin by congratulating the Copyright Office on the thoughtful and comprehensive report that it prepared. As I will detail in a moment, the careful analysis reflected in the office's report has already been helpful in bringing a measure of clarity to the difficult and challenging issues that the office confronted.
Page 62 PREV PAGE TOP OF DOC Segment 1 Of 2
I would also like to thank this Subcommittee, under the leadership of Chairman Coble and Ranking Democratic Member Berman, for its careful and thorough examination and development of the law in this complex area over the past several years. We not only appreciate the expertise you have brought to these issues, but also the balanced manner in which you have considered them.
I'll devote most of my 5 minutes to one of the subjects addressed by the study: copies incidental to the digital performance of a musical work.
One of the most difficult issues we have faced in applying copyright law to the new digital environment has been the licensing requirements for on-demand streams and limited downloads offered as part of new subscription services.
On-demand streaming is the real-time transmission of songs chosen by the listener. Limited downloads refer to music files which are transferred to a user's computer but can only be accessed for a limited period of time.
Uncertainty about the licensing requirements for these services has been an impediment to the launch of digital music services. But since the release of the report, and in part because of the very helpful legal analysis set forth in it, RIAA, NMPA, and HFA have been able to agree on a common interpretation of the relevant provisions of the Copyright Act. And as a result, we agreed on a framework for licensing subscription music services.
That agreement is posted on our website, so that anyone with an interest in these issues can read for themselves every provision of our agreement.
Page 63 PREV PAGE TOP OF DOC Segment 1 Of 2
In brief, the core elements of our agreement with the music publishers are that, consistent with the Copyright Office's report, the process of making on-demand streams through a subscription service, as well as the process of making limited downloads, from the making of the server copy to transmission and local storage involves the making of a DPD. Webcasting of the kind covered by the statutory license for sound recording performances does not involve the making of a DPD.
Consistent with the 1995 amendments to section 115, compulsory licenses to make on-demand streams and limited downloads are available under section 115 of the Copyright Act.
HFA will now issue licenses for on-demand streams and limited downloads through subscription services, even though there is presently no statutory royalty rate for on-demand streams and it has not been clear what royalty rate applies to limit downloads.
Our agreement contemplates that those questions will be answered by voluntary industry negotiations as authorized by section 115 or by arbitration if necessary. But as is the case with other compulsory licenses, services may commence operations in reliance on their licenses while the rate-setting process continues.
This agreement has many benefits. Most importantly, it will facilitate the immediate launch of licensed music services that will offer consumers a broad array of music and diverse methods of electronic music delivery.
Indeed, new licensing deals have been announced between record labels, Internet music services, and music publishers. A number of Internet music services have already launched, and a number of others are scheduled to launch within days or weeks. Legitimate services are finally commencing operations.
Page 64 PREV PAGE TOP OF DOC Segment 1 Of 2
The agreement simplifies and expedites the process for licensing mechanical rights for subscription services. It provides for electronic bulk licensing to expedite the process, and licenses issued will be retroactive to the date of request.
Moreover, for musical works owned by multiple copyright owners, HFA will issue a license if it represents any one of those owners.
By resolving the legal uncertainties and providing a streamlined process for obtaining licenses, the agreement fosters competition in the nascent online music marketplace and represents the type of marketplace solution that Congress has urged to resolve these business and legal issues.
Turning briefly to the other major issues in the Copyright Office report, we concur wholeheartedly with the office's conclusion that no change should be made to the first sale doctrine in section 109. That provision is a limitation on the copyright owner's distribution right, not the reproduction right. It was plainly intended to apply to physical copies, where disposing of the copy means that the original is no longer retained. To extend section 109 to distribution by means of digital transmission when there's no meaningful way to ensure that the original has been destroyed would be to create a loophole that would undermine the fundamental objectives of the Copyright Act.
With respect to the issue of archival copying and the interplay between the first sale doctrine and the fair use doctrine, the office's suggestion that a court could conclude that copies lawfully made under the fair use doctrine may be freely distributed under section 109 is troubling, because, as the Copyright Office points out, such an interpretation would clearly do serious damage to the copyright owners market. It would have a significant adverse effect on the market for recorded music if someone could make copies of entire recordings, perhaps a large number of such copies, and distribute them, perhaps for a profit, merely because the copies ostensibly were made for personal or backup use.
Page 65 PREV PAGE TOP OF DOC Segment 1 Of 2
This interpretation is so obviously incorrect, and it is so clear that Congress could not have intended such a result, that I think it unlikely that a court would ever adopt this mistaken view of the law.
Thank you again for the opportunity to present our views, and I'd be happy to respond to any questions you may have.
[The prepared statement of Mr. Sherman follows:]
PREPARED STATEMENT OF CARY SHERMAN
Good Afternoon. I am Cary Sherman, Senior Executive Vice President and General Counsel of the Recording Industry Association of America (''RIAA''), and I am grateful for the opportunity to present our views on the Copyright Office's study under Section 104 of the Digital Millennium Copyright Act.
I would like to begin by congratulating the Copyright Office on the thoughtful and comprehensive report that it prepared. The careful analysis reflected in the Office's report has already been helpful in bringing a measure of clarity to the difficult and challenging issues confronted in the report, and will undoubtedly continue to provide insights in the months ahead.
I would also like to thank this Subcommittee, under the leadership of Chairman Howard Coble and Ranking Democratic Member Howard Berman, for its careful and thorough examination and development of the law in the complex area over the past several years. The recording industry realizes and appreciates the expertise that this Subcommittee has brought to these issues, and we are grateful for the manner in which you have considered them.
Page 66 PREV PAGE TOP OF DOC Segment 1 Of 2
I will devote most of my time this afternoon to one of the subjects addressed by the study: copies incidental to the digital performance of a musical work. This has been an uncertain area of copyright law, and that uncertainty has been an impediment to the launch of digital music services. It was in an effort to eliminate that uncertainty that we petitioned the Office last November to address in a rulemaking the question of whether streams implicate the reproduction right, as well as other questions concerning the copyright status of certain kinds of transmissions made by digital music services. In its report, the Office discussed some of these questions, although it ultimately concluded that its answers to these questions were not so clear that they could be relied upon to make important business decisions.
But the Office's report did provide a very helpful legal analysis and perspective that has facilitated an emerging consensus on some of the vexing legal issues confronting the music industry and its partners in the online music market. Since the release of the report, RIAA, the National Music Publishers Association (''NMPA'') and its licensing affiliate The Harry Fox Agency (''HFA'') have been able to agree on a common interpretation of the relevant provisions of the Copyright Act, on the basis of which we have reached agreement on a framework for licensing subscription music services. This marketplace agreement became effective on October 5, 2001, and promptly thereafter, we posted it on our web site so that anyone with an interest in these issues could read for themselves every provision of our agreement. Not only is the agreement consistent with the legal analysis set forth in the Copyright Office's report, but it is also a very important step in giving consumers widespread online access to the music they love.
A copy of the agreement and a joint explanatory letter signed by representatives of the Recording Industry Association of America, the National Music Publishers Association, and the Harry Fox Agency is attached for the hearing record.
Page 67 PREV PAGE TOP OF DOC Segment 1 Of 2
I will give you some more details of this agreement in a moment, but first, so as to place it in context, I should give you a little background concerning music copyright law. Although the members of this Subcommittee may already be experts in this arcane area of the law, I will review the basics of the copyright law as it applies to music rights for the sake of completeness of the hearing record.
Background
Music involves two distinct copyrighted works: a ''musical work'' is the notes and lyrics of a song, and a ''sound recording'' is a particular recorded performance of a song. The copyrights in musical works tend to be owned by music publishers, and the copyrights in sound recordings tend to be owned by record companies. Copyright law gives the owners of both of those copyrights various exclusive rights.
In the case of musical works, one of those rights, the ''performance right,'' allows the copyright owner to control the playing of the work for the public, either live or by transmission (whether a broadcast, Internet transmission or otherwise). Performance licenses typically are obtained from performing rights organizations such as ASCAP and BMI.
Other of those rights are the ''reproduction'' right and ''distribution'' right. Since 1909 there has been a compulsory license—called the ''mechanical'' compulsory license—that has allowed record companies and others to reproduce copies of recorded musical works and distribute them to the public. This compulsory license is codified in Section 115 of the Copyright Act. The vast majority of music publishers use the services of HFA to administer their mechanical licensing.
Page 68 PREV PAGE TOP OF DOC Segment 1 Of 2
In 1995, Congress clarified the application of the mechanical compulsory license to digital music services. To do that, Congress recognized a type of transmission called a ''digital phonorecord delivery'' or ''DPD.'' A DPD is essentially the distribution of a copy by means of a digital transmission. A compulsory license under Section 115 includes the right to make DPDs.
Subscription digital music services are interested in offering consumers diverse methods of electronic music delivery. ''On-demand streams'' are one kind of offering that services would like to make available to consumers. These are real-time transmissions of recordings selected by users and delivered when the users want. The legal issue involving on-demand streaming has been that, while streaming creates the user experience of a performance, the operation of a streaming service involves making several different kinds of reproductions. So-called ''server copies'' reside on the computers used by a service to make transmissions. Other copies, called ''buffer copies'' in the Office's report, reside briefly on a user's computer. In between, many ''transient'' reproductions may be made.
Until recently it has not been clear whether any of these reproductions are technically ''copies,'' and hence DPDs, for purposes of copyright law. And if they are DPDs, it has not been clear how the mechanical compulsory license applies. In particular, there has been no royalty rate for these so-called ''incidental DPDs.''
Services are also likely to offer what we call ''limited downloads,'' which are downloads that can only be played for a limited time, such as the duration of a subscription, or a limited number of times. It likewise has not been clear how the mechanical compulsory license applies to limited downloads.
Page 69 PREV PAGE TOP OF DOC Segment 1 Of 2
The Copyright Office's study concluded that streams do implicate the reproduction right, implying that they are DPDs. The Office found that when a stream is licensed as a performance, certain reproductions made in connection with that performance probably qualify as a fair use, although it said that conclusion could not be relied upon with confidence in making important business decisions like whether to launch a service. Our agreement with NMPA and HFA will allow licensing of these activities, and those licenses will give companies the assurance they need to launch services.
The Agreement
Let me turn now to the core elements of our agreement with the music publishers:
Consistent with the Copyright Office's report, RIAA, NMPA and HFA have agreed that the process of making on-demand streams through a subscription service, as well as the process of making limited downloads, from the making of a server copy to transmission and local storage, involves the making of a DPD. Conversely, we agreed that webcasting of the kind covered by the statutory license for sound recording performances does not involve the making of a DPD. We also recognized, that consistent with the 1995 amendments to Section 115, compulsory licenses to make on-demand streams and limited downloads are available under Section 115 of the Copyright Act. Just as HFA administers compulsory licensing for physical product configurations, HFA now will issue licenses for on-demand streams and limited downloads through subscription services. To the extent that they have not done so already, we expect that record companies that have licensed their recordings to digital music services together with related mechanical rights will seek and obtain such licenses very shortly.
Page 70 PREV PAGE TOP OF DOC Segment 1 Of 2
NMPA and HFA also have announced that it is their policy to license not only RIAA members but also other digital music services that wish to negotiate comparable agreements. Thus, whether a service obtains its licenses through an RIAA member or directly from HFA, the agreement assures that an entity seeking to offer legitimate services will have the opportunity to obtain the appropriate licenses, and avoid the uncertainty that previously impeded the launch of services, promptly and through procedures that are not burdensome. By resolving disagreements over the nature and scope of the licenses needed by services and providing a streamlined process for obtaining the necessary licenses, the agreement also fosters competition in the nascent online music marketplace.
I said that there has been no statutory royalty rate for on-demand streams, and it has not been clear what royalty rate applies to limited downloads. Our agreement contemplates that those questions will be answered by voluntary industry negotiations as authorized by Section 115 of the Copyright Act, or by arbitration if necessary. But, as is the case with other compulsory licenses, services may commence operations in reliance on their licenses while the rate-setting process continues. Although we intend to begin rate negotiations in the near future, the final determination of a statutory rate may take a while, so RIAA agreed to make an advance payment to HFA as a sign of good faith and to ensure that music publishers and their songwriters did not have to wait until a final rate is determined before receiving payment for the use of their musical works in subscription services.
This agreement has many benefits:
Most important, the agreement will facilitate the immediate launch of licensed music services that will offer consumers a broad array of the music they love and diverse methods of electronic music delivery. The agreement assures that an entity seeking to offer legitimate services across this range of options will have the opportunity to obtain the appropriate licenses promptly and through procedures that are not burdensome. Indeed, the proof is in the pudding. New licensing deals have been announced between record labels, Internet music services and music publishers; a number of Internet music services have already launched; and a number of others are scheduled to launch within days or weeks. Legitimate services are finally commencing operations.
Page 71 PREV PAGE TOP OF DOC Segment 1 Of 2
The agreement will benefit both record companies and Internet music services in launching subscription services on the Internet. The agreement is nonexclusive, so Internet music services will have the option of obtaining licenses directly from HFA or individual publishers, or seeking authorization from record companies that take licenses under the agreement.
The agreement resolves legal uncertainties that have impeded the licensing of musical works for subscription services in a manner consistent not only with the law, but also Congress' manifest intent in 1995 when it made clear that the compulsory license for musical works extends to digital delivery. The agreement thus clears the way for more productive negotiations of terms and rates of royalty payments.
The agreement confirms that the compulsory mechanical license provisions of the Copyright Act are applicable not only to digital download services (i.e. selling recordings online just as they are sold on physical media), but also to the newer subscription service business models. This will enhance the availability of new delivery options and business models from which consumers can choose.
It is clear that server copies will be licensed under the agreement and that they are covered by the compulsory mechanical license provisions of the Copyright Act. Having ready access to licenses that include the right to make server copies will be particularly reassuring for companies seeking to launch services.
The agreement simplifies and expedites the process for licensing mechanical rights for subscription services. It provides for electronic ''bulk'' licensing to allow companies to obtain mechanical licenses very quickly. To facilitate the launch of services, licenses issued will be retroactive to the date of request. Moreover, for musical works owned by multiple copyright owners, HFA will issue a license if it represents any one of those owners, subject to the licensee paying the non-HFA co-owner its share of the royalties directly.
Page 72 PREV PAGE TOP OF DOC Segment 1 Of 2
By resolving uncertainties over the nature and scope of the licenses needed by services and providing a streamlined process for obtaining the necessary licenses, the agreement fosters competition in the nascent online music marketplace.
The agreement provides a framework to establish fair royalty rates, while ensuring that services can launch and operate in the interim. We have always been willing to pay a fair royalty for the use of musical works. But it has been difficult to agree on what that is in the abstract. In the absence of legitimate music subscription services in the marketplace, offering real consumers real content in exchange for real dollars, we haven't had the marketplace experience that would facilitate the kind of analysis leading to an agreed rate structure. But legitimate music subscription services couldn't launch, and provide us the needed marketplace experience, in the absence of a license. Under the agreement, subscription services can go into business while the royalty rate is being negotiated among the affected industries. Should we fail to agree on a fair royalty rate, we will rely on the arbitration provisions of Section 115 of the Copyright Act. Once a royalty rate is set, whether by negotiation or arbitration, payments will be made retroactive to the date the subscription services went into business.
The agreement represents the type of marketplace solution that Congress has urged to resolve these business and legal issues.
Having legitimate digital music services available in the marketplace sooner rather than later is very important to our continuing efforts to stem the tide of online piracy. We recognize that legal enforcement action alone will not put an end to the proliferation and growing use of pirate services. This agreement will allow record companies and their licensees to offer legitimate alternatives.
Page 73 PREV PAGE TOP OF DOC Segment 1 Of 2
First Sale Doctrine
I would also like to address briefly the Office's discussion of the first sale doctrine. We concur wholeheartedly with the Office's conclusion that the reproduction of a new copy by means of a digital transmission is so different from the physical distribution of an existing copy that Section 109 should not be changed to address digital transmissions. Section 109 is a limitation on the copyright owner's distribution right, not his or her reproduction right. It was plainly intended to apply to physical copies, where disposing of the copy means that the original is no longer retained. To extend Section 109 to distribution by means of digital transmission, when there is no meaningful way to ensure that the original has been destroyed, would be to create a loophole that would undermine the fundamental objectives of the Copyright Act.
Archival Copies
The other major part of the report concerns archival copying, and focuses on the interplay between the first sale doctrine and the fair use doctrine. The Office's suggestion that a court could conclude that copies lawfully made under the fair use doctrine may be freely distributed under Section 109 is troubling. It is troubling because, as the Copyright Office points out, such an interpretation would clearly do serious damage to the copyright owner's market. We hear constantly that it is a fair use for someone to reproduce our sound recording products in their entirety for personal or backup use. Whether or not that may be true in any particular situation, it should be clear to everyone that it would have a significant adverse effect on the market for recorded music if someone could make copies of entire recordings—perhaps a large number of such copies—and distribute them—perhaps for profit—merely because the copies ostensibly were made for personal or backup use. If a court were to adopt the misguided interpretation referred to by the Office, I have no doubt that every piracy case we pursue would get bogged down in this issue as even street vendors selling counterfeit CDs claimed they were just disposing of copies made for fair use.
Page 74 PREV PAGE TOP OF DOC Segment 1 Of 2
This interpretation is so obviously incorrect, and it is so clear that Congress could not have intended such a result, that I think it unlikely that a court would ever adopt this mistaken view of the law.
In addition, I think that creating a new exemption would be a real mistake. We already worry about new consumer electronics devices with hard drives capable of storing the equivalent of hundreds of CDs of recorded music, either ripped from CDs, or more often, I fear, downloaded from infringing peer-to-peer systems. If Congress were broadly to sanction ''archival'' copying of all copyrighted works, such devices would proliferate, and inevitably be equipped with digital outputs and probably direct Internet connections, so that they could serve as engines of piracy that would make Napster and the current generation of peer-to-peer systems look tame by comparison.
The Copyright Office's report addressed a number of important policy issues that should receive thoughtful review. We welcome careful consideration of these issues, and look forward to playing a part in it.
Thank you again for the opportunity to present our views, and I would be happy to respond to any questions you may have.
Page 75 PREV PAGE TOP OF DOC Segment 1 Of 2
AGREEMENT
This agreement (the ''Agreement''), dated as of October 5, 2001 (''Effective Date''), is made by and between the Recording Industry Association of America, Inc. (''RIAA''), on the one hand, and National Music Publishers' Association, Inc. (''NMPA'') and The Harry Fox Agency, Inc. (''HFA''), on the other (all of the foregoing collectively referred to as the ''Parties'').
WHEREAS, record companies desire to offer to consumers, or authorize others to provide to consumers, certain digital music services that provide On-Demand Streams and Limited Downloads (as defined below);
WHEREAS, music publishers desire to make their copyrighted musical works widely available to consumers by licensing such services;
WHEREAS, while the Parties have differed concerning certain legal and procedural questions implicated by the licensing of musical works for use in such services, record companies have always believed that musical work copyright owners should receive for the use of musical works in digital music services a fair royalty that reasonably reflects the value of the use of those works, irrespective of the particular rights of the copyright owner applicable to that use, and music publishers have always believed that their copyrighted works should be made available through such services for fair compensation;
WHEREAS, there has been litigation concerning the use of musical works in digital music services; the U.S. Copyright Office has issued a Notice of Inquiry whether to conduct a rulemaking concerning the legal status of On-Demand Streams and Limited Downloads; the U.S. Copyright Office has issued a report pursuant to Section 104 of the Digital Millennium Copyright Act addressing certain issues relating to streaming; and certain record companies may prefer to make business decisions concerning the launch of Covered Services (as defined below) with greater assurance concerning the legal status of such services;
Page 76 PREV PAGE TOP OF DOC Segment 1 Of 2
WHEREAS, the Parties desire to avoid the uncertainty and expense of litigation concerning the use of copyrighted musical works by Covered Services, and to provide assurance to record companies and others seeking to offer such services to consumers;
WHEREAS, Section 115(c)(3) of the U.S. Copyright Act authorizes voluntary negotiations for determining royalty rates and terms under the mechanical compulsory license; and
WHEREAS, in settlement of their differences and to facilitate the expeditious and widespread launch of digital music services, the Parties have reached this Agreement with respect to terms pursuant to which RIAA member record companies may obtain licenses to make and authorize On-Demand Streams and Limited Downloads of musical works in Covered Services;
NOW, THEREFORE, pursuant to 17 U.S.C. §115(c)(3), and in consideration of the mutual promises contained in this Agreement and for other good and valuable consideration, the adequacy and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. Covered Services. Any member of RIAA that seeks to use, or authorize the use of, a copyrighted musical work for which an HFA publisher-principal has the right to grant the rights that are the subject matter of this Agreement in connection with the operation of one or more Covered Services may obtain through HFA on behalf of such HFA publisher-principal a mechanical license (''License'') to make On-Demand Streams and Limited Downloads of the work through Covered Services, through to the end user, including by making server and related reproductions of the work used in the operation of Covered Services.
Page 77 PREV PAGE TOP OF DOC Segment 1 Of 2
1.1. ''Covered Service'' means a service that offers (but the offerings of which are not necessarily limited to) On-Demand Streams and/or Limited Downloads of sound recordings of musical works from servers located within the United States (including the territories and possessions thereof), where the basic charge to users for the service is a recurring subscription fee (in contrast to the basic charge being a per-download, per-play or per-song fee), including any use of such a service on a limited basis without charge to users in order to promote the subscription service.
1.2. ''On-Demand Stream'' means an on-demand, real-time digital transmission of a sound recording of a single musical work to allow a user to listen to a particular sound recording chosen by the user at a time chosen by the user, using streaming technology, which may include but is not limited to Real Audio or Windows Media Audio, that is configured by the provider of the Covered Service in a manner designed so that such transmission will not result in a substantially complete reproduction of a sound recording being made on a local storage device (e.g., the hard drive of the user's computer or a portable device) so that such reproduction is available for listening other than at substantially the time of the transmission.
1.3. ''Limited Download'' means a digital transmission of a time-limited or other use-limited download of a sound recording of a single musical work to a local storage device (e.g., the hard drive of the user's computer or a portable device), using technology designed to cause the downloaded file to be available for listening only either (1) during a limited time (e.g., a time certain or a time tied to ongoing subscription payments) not to extend more than thirty (30) days beyond the expiration of the user's subscription, or (2) for a limited number of times not to exceed twelve (12) times after the expiration of the user's subscription.
Page 78 PREV PAGE TOP OF DOC Segment 1 Of 2
1.4. Any member of RIAA that obtains a License hereunder is referred to herein as a ''Participating RIAA Member.'' Any member of NMPA or HFA publisher-principal that grants a License and/or accepts a portion of an Advance Payment hereunder is referred to herein as a ''Participating NMPA/HFA Publisher.'' The terms ''Participating RIAA Member'' and ''Participating NMPA/HFA Publisher'' are limited to such entities and their majority-owned subsidiaries.
1.5. Any digital music service that is majority owned by one or more RIAA members in the aggregate shall be entitled directly to obtain a License hereunder, and so shall be treated as a ''member of RIAA'' for purposes of Section 3.1. If such a service either obtains a License directly or is authorized under a License hereunder to make On-Demand Streams and/or Limited Downloads through Covered Services, such service shall be treated as a ''Participating RIAA Member'' for all purposes of this Agreement.
2. Covered Deliveries.
2.1. A License with respect to a musical work includes all reproduction, distribution and DPD rights necessary for Covered Services to make On-Demand Streams and Limited Downloads of that work, from the making of server reproductions to the transmission and local storage of the On-Demand Streams or Limited Downloads. A License does not extend to other transmissions made by a Covered Service or to activities not encompassed by a mechanical license, including, without limitation, print or display rights, merchandising rights, adaptation (derivative work) rights except as provided in Section 115(a)(2) of the Copyright Act, rights to synchronize musical works with visual images resulting in audiovisual works, or karaoke rights, all of which rights are specifically reserved. The Parties agree that server reproductions made under a License to transmit On-Demand Streams or Limited Downloads may be used to make transmissions other than On-Demand Streams and Limited Downloads; provided that the foregoing is without prejudice to any applicable requirement, if any, that the Participating RIAA Member also obtain a license for such other transmissions made using such server reproductions. It is understood that this Agreement does not address or extend to any performance rights that may be implicated by the making of On-Demand Streams or Limited Downloads through Covered Services.
Page 79 PREV PAGE TOP OF DOC Segment 1 Of 2
2.2. A License includes the right to make, and there shall be no separate payment or accounting for, On-Demand Streams of Promotional Excerpts (as defined below) of sound recordings of musical works licensed hereunder used for promotional purposes, provided that the applicable Participating RIAA Member shall be deemed likewise to authorize the relevant copyright owner or copyright owners of such musical work (or an organization of copyright owners designated by such copyright owners as their common agent) to make On-Demand Streams of Promotional Excerpts of that sound recording for the purpose of promoting that musical work without payment of any royalty. ''Promotional Excerpt'' is defined as a stream consisting of no more than thirty (30) seconds of playing time of the sound recording of a musical work, or in the case of sound recordings with a playing time of more than five minutes, a stream that is of no more than the lesser of ten percent (10%) or sixty (60) seconds of playing time of the sound recording of the musical work.
3. Licensing Process.
3.1. Commencing on the Effective Date, a member of RIAA may submit License requests in electronic form, either individually or batched, and either for On-Demand Streams and/or Limited Downloads alone or in combination with other configurations, substantially in accordance with Exhibit A. Promptly after the Effective Date, during the opt-out period described in Section 3.2, the Parties shall arrange discussions between appropriate personnel of HFA and of certain RIAA members concerning electronic licensing procedures, with the goal of refining and testing HFA's electronic licensing procedures so that they can be used readily for the issuance of mechanical licenses expeditiously following the completion of such opt-out period, and with the goal of enhancing such procedures so that they later can be used readily by RIAA members to request and obtain mechanical licenses for all configurations for which they desire licenses in a single request. In addition, a member of RIAA may submit License requests by other means generally accepted by HFA, including but not limited to SirNet (for so long as it is available), HFA's new web-based licensing system (when it becomes available), and HFA's standard paper form (but only using paper forms for complex License requests (e.g., requests involving medleys or samples), in limited numbers during times when electronic licensing capabilities are unavailable, or at other times in numbers that are generally consistent with such RIAA member's past use of paper forms, and in any case in numbers that do not exceed what HFA can reasonably be expected to process under the circumstances). HFA may modify its license request and license forms from time to time, provided that it gives reasonable notice thereof to RIAA and Participating RIAA Members and such modifications do not unreasonably affect the ability of Participating RIAA Members to submit license requests and obtain licenses. License forms may be issued electronically or in paper form, but when a Licensee submits a License request in electronic form in accordance with this Section 3.1, HFA shall, promptly after processing the License request, return to such Licensee an electronic file substantially in accordance with Exhibit A, with (1) the addition of that information indicated in Exhibit A as being ''output'' fields, (2) the addition of information, other than individual publisher share information, to complete any blank optional fields in the request, to the extent that such information is available in HFA's databases and is matched to the request in the License issuance process, (3) the substitution of information concerning HFA publisher-principal names where such information in HFA's databases is different from that in the request, and (4) the aggregated share of Participating NMPA/HFA Publishers. If an RIAA member submits a License request in accordance with this Section 3.1 but the request contains insufficient information for HFA to find a match for the relevant work in its databases, HFA will work with such RIAA member to provide the information necessary to enable a License to be issued, and if such RIAA member resubmits such request with the necessary information and the License can be issued, the provisions of Section 3.4 shall apply from the date of the original request. The Parties acknowledge the importance to NMPA, HFA and music publishers of having License requests submitted promptly, and the importance to RIAA and record companies of having License forms issued promptly. The Parties shall cooperate in good faith to promote each of those goals.
Page 80 PREV PAGE TOP OF DOC Segment 1 Of 2
3.2. The authority of HFA to license any individual musical work on behalf of its publisher-principals is subject to the approval of the relevant publisher-principal. HFA shall not require its publisher-principals to opt in to this Agreement either before or after commencing to issue Licenses, but HFA may establish an opt-out period before commencing to issue Licenses, provided that such period ends not later than six (6) weeks following the Effective Date. If an HFA publisher-principal at any time requests that HFA not issue Licenses on its behalf (either with respect to particular musical works or in general), HFA will honor that request; provided, however, that any such request shall not affect the validity or subsistence of a License issued prior to such request. During the opt-out period described in Section 3.2, HFA shall notify RIAA weekly of HFA publisher-principals that have notified HFA that they do not wish to make Licenses of their works available under this Agreement. Thereafter, through December 31, 2002, HFA shall notify RIAA quarterly of HFA publisher-principals that have notified HFA that they do not wish to make Licenses of their works available under this Agreement.
3.3. HFA shall issue mechanical licenses for DPD configurations (including but not limited to Licenses under this Agreement) with respect to a musical work in its entirety if one or more of its publisher-principals owns or controls a partial interest in such musical work, even if other co-owners of such musical work are not HFA publisher-principals, except that, pursuant to Section 3.2, if all the HFA publisher-principals that own or control a partial interest in such work request that HFA not issue mechanical licenses on their behalf, HFA will not issue such licenses. In the case of a mechanical license issued as descibed in this Section 3.3, a Participating RIAA Member shall pay directly to each co-owner that is not an HFA publisher-principal (or such co-owner's authorized payee) such co-owner's share of the applicable royalty payments under Section 6.1.
Page 81 PREV PAGE TOP OF DOC Segment 1 Of 2
3.4. License forms issued by HFA pursuant to this Agreement shall be retroactive to the date of the License request made by the Participating RIAA Member on or after the Effective Date in accordance with Section 3.1. To the extent that the Participating RIAA Member makes or authorizes On-Demand Streams and Limited Downloads of musical works pending the processing by HFA of license forms in response to proper License requests submitted on or after the Effective Date in accordance with Section 3.1, NMPA and HFA shall not directly or indirectly file, encourage, aid, support, finance, contribute to, promote, or participate in any claim, suit, action or proceeding asserting that such activities are infringing.
3.5. Subject to Section 3.3, HFA shall also accept License requests to make On-Demand Streams and Limited Downloads through Covered Services of musical works as to which no HFA publisher-principal has any ownership interest or control, in whole or in part, and for which a License is not otherwise available under this Agreement. In such a case, HFA shall use commercially reasonable efforts to secure the requested Licenses from the relevant non-HFA publisher-principals on the same terms as apply to HFA publisher-principals under this Agreement. (Non-HFA publisher-principals who grant Licenses through this arrangement shall be referred to as ''Participating Independent Publishers''.) In addition to any commission charged to the Participating Independent Publisher, HFA may charge the relevant Participating RIAA Member a one-time administrative fee of ninety-five dollars ($95) for each publisher that agrees to become a Participating Independent Publisher (it being understood that no such administrative fee shall be payable for any subsequent Licenses issued on behalf of that Participating Independent Publisher to any Participating RIAA Member), unless the Participating Independent Publisher also authorizes HFA to grant mechanical licenses other than Licenses under this Agreement, in which case no such fee shall apply. The Advance Payment described in Article 4 may be applied to such administrative fee when payable by a Participating RIAA Member specified by RIAA, and HFA shall provide to RIAA or an independent accounting firm designated by RIAA sufficient information concerning liability for such administrative fee to allow reconciliation of the Advance Payments as described in Section 4.4. When HFA arranges Licenses from Participating Independent Publishers pursuant to this Section 3.5, HFA shall collect and distribute mechanical royalties to such Participating Independent Publisher (or other authorized payees) unless the Participating RIAA Member requests to make such payments directly.
Page 82 PREV PAGE TOP OF DOC Segment 1 Of 2
3.6. It is understood that compilations of data supplied by HFA in electronic form pursuant to Section 3.1, except to the extent that they consist of data provided by the relevant Participating RIAA Member pursuant to Section 3.1, are proprietary in nature and shall not be used by the recipient Participating RIAA Member to engage in business activities in competition with HFA or for any purpose other than to request and administer licenses issued by HFA and/or other licenses such Participating RIAA Member acquires with respect to the same works or other works owned or controlled by the same copyright owners, and shall not be disclosed by the recipient Participating RIAA Member to any other party except insofar as it is reasonably necessary to disclose specific data relating to particular works for the purpose of requesting or administering licenses issued by HFA and/or other licenses such Participating RIAA Member acquires with respect to the same works or other works owned or controlled by the same copyright owners.
3.7. Nothing in this Agreement, including but not limited to the availability of Licenses or the procedures for obtaining the same, shall preclude an RIAA member or digital music service from at any time serving or filing a notice of intention to obtain a compulsory license in accordance with applicable law or, other than in Article 8, imply that any notice of intention so served or filed is valid or invalid. Nothing in this Agreement shall preclude any digital music services from seeking, or HFA or any of its publisher-principals from granting, direct licenses to digital music services, including without limitation Covered Services, on whatever terms might be agreed upon between the relevant parties, and it is the intention of HFA to make such licenses widely available as described more fully in a press release to be issued by HFA. By taking Licenses pursuant to this Agreement, Participating RIAA Members will be able to facilitate on a prompt and widespread basis the availability of music over the Internet through Covered Services.
Page 83 PREV PAGE TOP OF DOC Segment 1 Of 2
4. Advance Payment.
4.1. Within thirty (30) days after the Effective Date, RIAA, on behalf of Participating RIAA Members (including their licensees), shall pay to HFA a non-refundable advance royalty payment of one million dollars ($1,000,000) in the aggregate (''Advance Payment''). If, by the second anniversary of the Effective Date, there has then been no final non-appealable determination of royalty rates for On-Demand Streams and Limited Downloads through negotiation and/or a CARP proceeding, as the case may be, then, subject to Section 4.2, until such a determination, RIAA, on behalf of Participating RIAA Members (including their licensees), shall each month pay to HFA a supplementary Advance Payment of sixty-two thousand five-hundred dollars ($62,500) in the aggregate.
4.2. Effective at the second anniversary of the Effective Date or any time thereafter, RIAA may terminate this Agreement upon thirty (30) days advance written notice to NMPA and HFA. In the event RIAA does so, all Licenses previously issued under this Agreement shall terminate at the same time as this Agreement, without prejudice to the right of Participating RIAA Members thereafter to obtain new licenses under 17 U.S.C. §115. Effective at the second anniversary of the Effective Date or any time thereafter, any Participating RIAA Member may opt out of this Agreement upon thirty (30) days advance written notice to each of the Parties. In the event a Participating RIAA Member does so, (1) the provisions of this Agreement thereafter shall not apply to such Participating RIAA Member except as provided in Article 7, and (2) all Licenses previously issued to such Participating RIAA Member under this Agreement shall terminate at such time, without prejudice to the right of such Participating RIAA Member thereafter to obtain new licenses under 17 U.S.C. §115. In the case of termination by either RIAA or one or more Participating RIAA Members, (a) payments shall be due in accordance with Section 6.1 for activities under this Agreement prior to the termination of the relevant Licenses, (b) Advance Payments may be applied against such payments in accordance with Section 4.4, and (c) to the extent remaining, Advance Payments also may be applied to royalties due under new licenses for On-Demand Streams and Limited Downloads made through Covered Services, which licenses are issued by HFA at least one year after the relevant date of termination to the Participating RIAA Members whose Licenses were terminated. In addition, in the event a Participating RIAA Member that is one of the five ''major record companies'' (as that term is commonly understood, including any successors thereto and the subsidiaries thereof) so opts out of this Agreement, RIAA's monthly supplementary Advance Payments under Section 4.1 thereafter shall be reduced proportionately, based on the number of major record companies at such time (e.g., if there are then five major record companies and one opts out, RIAA's monthly supplementary Advance Payments shall be reduced by twenty percent (20%)). In addition to the foregoing, if there is a decision of the U.S. Copyright Office or a court, or any new legislation, inconsistent with Section 8.1, with the result that mechanical royalties are not required to be paid for some or all On-Demand Streams and/or Limited Downloads made through Covered Services, then the amount of RIAA's monthly supplementary Advance Payments under Section 4.1 shall be reduced to take into account such decision or legislation, based on actual usage under this Agreement to date, with the exact amount of such reduction to be agreed upon by the Parties promptly after such decision or legislation; provided that if any such decision is appealed and finally reversed on appeal, the amount of RIAA's monthly supplementary Advance Payments under Section 4.1 shall be restored, and RIAA shall promptly pay to HFA the total amount by which the supplementary Advance Payment was reduced in the interim.
Page 84 PREV PAGE TOP OF DOC Segment 1 Of 2
4.3. HFA shall deposit Advance Payments into an interest-bearing bank account (with such interest being treated as part of the Advance Payment). HFA shall be free to distribute the initial and supplementary Advance Payments to HFA publisher-principals in accordance with a reasonable and nondiscriminatory methodology based on market share, actual usage or a per musical work payment (which methodology HFA shall provide to RIAA), as well as to any Participating Independent Publishers pursuant to Section 3.5. Except insofar as it is recouped pursuant to Sections 4.4 and/or 4.5, the Advance Payment shall be nonrefundable.
4.4. Upon the final non-appealable determination of royalty rates for On-Demand Streams and Limited Downloads through negotiation and/or a CARP proceeding, as the case may be, the total amount of Advance Payments (including interest) shall be applied against undisputed amounts owed to HFA on behalf of its publisher-principals and Participating Independent Publishers by Participating RIAA Members under this Agreement. Such Advance Payments shall be applied to the accounts of individual Participating RIAA Members as specified by RIAA, or an independent accounting firm designated by RIAA, by written notice to HFA within 45 days after the date of such final non-appealable determination of royalty rates. If the Advance Payments are not fully recouped at such time, any remainder of the Advance Payments thereafter shall be applied against all undisputed amounts owed to HFA on behalf of its publisher-principals and Participating Independent Publishers by Participating RIAA Members identified by RIAA, under mechanical licenses issued by HFA for On-Demand Streams and Limited Downloads made through Covered Services (including but not limited to Licenses under this Agreement), until such amount is fully recouped, unless RIAA notifies HFA of a different allocation of the Advance Payments among the accounts of Participating RIAA Members from time to time. HFA shall provide to RIAA or an independent accounting firm designated by RIAA sufficient accounting information to allow payments between RIAA and Participating RIAA Members, or vice versa, as necessary for each Participating RIAA Member ultimately to have paid to RIAA a net amount equal to that portion of the Advance Payments recouped by royalties actually owed by such Participating RIAA Member hereunder.
Page 85 PREV PAGE TOP OF DOC Segment 1 Of 2
4.5. At the request of HFA, with RIAA's written consent, which consent shall not be withheld unreasonably, Advance Payments may be applied to other undisputed amounts (e.g., other mechanical royalties) owed by Participating RIAA Members to HFA on behalf of its publisher-principals.
5. Royalty. The royalty rate payable under a License shall be determined through negotiation and/or a CARP proceeding. The applicable rate will be structured as determined through negotiation or by the CARP, and may comprise separate royalty rate components for distinct uses of the musical work authorized by the License. The Parties shall meet to negotiate royalty rates in good faith, with the goal of concluding such negotiations promptly after the launch of Covered Services, and if an agreement is reached, jointly petition the U.S. Copyright Office for its adoption pursuant to 37 C.F.R. §251.63(b). NMPA reserves its right to seek interest as a part of such royalty rate determination. RIAA reserves its right to seek to have such royalty rate determination reflect any payments under foreign copyrights in the case where On-Demand Streams or Limited Downloads are transmitted to users outside of the United States. Whether royalty rates are determined by negotiation or a CARP, and regardless of how royalty rate categories may be denominated, the Parties shall seek a determination of royalty rates such that it is clear which royalty rates are applicable to each of On-Demand Streams and Limited Downloads.
6. Accounting and Payment.
6.1. Beginning with the issuance of a License, a Participating RIAA Member will be required to account to HFA on a quarterly basis for activity under such License, 45 days after the close of each quarter, providing information comparable to that presently provided for physical products, and specifically including the number of On-Demand Streams and Limited Downloads of each work made during such quarter. Without limitation, quarterly reports shall include a breakdown of On-Demand Streams and Limited Downloads made by Covered Services under Licenses in the applicable quarter, by musical work and delivery method code (indicating On Demand-Streams and/or Limited Downloads), and including ISRC number if available, catalog number if available and HFA license number if available (in the same manner indicated by the Participating RIAA Member in its License request), and shall identify the specific Covered Services in which such On-Demand Streams and Limited Downloads were made. Each Participating RIAA Member shall preserve all usage and financial data that reasonably should be expected to be relevant, upon the determination of royalty rates, to the calculation of royalties hereunder and use commercially reasonable efforts to require that each Covered Service it has authorized hereunder to make On-Demand Streams and Limited Downloads does the same. Subject to Article 4 and Section 3.3, upon the final non-appealable determination of royalty rates for On-Demand Streams and Limited Downloads through negotiation and/or a CARP proceeding, each Participating RIAA Member shall make the applicable payment for all previous quarters then completed, from the launch of the applicable Covered Services to date, within 45 days, to be accompanied by a cumulative statement setting forth and aggregating the information provided in the previous quarterly reports supplied under this Agreement. Thereafter, on a quarterly basis, 45 days after the close of each quarter, each Participating RIAA Member shall account to HFA for activities and/or revenues realized on such activities during such quarter as determined through negotiation and/or by regulation, providing such information as is required by regulation, a CARP, and/or a negotiated rate agreement, and, subject to Article 4 and Section 3.3, pay royalties at the applicable rate. Notwithstanding the foregoing, NMPA reserves its right to seek more frequent access, including without limitation real-time access, to usage information.
Page 86 PREV PAGE TOP OF DOC Segment 1 Of 2
6.2. At the request of HFA, a Participating RIAA Member shall accompany its quarterly reports with any available data in addition to that described in Section 6.1 concerning the numbers of On-Demand Streams and Limited Downloads made through Covered Services operated or authorized by such Participating RIAA Member (but not any personally identifying information), which data is regularly gathered or compiled by such Participating RIAA Member or provided to such Participating RIAA Member by its licensees with the right to disclose such data to HFA hereunder; provided that a Participating RIAA Member may provide any such data to HFA in whatever form it is available to such Participating RIAA Member in the ordinary course of its business and subject to any applicable confidentiality and other contractual use restrictions; and provided further that, before making any such request, HFA shall review with the Participating RIAA Member the types of such data the Participating RIAA Member has and can disclose to HFA, and the form in which such data is available, and HFA shall not request, and Participating RIAA Members shall not be required to provide, data that (given the volume and form of such data, the degree to which such data is reflected in quarterly reports, the data processing capabilities of HFA and the Participating RIAA Member, HFA's intentions to use such information, and other relevant factors) would not be commercially reasonable to provide. In addition, to the extent such information is available to a Participating RIAA Member and can be disclosed to HFA hereunder, at the request of HFA, a Participating RIAA Member shall accompany its quarterly reports with the total number of subscribers to and total number of subscriber months for each Covered Service operated or authorized by such Participating RIAA Member during the reporting period; provided that any such information relating to a Covered Service operated by a Participating RIAA Member shall be subject to an appropriate confidentiality restriction, and any such information provided to a Participating RIAA Member by a third party shall be subject to any applicable confidentiality and other contractual use restrictions. Notwithstanding the foregoing, to the extent that information requested by HFA under this Section 6.2 is subject to existing, proposed or future confidentiality restrictions that would preclude its disclosure to HFA, the relevant Participating RIAA Member shall in good faith seek the consent of the party that is the source of such information to disclose such information to HFA, subject to appropriate confidentiality restrictions.
Page 87 PREV PAGE TOP OF DOC Segment 1 Of 2
7. Term. The term of this Agreement shall commence on the Effective Date and, subject to Sections 4.2 and 8.5, continue until the final non-appealable determination of royalty rates for each of On-Demand Streams and Limited Downloads through negotiation and/or a CARP proceeding. New Licenses shall continue to be issued pursuant to this Agreement for the duration of such term. Thereafter, RIAA member companies may request, and HFA shall issue, mechanical licenses covering On-Demand Streams and Limited Downloads at the applicable royalty rates in accordance with its customary practices for the issuance of licenses where there is an applicable statutory rate, which the Parties currently understand to include the means of application described in Section 3.1. Notwithstanding the foregoing, Licenses once issued under this arrangement shall remain in effect unless terminated for default in respect to payment (once royalty rates are determined) or accounting (either before or after royalty rates are determined) pursuant to 17 U.S.C. §115(c)(6) (or other applicable provision of law, if any), it being understood that a License may not be terminated for such a default where the default is remedied as provided in 17 U.S.C. §115(c)(6). In addition, the provisions of Sections 3.6, 4.2, 4.4 and 4.5, and of Articles 6 and 7, shall survive the expiration or termination of this Agreement or any License under this Agreement.
8. Legal Framework for Agreement.
8.1. Subject to the other provisions of this Article 8, in order to settle issues in dispute and avoid litigation, provide assurance to record companies seeking to launch digital music services and enable HFA's issuance of license forms for Covered Services hereunder:
(a) The Parties agree that under current law the process of making On-Demand Streams through Covered Services (from the making of server reproductions to the transmission and local storage of the stream), viewed in its entirety, involves the making and distribution of a DPD, and further agree that such process in its entirety (i.e., inclusive of any server reproductions and any temporary or cached reproductions through to the transmission recipient of the On-Demand Stream) is subject to the compulsory licensing provisions of Section 115 of the Copyright Act. The Parties further agree that under current law the process of making streams that would qualify for a statutory license under Section 114(d)(2) of the Copyright Act does not involve the making or distribution of a DPD, and thus does not require a mechanical license. The foregoing does not express or imply any agreement that, and shall not be used to support any argument that, the process of making On-Demand Streams other than through Covered Services, or the process of making streams that would not qualify for a statutory license under Section 114(d)(2) of the Copyright Act (including, without limitation, because such streams are part of an ''interactive service'' (as that term is defined in Section 114(j)(7)) or exceed the ''sound recording performance complement'' (as that term is defined in Section 114(j)(13)) does or does not involve the making and distribution of a DPD, and the Parties expressly reserve all their rights with respect to that issue.
Page 88 PREV PAGE TOP OF DOC Segment 1 Of 2
(b) The Parties agree that under current law the process of making Limited Downloads through Covered Services (from the making of server reproductions to the transmission and local storage of the Limited Download), viewed in its entirety, involves the making and distribution of a DPD, and further agree that such process in its entirety (i.e., inclusive of any server reproductions and any temporary or cached reproductions through to the transmission recipient of the Limited Download) is subject to the compulsory licensing provisions of Section 115 of the Copyright Act.
(c) The Parties agree that under current law a compulsory license to make On-Demand Streams and Limited Downloads through Covered Services (from the making of server reproductions to the transmission and local storage of the On-Demand Streams and Limited Downloads) is available under Section 115 of the Copyright Act.
8.2. Subject to Sections 8.3 and 8.5, for the term of this Agreement, no Party, no Participating RIAA Member and no Participating NMPA/HFA Publisher shall take a position contrary to or inconsistent with Section 8.1, or lend support or resources, financial or otherwise, to any other person or entity taking a contrary or inconsistent position, before the Copyright Office, a CARP, a court or any other government office or tribunal. Thereafter, no Party, no Participating RIAA Member and no Participating NMPA/HFA Publisher shall commence or lend support to any action in court to challenge the validity of the rates determined pursuant to Article 5 on the ground that On-Demand Streams and Limited Downloads do not involve the making or distribution of DPDs. It is understood that, for purposes of this Section 8.2, a Participating RIAA Member or Participating NMPA/HFA Publisher shall not be deemed to lend financial support or resources to affiliated entities merely through intra-enterprise financial arrangements in the ordinary course of business.
Page 89 PREV PAGE TOP OF DOC Segment 1 Of 2
8.3. Notwithstanding Sections 8.1 and 8.2, the Parties, Participating RIAA Members and Participating NMPA/HFA Publishers may at any time (1) raise and litigate (including, without limitation, before a CARP) the economic value of, and the appropriate royalty rates to be applied to, On-Demand Streams and Limited Downloads; (2) take or support any position they choose with respect to sound recordings (as distinguished from any musical works embodied therein) and the rights therein, including, without limitation, rights under Sections 106 and 114 of the Copyright Act, and (3) make or lend support to any arguments they choose to prosecute, or defend or counterclaim against, an infringement claim relating to activities before the Effective Date. Notwithstanding Sections 8.1 and 8.2, RIAA and Participating RIAA Members may at any time make or lend support to any arguments they choose to defend or counterclaim against an infringement claim relating to activities on or after the Effective Date, in the event that a License with respect to the relevant works is not available hereunder (it being understood that, subject to Section 8.4, NMPA, HFA and Participating NMPA/HFA Publishers may participate in the litigation of any such claim, so long as their doing so is consistent with Sections 8.1 and 8.2). The Parties agree that they will act in good faith not to induce, promote or encourage the litigation of an infringement claim relating to activities as described in the immediately preceding sentence.
8.4. To the extent that an action being litigated by RIAA and/or a Participating RIAA Member, other than that pending case in the Southern District of New York captioned Rodgers & Hammerstein Organization v. UMG Recordings, Inc., involves the question of the validity of a notice of intention to obtain a compulsory license as described in Section 8.1(c) for a musical work for which a License is not available under this Agreement, neither NMPA nor HFA shall participate in or lend support to such action. The Parties agree that they will act in good faith not to induce, promote or encourage litigation concerning the validity of a notice of intention to obtain a compulsory license as described in Section 8.1(c).
Page 90 PREV PAGE TOP OF DOC Segment 1 Of 2
8.5. To the extent that a final, non-appealable decision of the Copyright Office or a court, or any new legislation, is inconsistent with Section 8.1, this Agreement shall be inapplicable to the extent of the inconsistency as of the date thereof, but subject to Article 4, Participating RIAA Members shall not be entitled to a refund of any monies paid prior to such date.
8.6. This Agreement is entered into in settlement and compromise of certain disputes among the Parties and to clarify certain aspects of the licensing of On-Demand Streams and Limited Downloads. Nothing in this Article 8 shall be used by, or be enforceable by, a third party not a Party to this Agreement, other than a Participating RIAA Member or Participating NMPA/HFA Publisher, in any manner or in any context, including without limitation in any legal proceeding. This Agreement does not give rise to any third-party beneficiary rights in any party other than Participating RIAA Members and Participating NMPA/HFA Publishers. The agreements set forth in this Article 8 and the course of dealing hereunder shall be inadmissible, and shall not be used to support any argument of law, in any litigation or arbitration relating to (1) activities before the Effective Date or (2) activities other than making and distributing On-Demand Streams and Limited Downloads through Covered Services, except making streams that would qualify for a statutory license under Section 114(d)(2) of the Copyright Act.
9. Copyright Office Proceedings.
9.1. RIAA and NMPA promptly shall file in the Copyright Office, in the Mechanical and Digital Phonorecord Delivery Compulsory License rulemaking proceeding (docket number 2000–7) (the ''Proceeding''), an appropriate mutually agreeable document (the ''Joint Statement'') signed by representatives of both RIAA and NMPA and (1) explaining that they have entered into this Agreement to resolve certain differences between them and enable the expeditious launch of subscription music services; and (2) describing the material terms of this Agreement (including without limitation the agreement in Section 8.1). Unless the Parties agree otherwise, the Joint Statement shall not address the question of whether the Copyright Office should or should not proceed with the Proceeding, and none of the Parties shall use the existence of the Agreement to argue to the Copyright Office that the Office should or should not proceed with the Proceeding.
Page 91 PREV PAGE TOP OF DOC Segment 1 Of 2
9.2. Either in the Joint Statement, in joint comments submitted in response to the Copyright Office's Notice of Proposed Rulemaking dated August 28, 2001, or in a separate petition signed by representatives of both Parties to be filed in the Copyright Office promptly after the Effective Date, RIAA and NMPA shall request that the Copyright Office amend 37 C.F.R. §201.18 to facilitate the licensing process for digital music services by addressing in a mutually agreeable manner such procedural issues as:
(a) Permitting combined notices of intention;
(b) Permitting service of notices of intention on the copyright owner's agent, and designating HFA as agent for the receipt of such notices;
(c) Eliminating the requirement that officer/director information be provided for publicly traded companies and their subsidiaries;
(d) Permitting notices of intention to be signed by any authorized representative of the licensee;
(e) Permitting mailing to a known correct address of the copyright owner; and
(f) Permitting the service of notices of intention by regular mail.
10. Congress. As soon as practicable after the Effective Date, and before any relevant congressional hearings then scheduled, if possible, the Parties shall draft and submit a mutually agreeable letter to appropriate members of Congress describing this Agreement and the benefits thereof.
Page 92 PREV PAGE TOP OF DOC Segment 1 Of 2
11. Memoranda of Understanding. Promptly after the Effective Date, HFA and RIAA shall commence good-faith negotiations to (1) revise and renew for an additional year the Memorandum of Understanding dated September 21, 2000 (the ''MOU'') concerning interim licenses for DPDs, the revisions to address updated licensing procedures consistent with the licensing procedures to be implemented under this Agreement, and (2) enter into a second Memorandum of Understanding concerning certain licensing, payment and additional operational issues of mutual concern to HFA and RIAA members, which issues shall include:
(a) record companies' payment to HFA of 100% of royalties due for a particular musical work regardless of whether HFA acts as an agent for all owners of such work;
(b) record companies' provision of album label copy to HFA in order to facilitate the licensing process; and
(c) what information concerning publisher names and shares appropriately should be provided by HFA to Participating RIAA Members, and the appropriate confidentiality protections therefor.
Pending completion of such negotiations, HFA will continue to issue ''Interim DPD Licenses'' as described in the MOU in accordance with the practice that has developed under the MOU.
12. Economic Data. In order to help the Parties better understand and evaluate emerging business models for digital music services, RIAA and NMPA shall jointly hire an independent accounting firm to collect from Participating RIAA Members on a confidential basis information concerning the economics of emerging subscription service business models and report composite information to RIAA and NMPA for the duration of this Agreement.
Page 93 PREV PAGE TOP OF DOC Segment 1 Of 2
13. Security. If RIAA or any Participating RIAA Member learns of any substantial (in terms of number of musical works affected, number of copies or prevalence) circumvention of security measures used by Covered Services resulting in unauthorized copying or distribution of sound recordings of musical works by authorized or unauthorized users of Covered Services, RIAA and/or the Participating RIAA Member shall use commercially reasonable efforts promptly to notify HFA of such unauthorized activity; provided, however, that RIAA and Participating RIAA Members shall be liable for damages for breach of this Article 13 only if, and to the extent, that they themselves are liable for direct, contributory or vicarious copyright infringement under applicable U.S. law, and in such case such damages shall be only those payable for such infringement.
14. Electronic Reporting. The Parties agree to work together in good faith to implement means whereby accounting information relating to Licenses will be provided to HFA in electronic, machine-readable form.
15. Publicity. RIAA and NMPA will issue a joint press release announcing this arrangement. In their communications to their members concerning this Agreement, the Parties shall recommend that their members avail themselves of this Agreement. The Parties confirm that, subject to Section 8.6, this Agreement is not confidential.
16. Miscellaneous.
16.1. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York (without giving effect to conflicts of law principles thereof).
Page 94 PREV PAGE TOP OF DOC Segment 1 Of 2
16.2. Amendment. This Agreement may be modified or amended only by a writing signed by each of the Parties.
16.3. Entire Agreement. This Agreement expresses the entire understanding of the Parties and supersedes all prior and contemporaneous agreements and undertakings of the Parties with respect to the subject matter hereof.
16.4. No Effect on Other Agreements. Without limitation, this Agreement shall not terminate, supersede, limit or otherwise affect the enforceability of, or the rights of any of the respective parties to, any of the following agreements: (1) the Settlement Agreement dated as of October 17, 2000 between HFA, MPL Communications, Inc. and Peer International Corporation, on the one hand, and MP3.com, Inc., on the other, and any amendments thereto; (2) the Governing Agreement dated as of October 2000 between HFA, MPL Communications, Inc. and Peer International Corporation, on the one hand, and MP3.com, Inc., on the other, and any amendments thereto; (3) the Digital Phonorecord Delivery License dated January 15, 1999 between HFA and Emusic.com Inc., and any amendments thereto; and (4) the Amendment Agreement dated November 2000 between HFA and Emusic.com Inc., and any amendments thereto.
16.5. Counterparts. This Agreement may be executed in counterparts, including by means of facsimile, each of which shall be deemed to be an original, but which taken together shall constitute one agreement.
16.6. Headings. The titles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
Page 95 PREV PAGE TOP OF DOC Segment 1 Of 2
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
Edward P. Murphy
President and CEO, NMPA
Hilary B. Rosen
President and CEO, RIAA
Gary Churgin
President and CEO, HFA
Cary Sherman
Senior Executive Vice President
and General Counsel, RIAA
Agree1.eps
Agree2.eps
Agree3.eps
Page 96 PREV PAGE TOP OF DOC Segment 1 Of 2
Agree4.eps
Agree5.eps
Agree6.eps
Mr. COBLE. Thank you, Mr. Sherman.
Mr. Simon?
STATEMENT OF EMERY SIMON, COUNSEL, BUSINESS SOFTWARE ALLIANCE
Mr. SIMON. Mr. Chairman, Mr. Berman, and Members of the Subcommittee, I'm grateful for the opportunity to appear before you today to present the views of America's leading software and computer companies on the section 104 report prepared by the Copyright Office.
I would like to start by congratulating the Copyright Office for having produced a sound and well-reasoned report. With few exceptions, primarily in the area of its analysis on temporary copies, we support its analysis and conclusions.
The report concludes that the law overall is working well and that changes in technology and the marketplace do not support significant changes at this time. We fully concur with this conclusion.
Page 97 PREV PAGE TOP OF DOC Segment 1 Of 2
I note that the Commerce Department, which was also charged with the responsibility for conducting a 104 report, and which is also well-situated to analyze technology, issued its report earlier this year and also concluded that the law is working well. And in fact, it concluded that no changes at all were necessary.
The BSA member companies approach the issues and findings of the report with two equally important considerations.
First, our member companies are determined and committed to making the Internet and e-commerce thrive. BSA member companies make the computers, software, servers, and switches that make e-commerce possible.
As importantly, these companies suffer substantial losses due to piracy, amounting to billions of dollars each year. Strong copyright protection is the essential tool we rely on to attack and deter theft.
We highlight these points because many of the submissions made in the course of this report suggests that these are incompatible and conflicting goals, that e-commerce will wither unless changes are made to section 109 and section 117. We disagree.
We see no evidence in the marketplace that would support such grim predictions, and we are gratified to read that the Copyright Office has reached the same conclusions.
Page 98 PREV PAGE TOP OF DOC Segment 1 Of 2
On the issue of temporary copies, the report is a bit more of a mixed bag. The legal analysis is generally sound, but it contains a number of statements which we find, at the best, imprecise, both in terms of immediate impact and their implication.
We're pleased to see that the report concludes that the reproduction right covers all forms of copies, regardless of duration, including copies in RAM, random access memory. It correctly notes that the leading case, MAI v. Peak, has been followed without deviation or qualification by all courts that have considered the issue, and there appears to be no confusion among the courts.
Clear legal protection of temporary copies is critically important to both the current and future business models of the software industry. Most popular computer programs are very large, consisting of millions of lines of code. Computers that run these programs operate by processing the code in pieces. The code is stored, fixed, buffered, or cashed in RAM—random access memory—until it is needed by the computer, at which time the central processor calls up the necessary data.
Using software over the Internet, which is likely to increase substantially in the coming years, takes place essentially the same way. Anyone connected to the Internet through a personal computer, handheld organizer, telephone, or other device can make full use of that software by making only a temporary copy of all or part of that program in random access memory.
Internet-based use typically takes place through the creation of temporary copies; some or all are temporary copies. Other than the single original copy on the host computer or server, no permanent copies need be made.
Page 99 PREV PAGE TOP OF DOC Segment 1 Of 2
A relatively new development in the software marketplace is the emergence of application service providers. These companies permit users of software products—use of software products without having to buy or install a copy on a local computer. The software is accessed as needed over the Internet; for example, once a week to write checks for employees or do basic bookkeeping.
The marketplace evidence we think is clear: Our customers are becoming less interested in possessing a full copy of a software product than in having the software available to them as they need it.
If temporary copy exceptions were somehow introduced, or different, additional exceptions were introduced into law, we think this would create uncertainty.
I would like to turn to the specific conclusions of the report for a moment. It recommends changes to reproduction rights with respect to streaming performances of music. Although the BSA members are not generally in the streaming audio business as such, the analysis that leads to this recommendation and the precedents it may set raise three questions.
First, the language on its face appears to be ambiguous. It could suggest an amendment which created an exception to reproduction right, but it could also be read to advocate amendment which would declare temporary buffer copies not to be reproductions within the meaning of the Copyright Act. We would have substantial reservations about either of these approaches.
Page 100 PREV PAGE TOP OF DOC Segment 1 Of 2
Second, the report makes amply clear that the proposed changes would apply to buffer copies and not all temporary copies, but the concept of buffer copies is really indistinguishable from any temporary copy made in RAM, random access memory. In fact, the term ''buffer'' describes a function of the copy, a fixation of data packets in random access memory while they wait for recall from the device's central processing unit. They are merely one form of random access memory copies. And as the report points out, RAM copies generally should not be treated differently from any other reproduction.
Finally, while the report lists a number of justifications recommending this change, we find very troubling the rationale that the copies should be excused because they have no independent economic significance. If the Copyright Office is suggesting a concept of testing for economic value of a copy in determining whether it is a copy within the meaning of the Copyright Act, this proposal is without foundation or precedent.
In conclusion, Mr. Chairman, every indication from the marketplace suggests that e-commerce and the Internet will continue to grow vigorously. Over the past 3 years since the enactment of the DMCA, that growth has accelerated, despite our economic slowdown.
Thus, we would urge the Committee to proceed with utmost care to ensure that the positive developments now underway are not suppressed.
Thank you very much.
[The prepared statement of Mr. Simon follows:]
Page 101 PREV PAGE TOP OF DOC Segment 1 Of 2
PREPARED STATEMENT OF EMERY SIMON
Mr. Chairman and members of the subcommittee, we are grateful for the opportunity to appear before you today to present the views of the software and computer companies that are members of the Business Software Alliance(see footnote 16) on the Section 104 Report of the Copyright Office.
These comments will address four areas: the importance of the Copyright Act and the Digital Millennium Copyright Act (DMCA) to our industry; the first sale doctrine (section 109); temporary or buffer copies; and some miscellaneous points raised in the Report. As a general matter, we think the Report is sound, and well reasoned, and support its analysis and conclusions. We do have specific concerns in certain areas, most importantly in its analysis of the justification for, and scope, of its recommendations in respect of temporary or buffer copies.
THE SECTION 104 DIRECTIVE FROM CONGRESS
It is our understanding that this Committee and the Congress directed this Report because, at the time of the enactment of the DMCA, it determined that changes to Sections 109 and 117 were not merited, beyond a narrow change for maintenance of computer programs that was made to section 117.
In a very real sense, the Congress ordered this Report, as a prudential measure: to ensure that the enactment of the DMCA, and intervening developments in technology, did not harm the marketplace. The Copyright Office's Report concludes that the law is working well, and that changes in technology and the marketplace do not support significant changes to the law at this time. We fully concur with this conclusion.
Page 102 PREV PAGE TOP OF DOC Segment 1 Of 2
THE REPORT'S CONCLUSIONS ON THE DMCA
The member companies of the BSA believe the DMCA is a good law, which has made a substantial contribution to the development of their businesses. Its provisions limiting remedies against service providers in certain circumstances have promoted cooperation by service providers in our efforts to stem the threat of piracy. While that collaboration has at times been imperfect, the law is working. Similarly, our companies are increasingly relying on technological protection measures to defend themselves against those who would steal their works. In both respects, the DMCA has accomplished its intended goal of updating the Copyright Act, and has thus contributed to increasing confidence and encouraging the greater use of the Internet.
We wholeheartedly support the conclusion of the Report with respect to Section 1201, the rules on circumvention of technological protection measures. The Report states: ''We are not persuaded that Title I of the DMCA has had a significant effect on the operation of Section 109 and Section 117 . . . Consequently, none of the legislative recommendations made in this Report are based on effects of section 1201 on the operation of {these} Sections) . . .'' (At pg. 73)
More specifically, Congress directed the examination of two provisions of the Copyright Act: the ''first sale doctrine'' codified in Section 109, and the backup and archival copies provisions contained in section 117.
CONTEXT
Page 103 PREV PAGE TOP OF DOC Segment 1 Of 2
Before commenting on the specific conclusions of the Report, I would like to note that the BSA's member companies approach these issues with two considerations of equal importance.
1. First, our member companies are determined and committed to making the Internet and e-commerce grow and thrive. BSA member companies make the computers, software, servers, and switches that make e-commerce possible. Many of these companies are also in the business of providing web-design, data management, hosting and other critical services.
2. As important, these companies suffer substantial losses due to piracy, amounting to billions of dollars each year. Strong copyright protection is the essential tool we rely on to attack and deter theft.
We highlight these points, because many of the outside submissions made in the course of this Report suggest these are incompatible and conflicting goals, and that e-commerce will wither unless changes are made to Sections 109 and 117. We disagree: we see no evidence in the marketplace that would support such grim conclusions, and we are gratified to read that the Copyright Office has reached the same conclusion.
Here are just two facts:
Under current law, recent estimates suggest that e-commerce has grown ten fold over the past three years, and even though our economy has slowed, the growth in online transactions will continue to explode.
Page 104 PREV PAGE TOP OF DOC Segment 1 Of 2
By 2005, the BSA's CEOs anticipate that a compelling 66 percent of software will be distributed over the Internet-compared to only 12 percent in 2000, accounting for over $40 billion in sales.
Having set the commercial context, I would like to focus in the balance of these comments on Sections 109 and 117.
SECTION 109
Proposals considered by the Copyright Office included changing Section 109 to make all copies of all works, including software, distributed over the Internet—whether by purchase, lease or license—transferable, regardless of the terms on which the copy was acquired. The Copyright Office Report unequivocally rejects this proposition, concluding that ''. . . Section 109 does not apply to digital transmissions . . .'' (at pg. 80) and that change in the law are not needed.
Their reasoning, which we find both correct and compelling, focuses on issues of law and the practical threats of infringement in the marketplace. With respect to the issue of statutory interpretation, the Report correctly notes that the language of Section 109 must be read for what it is—modifying the distribution right—and if Congress had intended for it cover other rights, such as reproduction, Congress would have specifically included them. With respect to the marketplace realities, the Report concludes that it would be impossible to administer a rule that would require persons re-selling a copy of a work to simultaneously destroy the original copy in their possession.
Page 105 PREV PAGE TOP OF DOC Segment 1 Of 2
BSA agrees with these conclusions. If Section 109 were read to apply to digital transmissions of works, the already acute piracy problem our industry faces would become substantially worse.
TEMPORARY COPIES
The second principal issue considered by the Report is that of temporary copies. In this regard the Report is mixed: it has elements of legal analysis that we support, but it contains a number of statements which we find at best imprecise, and potentially quite disturbing both in terms of their immediate impact and their precedent and implications.
We are pleased to see that the Report undertakes a thorough and comprehensive analysis that the reproduction right covers all forms of copies, regardless of duration, including copies in RAM. It correctly notes that the leading case, MAI v. Peak, has been followed without deviation or qualification by all courts that have considered the issue. In MAI Systems v. Peak Computer the court held that:
Because the loading of software into a computer's RAM creates a copy that can be perceived, reproduced, or otherwise communicated as defined by the Copyright Act, such loading . . . create(s) a copy protected under the Act . . .
As the Report correctly notes, this legal conclusion was endorsed and affirmed by Congress through the enactment of the Digital Millennium Copyright Act. Title III of which creates an exception for making a copy of a computer program by switching-on a computer for the purposes of maintenance or repair. This exception would have been wholly unnecessary if Congress had concluded that temporary copies should not be subject to protection. Moreover, Congress had ample opportunity at that time to create a broader exception. It did not.
Page 106 PREV PAGE TOP OF DOC Segment 1 Of 2
Finally, the Report notes that while a number of academic commentators have criticised Mai v. Peak, the Report also notes those criticisms are without merit, nor is there any evidence of confusion among the courts on the issues they raise.
THE IMPORTANCE OF TEMPORARY COPIES TO SOFTWARE DEVELOPERS
These conclusions are critically important to both the current and even more significantly future business models of the software industry. Because most popular software programs are very large, consisting of millions of lines of code, computers that run these programs operate by processing the code in pieces. Code is stored (fixed, buffered or cached in RAM), until it is needed for the program to operate at which time the central processor calls up the necessary data. Proposals submitted to the Copyright Office would have put these copies of portions of a program outside the scope of the reproduction right.
Our member companies, which make devices that ''buffer'' and cache data, do not see the logic of creating an exception from the reproduction right for these functions. Moreover, creating such exceptions could have dire negative economic consequences for the software industry. While exemptions from copyright liability are not to be made lightly, we do not object to creating exemptions from liability for temporary copies made in the course of otherwise authorized uses.
A substantial percentage of the software piracy problem consists of unauthorized use of software over local-area networks (LANs). Piracy results if the number of people using a software program stored on a central computer known as a ''server'' exceeds the number of licenses that the LAN operator has purchased from the copyright holder.
Page 107 PREV PAGE TOP OF DOC Segment 1 Of 2
In the LAN environment, only one permanent copy needs to be installed on a server. Anyone connected to that LAN through a personal computer, handheld organizer, telephone, or other device, can make full use of that software by making a temporary copy of all or part of that program in random access memory (RAM). There is no need to make a permanent copy of the software on the internal memory of every PC or device to enjoy the full functionality of the software. Given the ubiquity of LANs, denying the software copyright owner the ability to control temporary digital copies in this environment is likely to significantly diminish the value of the software.
Using software over the Internet—which is likely to increase substantially in coming years—takes place essentially the same way as in the LAN environment, but on a vastly larger scale. As in the case of LAN, Internet-based use typically takes place through the creation of temporary digital copies of some or all a computer program in the RAM of the PC or other device running the software. Other than the single original copy on the host computer or server, no permanent copies need be made.
A relatively new development in the software marketplace is the emergence of application service providers (ASP). ASP's permit a company to use a software product, without having to buy or install a copy on a local computer. The software is accessed ''as needed,'' over the Internet, for example once a week to write checks for employees and to do basic bookkeeping. Consumers are also using web based software services to pay their taxes and design websites.
ASP's can be a popular choice for business users because developing and maintaining an information technology system diverts in-house resources away from a company's main line of business. Companies are increasingly ''outsourcing'' their business software needs to outside vendors (ASPs). Companies find outsourcing attractive for several reasons including:
Page 108 PREV PAGE TOP OF DOC Segment 1 Of 2
Reducing the burden of maintaining in-house software systems
Reducing the need for information technology staff;
Allowing faster access to new software; and
Creating a predicable cost structure for software use by substituting standard monthly service charges for up front payments.
The demand for ASP services is expected to grow rapidly, with some experts predicting that it will become a $21 billion business by 2002.
The marketplace evidence is clear: our customers are becoming less interested in possessing a full copy of our software products, than in having the software available to them, as they need them. Denying or limiting the legal ability of the copyright owner to control and manage the making of temporary copies flies in the face of this marketplace reality.
THE REPORT'S RECOMMENDATION ON BUFFER COPIES
Turning to the specific conclusion of the Report, it recommends changes in the reproduction right. While these changes are narrowly cast with respect to streaming performances of music, and although the BSA members are not generally in the streaming audio business as such, the analysis that leads to this recommendation, and the precedents it may set, raises a number of important questions.
Page 109 PREV PAGE TOP OF DOC Segment 1 Of 2
The relevant part of the Report's recommendation states:
We recommend that Congress enact legislation amending the Copyright Act to preclude any liability arising from the assertion of a copyright owner's reproduction right with respect to temporary buffer copies that are incidental to a licensed digital transmission of a public performance of a sound recording and any underlying music. (at page 142–43).
This proposal raises three questions. First, the language on its face appears to be ambiguous. It could suggest an amendment which would create an exception to the reproduction right, but it could also be read to advocate an amendment which would declare ''temporary buffer copies'' not to be reproductions within the meaning of the Copyright Act. For reasons explained below, we would have substantial reservations about the either of these approaches. We believe the intent of the recommendation is to create an exception from liability, but not from the reproduction right or public performance right—for copies that are incidental to an otherwise licensed digital transmission of a public performance. Such an approach, if adopted by Congress, would be a more logical and measured means to address the interests of all parties.
Second, the proposed change would apply to ''buffer'' copies, and not to all temporary copies, as the Report makes amply clear. The concept of buffer copies, however, is really indistinguishable from any temporary copy made in RAM. In fact, the term ''buffer'' describes a function of the copy (fixations of data packets in RAM while they wait for a call from the device's processing chip). They are merely one form of RAM copy, and as the Report points out, RAM copies generally should not be treated differently from any other reproduction.
Page 110 PREV PAGE TOP OF DOC Segment 1 Of 2
Finally, while the Report lists a number of justifications for recommending this change, we find very troubling the rationale that these copies should be excused because they have ''. . . no independent economic significance.'' (at pg. 143.) If the Copyright Office is suggesting a concept of testing for the economic value of a copy in determining whether it is ''a copy'' within the meaning of the Copyright Act, its proposal is without foundation or precedent. Section 101 of the Act, directs the analysis to determine whether there has been a fixation, in a material object, from which the work can be perceived, reproduced or otherwise communicated. It stops there. The Copyright Office's apparent suggestion that the Act contains a further precondition of economic value would present enormous problems to our industry. As I noted above, in both the local area network use of software, and in the ASP environment, full enjoyment the work may require only temporary copies. For copyright owners to have to prove that each such portion copied had distinguishable and independent economic value would create an enormous burden along with unprecedented uncertainty and insecurity. While the economic impact of a particular unauthorized temporary copy may be a relevant factor to be considered in analyzing whether the reproduction in question constitutes a fair use, see 17 USC 107, this ''economic value'' evaluation should have no role in determining whether the making of that copy was an unauthorized exercise of the reproduction right in the first place.
SECTION 117
The software industry is the specific object of the back-up and archival provisions of Section 117. With one notable exception discussed below, these provisions have not presented substantial issue for our industry. The software industry has been subject to this provision for over 20 years, and as the Report correctly notes, it has never been the subject of a reported litigation. The facts summarized in the Report are all correct: that prudent computer users regularly back-up their files, that such files may include a number of works, and that the act of making backups may result in the making of copies not specifically authorized. But there was no evidence presented in the submissions, nor is there any in the Report, that these practices result in either uncertainly, confusion or litigation.
Page 111 PREV PAGE TOP OF DOC Segment 1 Of 2
The Report discusses in some detail one aspect of Section 117 that has posed a problem for our companies. Recently, operators of pirate web sites have been posting notices on these sites suggesting that downloading software be excused by Section 117. Their deliberate goal is to mislead, by suggesting that these acts of unauthorized downloading are not illegal. While the Copyright Office Report correctly notes that these posting by pirates have no basis in law, and are deliberately misleading, the Report does not make any recommendations on how to address the problem. As this Committee proceeds with its work, we would urge you to take these facts into account.
TWO FINAL POINTS
First, the Report notes that ''tethering'' copies of works to a particular machine may, if it becomes widespread, have implications for the first sale doctrine. We respectfully disagree. ''Tethering'', as used in the Report, consists of making a copy of a work available for use with a specified device. One of the most serious piracy problems confronting the software industry is the loading on multiple machines, sometimes thousands of machines, of a single copy of a word processing or accounting software program. This practice, common within corporations, causes substantial lost sales and direct harm. Copyright owners may, in certain circumstances, find that ''tethering'' copies of works, through the use of technological measures, to one or a limited number of devices is the only practical solution for addressing piracy of this sort.
Finally, almost as an afterthought and certainly outside the scope of the Section 104 mandate, the Report includes a section on contracts and licensing practices. The Report correctly states that there ''is consensus among the courts that enforcement of contracts is not prohibited . . .'' by the Copyright Act, and cities the leading case of ProCD v. Zeidenberg for this proposition. It also notes that no court has overruled contract provisions relying principally in its reasoning on the Copyright Act. The Report nonetheless suggests that the freedom of parties to contract should be monitored. We find this concept very troubling indeed. Parties have long used contracts to specifically state which of the copyright owners bundle of rights (reproduction, distribution, translation, etc.) are implicated by a particular transaction. With the advent of the Internet, it has become commonplace for software developers to make their works available subject to a ''click-I-agree'' contracts where the user must click on an onscreen ''I agree'' button in order to begin using the program. These practices and use of contracts generally, are critical to the way our industry works. The rules governing these contracts has been upheld consistently the courts. Moreover, contract law has historically been a matter of state law, and those laws contain safeguards, such as unconscionability doctrines, to protect against abuse.
Page 112 PREV PAGE TOP OF DOC Segment 1 Of 2
CONCLUSION
In conclusion, every indication from the marketplace suggests that e-commerce and the Internet will continue to grow vigorously. Over the past three years since the enactment of the Digital Millennium Copyright Act, that growth has accelerated. Thus, we would urge this Committee to proceed with utmost care to ensure that the positive developments now underway are not suppressed by the legislative initiatives you pursue. Our concerns in this regard are most acute in respect of the changes you may consider with respect to the reproduction right.
Mr. COBLE. Thank you, and I thank the entire panel.
Now, we have imposed the 5-minute rule upon you all, and in a sense of fairness, we will impose the 5-minute rule upon us as well. If the Members want it, I am not adverse to a second round of questioning, so we'll sort of play that by ear.
Ms. Peters, is it your opinion that, if a temporary reproduction has no economic significance, it does not implicate the copyright owner's reproduction right?
Do you want me to repeat that?
Ms. PETERS. Yes.
Mr. COBLE. Is it your opinion that, if a temporary reproduction has no economic significance, it does not implicate the copyright owner's reproduction right?
Page 113 PREV PAGE TOP OF DOC Segment 1 Of 2
Ms. PETERS. No. That is not our position.
In fact, we conclude that these temporary copies are in fact copies, and then the question is whether or not there should be liability. In other words, you need to license the use.
And the piece about whether or not it has any economic significance, it is whether or not it has any separate economic significance apart from the licensed use.
In other words, you license the activity, and what we're saying is, in this case, the copies that are made merely facilitate the licensed use. And we believe that because it facilitates the use that's licensed, they don't have any separate economic value apart from that already licensed use.
Mr. COBLE. Hypothetically, if the parties at this table, and other tables on the issue, hammered out an agreement satisfactory to all, do you believe that legislation would still be needed?
Ms. PETERS. Well, I guess you're referring to the NMPA-RIAA agreement. To the extent that they agree between themselves that this is a way to solve the problem, it is fine. As to whether or not that is good copyright policy that should be binding on everybody, I think that's a different issue.
And so, to the extent that we believe that our recommendation is sound copyright and balanced copyright policy, we would stay with our recommendation.
Page 114 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. COBLE. I thank you.
Mr. Sherman, now that you've reached an agreement with the music publishers, do you want the Congress to codify it, A, and, if not, do you think that the agreement or the deal eliminates the need for Congress to act on the recommendations in the report?
Mr. SHERMAN. At this point, it's our feeling that our agreement does obviate the need for congressional action. We have always said that we prefer marketplace responses to these kinds of problems. These are business problems in need of business solutions. They're best worked out across the negotiating table.
If we were to rely on Congress to solve these problems for us, we'd be back here every 6 months, every time a new business model has emerged that is a new wrinkle on an old problem.
We're very pleased that we were able to, across the negotiating table, come up with a system that provides a framework for this system to operate. And, therefore, we think that legislation is not necessary at this point.
Mr. COBLE. Well, I concur. There's much to be said for marketplace resolutions. I don't disagree with that.
Mr. Ramos, we've heard a great deal today about downloads versus streaming, various business models for online music services, and developments in licensing that will enable the launch of these services. How much business has been created by these new services?
Page 115 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. RAMOS. Mr. Chairman, regrettably, to date, virtually no business has been generated by legitimate services. The market has been dominated by pirates who are giving away my clients' copyrighted works free. That is the major problem that we face today.
And we believe that through this deal with RIAA that we will be able to assist the legitimate services to get out there and compete with the illegitimate ones, and that that is a positive step in the right direction.
Mr. COBLE. I thank you.
We didn't start my time until about a minute late, so technically my time has expired.
Mr. Simon, I will get you on the next round. I've not been ignoring you.
The gentleman from California?
Mr. BERMAN. Thank you. Mr. Chairman, I'd like to ask Ms. Peters a couple of questions, and then hear her answer, and if any other members of the panel want to add, contradict, comment on her answer, I'd be happy to hear them.
First, let's get to this issue of the RAM buffer copies. Part of the reason why you thought there was a good case to be made that this was a fair use was the absence of economic harm, as I understand it. Is that a fair——
Page 116 PREV PAGE TOP OF DOC Segment 1 Of 2
Ms. PETERS. Right. We believed——
Mr. BERMAN [continuing]. Assumption?
Ms. PETERS [continuing]. That, yes, there was no separate economic value to the buffer copy.
Mr. BERMAN. Well, initially that struck me as a good argument. But at least the music publishers say, take this case, the streaming, the interactive digital streaming on demand, this is different than radio or webcasting in that sense, because now you're getting the music in perfect quality, exactly when you want it, and at any time that you want it; and that that is going to replace a sale, because why buy it, if I can get it any time I want it; and that, therefore, there is economic harm to the writers and owners of that copyright of that musical work; and that, therefore, this temporary buffer copy should be implicated as a—in the context of developing a legitimate mechanism for compensating; forget why the copy is made or what utility that copy has, that this is a good mechanism to balance equities with. And I would like to get your response to that argument.
Ms. PETERS. I agree with you until you get to the issue with the buffer copy. I agree that on-demand streams can have a negative impact with regard to the sale of records, because if you can get it whenever you want it, why own the physical object?
But what's happened is, it's the performance right that is implicated, and it's the value of the performance right that has now increased.
Page 117 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. BERMAN. Well, I mean——
Ms. PETERS. Because the random access—you never make a copy from what's in the random access memory.
Mr. BERMAN. I understand that. But in reality, one plays his own CD, and it's not a public performance, but there's—in other words, we worked out these mechanisms ages ago to get in—to deal with the radio, the broadcasting, and the public performances versus the purchasing of a record or a CD. Now you have this individual—the streaming to the individual——
Ms. PETERS. Right.
Mr. BERMAN [continuing]. And on-demand at any time. Why isn't that more analogous to the purchasing of a CD? And why won't it replace the purchasing of the CD?
Ms. PETERS. It may, but the activity is essentially a performance. What you're getting at is the copyright law, as it exists today, breaks things into rights and you attach them to rights. This problem, and the reason why we only have this problem in the music area, was because there are two organizations that administer different rights. It didn't come up in any of the other areas because, if you are going to a company that owns all of the rights and you identify the activity, they price that activity. But if in fact different rights are administered by different people, each one has got to grab on to the piece that they have.
Page 118 PREV PAGE TOP OF DOC Segment 1 Of 2
But the truth of the matter, with regard to streaming, is that it's performance. The European Union has in its directive a mandated exception. The activity that we propose to exempt is required to be exempted under the European Union directive.
So it's not that what we're suggesting is that far off. But all I'm saying is, the value is in the performance. What my argument is, is the performance right value goes up. The performance right value goes up. The music publishers get paid from the performing rights organizations. And the composers and lyricist get paid, and get paid directly.
So my own analysis is that they don't lose. It's just who gets to dish out the money and who gets to administer the right.
Mr. BERMAN. Mr. Chairman, could I just—does anyone else on the panel, particularly Mr. Ramos, want to make any response to this?
Ms. PETERS. I am sure they do. [Laughter.]
Mr. RAMOS. I just don't want to run over the time. If I may, I would like to address that.
I appreciate that this issue was a difficult one for the Copyright Office to address, because the questions of economics in this industry are not simply resolved.
I guess what I would say is that the objective of the music publishers and the songwriters they represent here is to hold on to the meager income streams—no pun intended—that they already have. And if they lose the income streams from on-demand streams on the Internet, they're going to lose income. They're going to be worse off.
Page 119 PREV PAGE TOP OF DOC Segment 1 Of 2
And we believe that that should not be a necessary consequence of the development of music delivery on the Internet, as opposed to in the physical world.
Much has been made of this concept of the double-dip, and it has a certain superficial appeal, but the reality is that IP is not ice cream. We're not talking about taking two dips of ice cream. These are two distinct, separate rights that have been recognized in copyright law for over a century: the right of reproduction and distribution, and the right of public performance.
If I take a stack of CDs down to an auditorium for a high school dance and play those CDs, there's no question but that I need a performance license. That doesn't mean that I am entitled to go into Tower Records and take a stack of CDs without paying for them on the theory that, because I'm going to perform them, it would be a double-dip for the copyright owner to be paid for the record as well as the performance.
That has been the case for years in copyright law. And we think there's no reason for departing from that very simple concept.
There are two streams that the copyright owner relies on. They are meager streams. We are the small mammals——
Mr. COBLE. Mr. Ramos, if you'd wrap up——
Mr. RAMOS [continuing]. Going around the feet of the mighty animals.
Page 120 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. COBLE [continuing]. Because I think your time is about up.
Mr. RAMOS. I'm done. Thank you.
Mr. COBLE. Thank you, sir.
Mr. RAMOS. Thank you, Mr. Chairman.
Mr. COBLE. The gentleman from Tennessee.
Mr. JENKINS. Thank you Mr. Chairman. I don't have any questions at this time.
Mr. COBLE. I thank the gentleman.
The gentleman from Michigan, Mr. Conyers.
Mr. CONYERS. Thank you, Mr. Chairman.
Somewhere in this discussion there are issues far more complex than I ever imagined, very heavy philosophical questions, tremendous economic free-market considerations.
Mr. Sherman, I think you're the biggest free marketeer on the panel. Why doesn't the government just butt out of this stuff, and we wouldn't even have this hearing, and let the market work its way? What's wrong with that?
Page 121 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. SHERMAN. At this point, I think that's what's happening. I think the fact that Congress has actually been looking at these issues has actually been helpful in pushing the parties to work out these issues, and there really has been a beneficial effect.
But at this point, government regulation of this marketplace is more likely to interfere with the natural evolution of the marketplace than benefit it.
Mr. CONYERS. Right. That comes down to ''butt out.'' [Laughter.]
Mr. CONYERS. OK, let's go to the next consideration.
Mr. SHERMAN. I don't think I can say that as freely as you can. [Laughter.].
Mr. CONYERS. Oh, OK.
And that might extend to antitrust considerations. I mean, we're always, ''What's happening? Who's merging? Who's weighing in? Who's using their weight?'' You think there's little bit too much of that, too?
Mr. SHERMAN. I don't think I can——
Mr. CONYERS. Just between you and me. [Laughter.]
Page 122 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. SHERMAN. I think it is an unusual situation where companies with a 0 percent market share are being investigated for antitrust activity, but the marketplace will evolve. And the antitrust law should remain fully applicable and applied as deemed warranted, as the market develops.
Mr. CONYERS. Well, you're losing some of your free-market credentials here, sir.
OK, what about people being compensated for their ownership, creativity, even though they may not be corporations? What about that?
Mr. SHERMAN. Absolutely. Relationships with artists are critical in the industry. Without the artists, we wouldn't have music to sell.
Mr. CONYERS. Well, that's great. We're coming a long way now, because for a long time, that wasn't the case.
I mean, there are a lot of artists, not all of them dead, who never got a dime, and people made millions and millions of bucks. Did you know that?
Mr. SHERMAN. I have certainly heard that reported. But whatever the experience was in the past, I assure you that artists today are very well represented in their negotiations with record labels. In fact, most major record labels will not even negotiate with an artist unless they're represented by a lawyer.
Page 123 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. CONYERS. I didn't know that.
You know what I know? I know artists who come in with their product, and they're given a contract, and they're told, ''You've got 24 hours to sign this, buster. And if you don't sign it, don't ever walk in this door again.''
You ever heard that before?
Mr. SHERMAN. Actually, I haven't, but I've heard of lots of stories where——
Mr. CONYERS. You've heard allegations——
Mr. SHERMAN [continuing]. There are multiple companies bidding for the same artist, and those artists and their agents are able to put one bid against another and increase the advance and royalties that they're paid. That is the effect of a marketplace.
Mr. CONYERS. Well, that's the free market at its finest moment, right?
Mr. SHERMAN. Well, it is the marketplace at work, yes.
Mr. CONYERS. That's the real world.
Page 124 PREV PAGE TOP OF DOC Segment 1 Of 2
Well, I suggest that maybe we're both looking at the same glass of water, but you're looking at it from the top.
See, Quincy Jones really doesn't need ASCAP, to be honest with you. I mean, he can negotiate his own terms. But Barry Gordy, when he first started out, he needed every CAP there was in town, because he couldn't negotiate anything.
And so if you look at it from the top, it's great. I mean, the big guys, if you make it, you can sit down and do what you're talking about.
The little guys that you've heard allegations of, that I reported to you, of which there are many more than there are the guys at the top, guess what? They're told that if they try to change as much as a clause in this contract drawn up by the lawyers, they can just keep the contract and their music and go somewhere else.
So what we're trying—this is where the government comes in, Mr. Free Market Celebrity for This Panel, named by me. This is what the government does, my man. We create policy, and we think that there's something—there's a pirate problem in here somewhere that seems to me so simple and elementary, I can't figure out what all this very lofty conversation is about.
But maybe I'll see you on the next panel, next round.
Mr. COBLE. The gentleman's time has expired.
Page 125 PREV PAGE TOP OF DOC Segment 1 Of 2
The gentleman from Utah, Mr. Cannon.
Mr. CANNON. Thank you.
Given Mr. Conyers' line of questioning there, I hope he'll consider cosponsoring the Music Online Competition Act, which provides for direct payment to artists.
Mr. Chairman, I'd ask unanimous consent to submit for the record a recent article from the Washington Post.
Mr. COBLE. Without objection.
[The information referred to follows:]
Mr. CANNON. Thank you.
This article reviews the MusicNet digital music service offered by some of the major labels represented here today by the RIAA. The article offers, to say the least, a very harsh assessment of MusicNet from a consumer perspective, saying MusicNet represents one of the worst consumer bargains since the DivX pay-per-view DVD scheme.
The article also notes each download expires in 30 days. You cannot make a backup copy of a song, write to a recordable CD, or transfer it to a portable player. The record labels made this choice, electing to sacrifice convenience and choice to copy protection. Those behind PressPlay, a competing subscription system, seem on their way to making the same mistake.
Page 126 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. Sherman, the article and others suggest that the major labels do not intend to fully embrace the Internet, preferring instead to continue to derive their revenues from the more lucrative and costly to consumers CD marketplace.
Reviews of the new online music services stand in direct contrast to what your superior, Hilary Rosen, promised last April before the Senate Judiciary Committee, when she urged us to stay tuned for the rollout of services like MusicNet and to just give the industry time.
Specifically, she said, ''I am amused by those who suggest that record companies don't want to be online with legitimate music, that we don't want to serve our customers.''
But the realities of MusicNet, the MusicNet offering, seemed to confirm just the opposite. Of the top 20 billboard CDs for this week, only two have tracts available for download on the MusicNet services, and both those two CDs—that is Britney Spears and the Backstreet Boys—are distributed by Zomba Records, the largest independent label.
In short, the major labels have not made a single track available from top-selling CDs, even as rentals to download using that service.
Mr. Sherman, in your opening statement you said that the RIAA-NMPA deal will bring competition to digital music. Today's hearing is to examine the need for change to the copyright laws. However, I look forward to measuring your statement on competition in antitrust hearings next year on this issue.
Page 127 PREV PAGE TOP OF DOC Segment 1 Of 2
But now for a question, if we can get there: Is the present copyright system under the DMCA in part to blame for your member companies' inability to offer what consumers want, or is it solely a function of your industry's desire to maximize control over content and profit margins? [Laughter.]
Mr. SHERMAN. That's one of those questions like, ''When did you last stop beating your wife?'' [Laughter.]
The truth is that it really would be a mistake to think that record companies don't want to be online, because they have to be online. They have no choice.
Right now, the online marketplace is simply a pirate marketplace. It is where all the music is available for free, any time of the day or night.
So record companies, even if they didn't want to be online, can't afford not to be. And therefore, they are trying to move online as aggressively as they can.
The DMCA has not been responsible for the difficulties in getting online. There are lots of reasons for the difficulties in getting online, some of them involving clearance of the various publishing rights and artists' rights that are necessary to do so.
You know, Mr. Conyers is very concerned about artists. Well, a lot of those artists own the rights for electronic distribution and aren't allowing their music to go online. That's why you don't have any Beatles songs on any of the services.
Page 128 PREV PAGE TOP OF DOC Segment 1 Of 2
So before you jump to the conclusion that the major labels have chosen not to put their first releases, their new releases that are on the Billboard Top 20, online, you really need to understand whether it's the artist that has the rights or whether the publishing licenses haven't yet cleared.
Mr. CANNON. Pardon me, Mr. Sherman, but do you know, of the other 18 of the top 20 that are not available, what the cause is for those not being available?
Mr. SHERMAN. I do not know. It may be because they're owned by labels that aren't participating in MusicNet. It may be because the—with new releases, we have a problem with getting publishing licenses out in a timely fashion. If my mechanical licenses haven't yet been issued, then they cannot yet go online. It is a problem that we are working hard to solve, but it is a problem.
Believe me, record companies want their new releases online, because they need to appeal to consumers to bring them to the legitimate alternative instead of the pirate marketplace. Bringing the newest material online is important to them.
Mr. CANNON. Thank you.
I see my time has expired, so I yield back what does not remain of it.
Mr. COBLE. I thank the gentleman.
Page 129 PREV PAGE TOP OF DOC Segment 1 Of 2
Folks, we have six votes; you're talking about 45 to 50 minutes, but I think we can get the gentlelady from California in prior to going to vote.
Ms. LOFGREN. Thank you, Mr. Chairman. I'll be quick, because we do need to get over to the floor.
Ms. Peters, I found the report very interesting, and I wanted to explore just a couple of quick items.
As I understand it, the office, your office, did establish a concern about tethering and its impact on the first sale doctrine but don't recommend that we do anything about that at this time, because the tethering phenomenon is, in your office's judgment, limited. I am not so sure it is that limited, and I'm wondering what remedy you would urge us to explore if my assumption that the tethering is not as limited as you suspect is correct.
Ms. PETERS. I'm not sure that we said——
Ms. LOFGREN. If I've misstated it, correct me.
Ms. PETERS. No, no, no.
What we said was that tethering could become a problem in the overall balance, but I'm not sure that it went totally to first sale.
You can take the physical object and can transfer it. It's just that you are not going to have access to it, because the access is to a particular device. But first sale doesn't really necessarily go to access. It goes to the distribution of the physical copy.
Page 130 PREV PAGE TOP OF DOC Segment 1 Of 2
So what we were doing was looking at a variety of concerns that libraries basically raised with regard to things like preservation and their issue with regard to access down the line and donated copies that may be tethered and someone is giving them a copy.
What we basically said is, at the moment, for example, we recognize that certain electronic books are tethered. We've talked to book publishers and they say that's a nascent market. They're aware of a library's need to preserve those works, and they will be working with libraries to figure out how libraries can be served.
I noted in my report that the Library of Congress is taking a leadership role in making sure that libraries have preserved the works for future generations, and that we're looking—the Copyright Office is looking to the library and the committee, which I basically serve as an adviser, to how to deal with those issues.
So it's not that we didn't say that there weren't legitimate issues. We didn't think it was necessarily exactly a first sale issue. But it is an issue for libraries with regard to access of works.
And in part, it has maybe more to do not with section 109 but with the DMCA and the access controls and the copy controls that may be put on these things.
Ms. LOFGREN. So do you think the consumer has a stake in this tethering issue?
Page 131 PREV PAGE TOP OF DOC Segment 1 Of 2
Ms. PETERS. At the moment, any book that is being put out in electronic form is also available in a non-electronic form. So a consumer, as far as getting and reading the work and having access to the work, I think at the moment, it has not risen to the level of a major problem. It is something that we identified as it's something worth looking at.
Ms. LOFGREN. Although it's not subject to the same lingo, tethering, isn't it essentially the same, that if you paid to download a song and then you want to transfer the song that you paid for to your MP3 player, but you can't because of an access code, isn't that a form of tethering, in a sense? Isn't that the same thing as the books?
Ms. PETERS. Well, I think it's a little bit different.
One of the—the issue with regard to the downloaded song was in fact a first sale issue. It was, whether or not I acquire the work through a transmission, do I have a right to make a copy of it and put it someplace else? And the answer is, under first sale, you do not, because, in effect, first sale is only the distribution right.
With regard to the tethering, it's not really that you can't really basically distribute the copy sometimes. It's that there may be a control that limits it to a particular machine.
Nobody gave evidence that this was a real-world, large problem now. We basically commented that we thought that maybe the marketplace would address this. People are either going to accept it or they're not. It's either going to work in the marketplace or it's not.
Page 132 PREV PAGE TOP OF DOC Segment 1 Of 2
And we hoped that we wouldn't see, you know, a big problem developing in this area. But we did say: Monitor it.
Ms. LOFGREN. But if the marketplace is really controlled only by a few actors in terms of distribution, in terms of legal distribution, isn't the real market competition the pirates?
Ms. PETERS. I don't know. What we were really referring to, and Emery Simon can comment on it, is if the restrictions are seen is too cumbersome by the consuming public, so that they don't purchase it—and it was in the software area where technical protection measures were used and given up. That's the marketplace we were talking about.
We think that if things are too onerous, consumers will not buy into it.
Ms. LOFGREN. My time is up, Mr. Chairman. Thank you.
Mr. COBLE. Mr. Berman and I have agreed to adjourn, unless the Members want a second round. I'll put that to the Members.
The gentleman from Alabama wants to introduce a statement, I think.
Mr. BACHUS. Yes. And, Mr. Chairman, I'm going to be very brief.
There are 20,000 video stores in the United States, and that's really how a lot of my constituents interact on these issues. And they have prepared a statement concerning the report, section 104 report. I'd like that to be introduced in the record.
Page 133 PREV PAGE TOP OF DOC Segment 1 Of 2
[The information referred to follows:]
PREPARED STATEMENT OF VIDEO SOFTWARE DEALERS ASSOCIATION
The Video Software Dealers Association (VSDA), the international trade association representing the home video industry and video stores across the nation, submits this statement for the record of the oversight hearing on the DMCA Section 104 Report. We wish to make the Subcommittee aware of certain efforts of copyright owners to expand the limited privileges granted to them by Congress under the Copyright Act to control the lawful distribution and use of copyrighted products. These efforts promise to undermine the first sale doctrine and the public policies it serves, and ultimately will impede the development of online entertainment, to the detriment of consumers, retailers, and copyright owners.
VIDEO SOFTWARE DEALERS ASSOCIATION
Established in 1981, the Video Software Dealers Association (VSDA) is a not-for-profit international trade association for the $19 billion home entertainment industry. VSDA represents more than 2,000 companies throughout the United States, Canada, and 10 other countries. Membership comprises the full spectrum of video retailers (both independents and large chains), as well as the home video divisions of all major and independent motion picture studios, and other related businesses that constitute and support the home video entertainment industry.
COPYRIGHT LAW AND HOME VIDEO
Page 134 PREV PAGE TOP OF DOC Segment 1 Of 2
Having built the world's first home distribution system for motion pictures on the strength of first sale provision of the Copyright Act, video retailers may have more at stake in this discussion than perhaps any other market segment.
Copyright law, and particularly the first sale doctrine (codified at 17 U.S.C. 109(a)), provides the legal foundation that has facilitated the phenomenal growth of the home video industry over the past two decades. Section 109(a) provides that, notwithstanding a copyright owner's distribution right, the owner of a particular copy or phonorecord lawfully made under U.S. copyright law ''is entitled, without the authority of the copyright owner, to sell or otherwise dispose of that copy or phonorecord.'' By giving retailers the right to sell and rent these lawfully made videos and video games without restriction by the copyright owner, the first sale provision benefits society by promoting retail competition and maximizing distribution of creative works.
When videocassette recorders (VCRs) first emerged as a consumer electronics product in the late 1970s, few imagined how ubiquitous they would become in America's homes and how popular watching a prerecorded video of a motion picture would be. For an overwhelming majority of America's 250 million plus consumers, renting and buying prerecorded videocassettes and digital versatile disks (DVDs) is an integral component of their entertainment options. More than 90% of the households in the U.S. own at least one VCR. And although the DVD is a relatively new format, it is projected that by the end of the year approximately 25 million U.S. households will own a DVD player. It is estimated that almost 2.8 billion videotapes and DVDs were rented in 2000. Approximately one-third of all video-equipped households rent a videotape or DVD weekly, while 50% rent at least once a month. More than 60% of video-equipped homes have a video library of some sort. The average videotape library contains 75 titles, while the average DVD collection contains 19 titles. Consumer spending on video rentals in 2000 was a record $8.25 billion. An additional estimated $10.8 billion was spent purchasing videotapes and DVDs, with DVDs representing 32% of the total dollars spent.
Page 135 PREV PAGE TOP OF DOC Segment 1 Of 2
Although the motion picture studios strenuously resisted the emergence of the VCR and the creation of the video rental industry, even going so far as petitioning Congress to eliminate the first sale doctrine for prerecorded videos of movies, the home video industry today is an enormously profitable enterprise for the motion picture studios. Total revenue to the studios from domestic video sales and rentals totaled $9.5 billion in 2000. Over the past several years, revenue from home video has accounted for more than half of the studios' gross domestic film revenue.
Video retailing, while experiencing some of the consolidation and slowing of growth of a maturing industry, remains a vibrant enterprise. As of early 2000, there were 20,000 video rental specialty stores in the U.S. These stores included the major public chains such as Blockbuster, Hollywood Video, and Movie Gallery, and a significant number of independent retailers. It is estimated that more than 40% of video specialty stores currently are single-store operations. Another 8,000 non-specialists, primarily supermarkets and drugstores, also rent video as a regular part of their business, and numerous other retail outlets sell prerecorded videos.
Thus, the freedom to rent and resell videos guaranteed by the first sale provision has provided consumers with access to affordable, quality entertainment that they can enjoy in their homes, generated a tremendous revenue stream for the copyright owners, and created a thriving industry consisting primarily of small, community-based businesses.
THREATS TO THE FIRST SALE DOCTRINE
The benefits of the first sale provision to society, consumers, copyright owners, and video retailers are threatened by some of the trends in online entertainment. VSDA is opposed to any erosion in the rights provided by the first sale provision and the suppression of competition and restriction of consumer choice such erosion portends.
Page 136 PREV PAGE TOP OF DOC Segment 1 Of 2
Copyright law maintains a careful balance between protecting the intellectual property of copyright owners and promoting the broad dissemination and enjoyment of protected works. Section 202 of the Copyright Act clearly delineates between ownership of the copyright to a work and ownership of a lawful copy of a copyrighted work. The copyright owner and the copy owner each have distinct rights under the Copyright Act, and the rights of each must be respected.
Some in the copyright owner community seek to disable the protections that copyright law provides to legal owners of lawfully made copies of copyrighted works—and expand the limited privileges granted to copyright owners by Congress—in order to control the lawful distribution and use of copyrighted materials, control Congress has expressly denied to them in the Copyright Act. Copyright owners have taken the position that they are free to control the distribution and use of digitally delivered copyrighted works through access control technology and non-negotiable contracts after ownership of a copy has passed to others. They seek this control in order to impose a business model under which they can charge for repeated use or multiple users of copyrighted works.
''Access control technology'' serves important functions when used to protect rights granted by the Copyright Act. For example, it is acceptable for a copyright owner to deny initial access to a digitally distributed work until payment for the reproduction is received. But such access control technology must not be abused to expand the copyright monopoly without congressional warrant. Examples of the misuse of access control technology by copyright owners include ''tethering'' (limiting a download to use on a single computer) and ''timing out'' (disabling a download after a certain amount of time). The practical effect of such use of access control technology is to allow the copyright owner to restrict the lawful distribution and use of the work. The use of such technological locks is the digital equivalent of preventing anyone from reading a book unless they get permission from the copyright owner every time they wish to do so.
Page 137 PREV PAGE TOP OF DOC Segment 1 Of 2
Non-negotiable contracts in the digital environment are most commonly presented as ''click-thru end user license agreements.'' These contracts of adhesion typically incant that a sale is not a sale but a ''rental'' or a ''license'' that restricts the purchaser's ability to use and transfer ownership of the product. In a digital environment, ''click here to agree'' is a non-negotiable step in an automated transaction, leaving no opportunity to object.
Video retailers are concerned that such access control technology and non-negotiable contracts are being used not to prevent piracy, but to restrict the legal rights of lawful owners to give away, sell, and rent the digital copies they own, in contravention of first sale rights.
These concerns are not theoretical. The MovieFly ''video on demand'' online delivery service for motion pictures is set to launch soon. MovieFly is a joint venture of five motion picture studios. Reportedly, a download from this service will have to be watched within 30 days from the date of download and will be operable only for 24 hours after the first viewing, after which the movie will be rendered as inaccessible code. In addition, the download will be tethered to the computer on which it is downloaded.
Under the Copyright Act, the person who downloads a movie from the MovieFly service owns that copy and has the right to give it away, sell it, or lend it. The questions that must be asked are whether copyright owners are free to nullify those rights, and if so, what is the source of copyright owners' right to do so? We submit that copyright owners have no right to prevent the owners of lawfully made copies from disposing of them by gift, sale, or even lending, yet that is exactly what the technology to be employed by MovieFly apparently would do.
Page 138 PREV PAGE TOP OF DOC Segment 1 Of 2
Because the first sale provision furthers the important public policies of promoting competition and maximizing dissemination of copyrighted works, the rights it confers cannot be extinguished either by technological controls or non-negotiable contracts. To conclude otherwise would make the rights granted by the first sale doctrine merely contingent on the technological prowess or goodwill of copyright owners.
The attempts of copyright owners to control distribution and use of digitally delivered works also have the potential to erode consumer choice, retail competition, and fair use and free speech rights in the digital marketplace and result in a new exclusive and unrestricted general copyright ''right of use.'' They may also infringe upon consumer privacy. Therefore, Congress must closely examine the use of access control technology and non-negotiable contracts in digitally delivery by copyright owners.
THE NEED TO DETER VIDEO PIRACY
This is not a debate about piracy. Video retailers support the efforts of copyright owners to protect their intellectual property against infringement, as legitimate retailers are usually the first to feel the impact of piracy.
VSDA actively supported the enactment of the Digital Millennium Copyright Act of 1998 (DMCA) and specifically the anticircumvention provisions with the understanding that these provisions were intended by Congress to deter piracy. VSDA has supported the positions of copyright owners in A&M Records v. Napster, Inc., DVD Copy Control Ass'n, Inc. v. Bunner, and similar cases. VSDA also actively works with the Motion Picture Association of America to identify individuals engaged in piracy. Thus, VSDA is not aligned with those who seek to make meaningless the legal protections that copyright law provides to prevent piracy of covered works.
Page 139 PREV PAGE TOP OF DOC Segment 1 Of 2
However, allowing consumers to exercise their right to give away, resell, or rent lawfully acquired digitally delivered works will not inevitably lead to the unauthorized exhibition, reproduction, or public performance of copyrighted works. Copy protection software is distinct from the software used to tether or time-out digital downloads. The technology exists today, through digital rights management, to facilitate the lawful digital distribution of works while respecting first sale rights and deterring piracy. Moreover, the Ninth Circuit's decision in A&M Records v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001), demonstrates that copyright owners have adequate legal remedies at their disposal to address online piracy.
THE DMCA SECTION 104 REPORT
The DMCA Section 104 Report, issued by the Copyright Office in August, was requested by Congress in the DMCA. The Report examined the impact of Title 1 of the DMCA and the development of electronic commerce on the operation of the first sale doctrine and Section 117 of the Copyright Act, and the relationship between existing and emerging technology and the operation of the first sale doctrine and Section 117. During the study process, VSDA submitted written comments and made oral presentations to the Copyright Office.
First Sale Rights and Digital Downloads: The DMCA Section 104 Report states that the first sale provision unequivocally applies to digital downloads that are fixed in a tangible medium, such as a writable CD or DVD, a computer diskette, or a hard drive.
VSDA agrees that a digital copy authorized by the copyright owner that is reproduced by downloading onto a consumer's computer or portable storage medium is no different from a digital copy authorized by the copyright owner that is reproduced in the form of packaged media (such as a prerecorded videocassette or DVD). Both are lawfully made copies and are fixed in tangible media. First sale rights apply to both.
Page 140 PREV PAGE TOP OF DOC Segment 1 Of 2
VSDA commends the Copyright Office for affirming that the first sale provision of the Copyright Act applies to videos and other entertainment lawfully downloaded from the Internet. This report should resolve whatever ambiguity may have existed regarding whether first sale rights apply to digital downloads.
However, VSDA strongly disagrees with the Copyright Office's dictum that the first sale provision is not a right, but is an unenforceable restriction on copyright owners. The Copyright Office said:
Many of the commenters referred to the first sale doctrine as a ''right.'' This is an inartful term to describe the doctrine. Rights are guaranteed to individuals and are generally enforceable in court. The first sale doctrine is not an enforceable right from the standpoint of the owner of a copy—that is, there is no independent remedy if a person is effectively denied the benefits of section 109 through technological or contractual means. The first sale doctrine is a limitation to the scope of copyright; specifically it is a limitation to the distribution right of copyright owners.
This statement appears to invite copyright owners to infringe with impunity the first sale rights of owners of lawfully made copies. We can find no support for the proposition that the first sale doctrine is unenforceable, and the Copyright Office's interpretation is clearly at odds with the Supreme Court's recognition that the Copyright Act's limitations on copyrights should be given just as much weight as the copyrights themselves. See Fogerty v. Fantasy, Inc., 510 U.S. 517 (1994).
Page 141 PREV PAGE TOP OF DOC Segment 1 Of 2
Access Control Technology and Non-Negotiable Contracts: The Section 104 Report also touched on whether copyright owners can use access control technology and non-negotiable contracts for digital works to circumvent the first sale doctrine. The Copyright Office correctly noted that access control technologies that tether digital downloads to a single computer and non-negotiable ''click-thru'' contracts that attempt to override copyright law may negatively impact consumer choice and retail competition. It concluded, however, that the problems raised by them are speculative, or premature, or beyond the scope of the report.
In this respect, the Copyright Office was remiss. The announced efforts of copyright owners to defeat first sale rights and control retailers' and consumers' lawful use of digitally delivered media through restrictive access control measures and non-negotiable contract terms fall squarely within the Copyright Office's mandate from Congress. Yet the Copyright Office's report makes no mention of business models promoted by joint ventures among copyright holders over the past year, under which consumers would be locked out of their own property unless they keep paying the copyright owner for access. The problems created by overly restrictive access control technology and non-negotiable contracts need to be addressed now, not at some indefinite time in the future. To fail to do so leaves to the designers of access controls the allocation of rights between consumers and copyright owners, a function that previously was the exclusive responsibility of Congress.
These restrictions on consumers' abilities to transfer and use fully the products they lawfully purchase and download are not speculative and consideration of their impact is not premature. Motion picture studios will soon offer ''video-on-demand'' over the Internet through studio joint ventures. It appears these services will restrict purchasers' abilities to transfer and use fully the downloaded movies.
Page 142 PREV PAGE TOP OF DOC Segment 1 Of 2
VSDA'S STATEMENT OF PRINCIPLES
In light of the Copyright Office's failure to adequately address the harm to consumers from overly restrictive access control technology and non-negotiable contracts, we believe Congress needs to address this issue. VSDA calls for the adoption of our ''Principles to Facilitate Digital Delivery of Movies,'' which are attached to this statement. These principles are designed to ensure consumer choice, prevent piracy, and promote retail competition. VSDA's principles emphasize anti-piracy protections, endorsement of first sale rights for digital products, rejection of exclusive dealing, promotion of consumer choice, protection of consumer privacy, and limitation of digital rights management systems to copyright protection and management.
Consumers have legitimate concerns over their ability to use and transfer possession of digitally delivered copyrighted works; copyright owners have legitimate concerns about unlawful reproduction and distribution of their movies; and retailers have legitimate concerns about business models that would suppress or eliminate retail competition. Consumers, retailers, and copyright owners of motion pictures would all benefit from adoption of our principles.
CONCLUSION
Copyright law is a balance between the protection of intellectual creations and the promotion of broad public dissemination of these creations in a manner that benefits society as a whole. Congress must ensure the proper balance is maintained between the rights of copyright owners on the one side and consumers and retailers on the other so that lawful digital distribution can move forward.
Page 143 PREV PAGE TOP OF DOC Segment 1 Of 2
VSDA is deeply concerned about the overreaching that appears to be part of some emerging business models for online entertainment. Copyright owners' use of access control technology and non-negotiable contracts are upsetting the equilibrium of copyright law. Many such uses do not deter piracy at all but instead control the lawful use, resale, and rental of digitally delivered entertainment. Overreaching by copyright owners, if unchecked by Congress, will impede the development of online entertainment, to the detriment of consumers, retailers, and copyright owners.
Video retailers see tremendous possibilities in digital distribution and want to see this market grow. They do not fear a free market, but believe that copyright owners should not be able to expand the limited privileges granted to them under the Copyright Act to lock out retail competition. They ask only for the opportunity to compete fairly for consumers in the digital marketplace. They disagree with the notion that any single participant in the marketplace should be allowed to dictate the winners and losers.
While it can be argued that, ultimately, business models that rely on consumer-unfriendly technology will fail, in the interim some retailers may be driven out of business and the development of the market for digital delivery will be severely impeded.
We call on Congress to support public policies for digitally delivered copyrighted works that preserve the balance of copyright law, promote competition for consumer allegiance, protect consumer rights, and stimulate technological innovation. These policies must ensure that the first sale, fair use, private performance, and other intellectual property rights of consumers guaranteed under the Copyright Act remain vital and meaningful in the digital marketplace. They must prevent copyright owners from misusing the limited privileges granted to them by Congress under the Copyright Act to extend their copyright monopoly. And they must enable copyright law to continue to stimulate artistic, business and technological innovation that benefits society, enhances the quality of life, and fuels economic growth.
Page 144 PREV PAGE TOP OF DOC Segment 1 Of 2
Thank you.
STATEMENT OF PRINCIPLES FOR FACILITATING
DIGITAL DISTRIBUTION OF MOTION PICTURES
PRESENTED BY THE VIDEO SOFTWARE DEALERS ASSOCIATION
1.
Federal law must continue to make it a crime to disseminate or use technology to circumvent the encryption of digital works for the purpose of creating unlawful copies. However:
a.
These provisions of federal law should not be utilized for purposes other than protecting against copyright infringement, such as extension of the copyright term or limiting the rights provided by the first sale doctrine.
b.
The anticircumvention provisions of the DMCA ''[do] not apply to the subsequent actions of a person once he or she has obtained authorized access to a copy of the work ... even if such actions involve circumvention of additional forms of technological protection measures.'' H. Rpt. No. 105–551(I) (1998). Accordingly, technological measures should not be employed by copyright owners to limit the lawful owner's ability to realize the full value of ownership, such as by use of time-out or limited play features, or binding the initial access to a single computer and thereby preventing the lawful copy from being played in a different computer.
Page 145 PREV PAGE TOP OF DOC Segment 1 Of 2
2.
The first sale doctrine, and its codification at 17 U.S.C. §109(a), are essential parts of U.S. copyright law.
a.
Copyright law provides content owners with special legal protection of their work in exchange for their maximizing dissemination of their works to the public.
b.
The first sale doctrine is a distinct right under copyright law, not an exception to the copyright owner's exclusive right of reproduction or a fair use defense.
c.
The first sale doctrine encourages wide distribution of creative works that can benefit society and promotes competition and consumer choice.
d.
While the first sale doctrine is a right belonging to the owner of a lawfully made copy against the copyright owner, it exists for the benefit of the public and therefore cannot be abrogated or voided by the copyright owner, either unilaterally (such as by use of technology) or by agreement with the owner of the copy (such as by an end-user license agreement).
3.
The first sale doctrine transcends technologies and should not be abandoned. The public policy considerations against restraints on alienation of property or trade in lawfully acquired copyrighted works are technology-neutral.
Page 146 PREV PAGE TOP OF DOC Segment 1 Of 2
4.
The first sale doctrine applies to digital copies lawfully made under the Copyright Act that are fixed on any tangible medium of expression (including computer hard drives or portable storage media) and the lawful owner of such digital copies may transfer ownership of such copies. In the case of audiovisual works, the owner may also transfer possession by rental.
a.
The first sale doctrine does not authorize the owner of a lawfully made digital copy to make other digital copies, such as by e-mailing copies to friends and family.
b.
The copyright owner may not restrict how a lawfully made copy is used by its owner because there is no general ''use'' right under copyright law. A lawfully made copy is personal property, even though it contains intellectual property.
5.
Exclusive dealing (including exclusive cross-licensing among suppliers) that forecloses an open and competitive market for electronic distribution of motion pictures should not be permitted.
6.
Consumers should continue to be assured of aggressive competition for price, service, selection, and convenience in the retailing of motion pictures. They should be able to select the retailers from whom they obtain digitally delivered motion pictures, just as they currently are able to do with packaged media, and retailers should have access to product from all suppliers in order to meet consumer demand and ensure competition.
Page 147 PREV PAGE TOP OF DOC Segment 1 Of 2
7.
Any digital rights management (''DRM'') systems should be limited to preventing copyright infringement and should not be used to restrict otherwise lawful access and use, whether by retailers or consumers.
8.
Consumers should not be required by copyright owners, directly or indirectly, to surrender personally identifiable information as a prerequisite for obtaining motion pictures via digital distribution from third parties.
9.
A retailer's customer base is as important to the retailer as copyrights are to the copyright owner. The copyright owner's use of DRM systems to protect its copyrights should not require that the retailer's customers (or their addresses) be identified to the copyright owner or any third party.
10.
All digital delivery systems must ensure that the privacy of consumer video sales and rental records are protected at all times, as required under the Video Privacy Protection Act (18 U.S.C. §2710). No retailer should be made to violate the federal law by use of technology that captures personally identifiable information the retailer is prohibited from disclosing.
Mr. BACHUS. I also have five questions, and Ms. Peters will be back here tomorrow; particularly for one question—Mr. Sherman.
Page 148 PREV PAGE TOP OF DOC Segment 1 Of 2
I'm not going to ask it, but I would like to submit it to him in writing——
Mr. COBLE. Without objection, that can be done.
Mr. BACHUS [continuing]. And have him respond to it.
[The information referred to follows:]
QUESTIONS FOR MARYBETH PETERS, REGISTER OF COPYRIGHTS, FROM REPRESENTATIVE BACHUS
1. The Copyright Office states that the first sale provision of the Copyright Act is not a right, but is an unenforceable restriction on copyright owners (footnote 41). Doesn't the Copyright Office's interpretation of first sale rights make those rights contingent on the technological prowess and goodwill of copyright owners?
Do you believe that Congress intended the rights it granted to the owners of lawful copies in the Copyright Act to be subject to voiding by copyright owners?
Unlike the exclusive rights of the copyright owner set forth in section 106 of the Copyright Act, first sale is not referred to as a ''right'' in section 109. Moreover, while infringements of a copyright owner's exclusive rights are subject to the remedies set forth in chapter 5 of the Act, ''infringements'' of first sale are not subject to any remedies. Consequently, within the statutory scheme created by Congress it is not accurate to refer to first sale as a ''right.'' Rather, as stated in footnote 41 of the Report, the first sale doctrine ''is a limitation on the scope of copyright'': The owner of a particular copy of a work cannot be sued for infringement for disposing of possession or ownership of that copy.
Page 149 PREV PAGE TOP OF DOC Segment 1 Of 2
While section 109(a) permits the owner of a particular lawful copy to dispose of it ''[n]otwithstanding the provisions of section 106(3),'' that is no guarantee that the owner of that copy can in fact dispose of it as he wishes. Plainly, applicable law (e.g., laws concerning obscenity or libel), or contractual obligations to third parties (e.g., exclusive dealing arrangements) may limit the ways that the owner of a copy may dispose of it. Similarly, copyright owners have long had the ability to impose limitations on the disposition of copies. Certain types of works have traditionally been licensed (e.g., 35mm prints of motion pictures for exhibition, computer programs and databases) or rented (e.g., classical music, stage plays and musicals) rather than sold, thus avoiding the first sale doctrine entirely. These practices—which often benefit consumers by allowing them to gain access to works more cheaply than if copies were sold outright—were in existence at the time that section 109 was formulated and there's no indication that Congress intended to disturb them.
Other works are distributed subject to contractual restrictions on further disposition of the copy. As in other fields of commerce, contracts permit parties to order their business dealings in the way that is most efficient for them, often resulting in greater availability of a work than would be possible under the default rules in the Copyright Act. Congress recognized when it enacted section 109 that the first sale doctrine ''does not mean that conditions on future disposition of copies or phonorecords, imposed by a contract between their buyer and seller, would be unenforceable between the parties as a breach of contract.'' H.R. Rep. No. 1476, 94th Cong., 2d Sess. 79 (1976). There is substantial case law holding that copyright owners and their licensees may, by contract, generally agree to limitations on the licensee's conduct that may otherwise be permitted under copyright law, and that such contracts are not preempted by the Copyright Act. See, e.g., ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Trandes v. Guy F. Atkinson Co., 996 F.2d 655 (4th Cir.), cert. denied, 114 S.Ct. 443 (1993); National Car Rental Sys., Inc. v. Computer Assocs. Int'l, Inc., 991 F.2d 426 (8th Cir.), cert. denied, 114 S.Ct. 176 (1993); Harper & Row, Publishers v. Nation Enters., 723 F.2d 195 (2d Cir. 1983), rev'd on other grounds, 471 U.S. 539 (1985).
Page 150 PREV PAGE TOP OF DOC Segment 1 Of 2
Finally, Congress has amended section 109 twice to limit the first sale doctrine to allow copyright holders to exercise their distribution right as to copies of certain types of works in order to prevent rental of those copies. For all of these reasons it is clear that section 109 does not confer an absolute right on owners of copies to dispose of them in any manner. Congress was aware of a number of circumstances where the ability to dispose of copies would be limited and, in some circumstances, endorsed the ability of copyright owners to impose limitations.
2. You have stated that the issue of contract preemption is outside the scope of the Section 104 Report (p. 163). However, the mandate of Section 104, in part, was to ''evaluate . . . the effects of . . . the development of electronic commerce and associated technology on the operation of [the first sale doctrine].'' Contract provisions that attempt to override the rights of owners of lawful copies is an issue in electronic commerce and they do have an impact on the ability of those owners to exercise their first sale rights, particularly when the contract is enforced by access control technology. Can you explain why you declared contract preemption to be outside the scope of the interplay between electronic commerce and the first sale doctrine?
Electronic commerce comprehends the entire gamut of commercial issues as applied to the Internet. In instructing the Copyright Office to examine the effects of the development of electronic commerce on sections 109 and 117 of the Copyright Act, it can be safely assumed that Congress did not intend the Office to examine all of the effects of all of the commercial issues involved in electronic commerce on those two sections of the Act. In interpreting the scope of our mandate under section 104 of the DMCA, we focused on those issues that are unique or different in the online context. Contract preemption is not one of those issues. It is, rather, an issue that predates electronic commerce, and has as much importance in the off-line world as in the online world.
Page 151 PREV PAGE TOP OF DOC Segment 1 Of 2
Our interpretation is confirmed by the legislative history of section 104 of the DMCA, which is reviewed on pages 14-19 of the Report. The legislative history of section 104 indicates that the study was intended to cover a subset of the issues that were raised by the proposals in H.R. 3048 in the 105th Congress. Sections 4 and 6 of that bill proposed amendments to sections 109 and 117 of the Copyright Act, to create a digital first sale doctrine and a temporary copy exemption, respectively. Section 7 of that bill would have amended section 301(a) of the Act to preempt state-law enforcement of non-negotiable license terms that abrogate or restrict limitations on copyright owners exclusive rights. Section 109 of the DMCA directs the Office to examine sections 109 and 117 (corresponding to the proposals in sections 4 and 6 of H.R. 3048), but does not direct the Office to examine section 301(a). We interpret the failure to mention section 301(a) as a strong indication that the proposal on contract preemption in section 7 of H.R. 3048 is outside the scope of the study.
3. In light of the opening of MusicNet and the imminent launch of PressPlay and the online movie delivery services Movies.com and MovieFly, do you have a concern that access control technologies, such as tethering and time outs, that may be used by those services will have a negative effect on the operation of the first sale doctrine?
On page 76 of the Copyright Office Report we state that ''if the practice of tethering were to become widespread, it could have serious consequences for the operation of the first sale doctrine, although the ultimate effect on consumers of such a development remains unclear.''
At this point in time it is premature to conclude whether these services represent a trend toward use of access control technologies, such as tethering and time outs, in a way that would have a negative effect on the operation of the first sale doctrine. The services that you mention in your question are, by their own admission, the first, limited steps toward online delivery of these kinds of content. We are in a period of experimentation and change, and it is certain that a number of different types of services, offering content to consumers in a variety of formats, will come into (and go out of) existence in the coming years. What does appear certain to us, given the current environment, is that the availability of the existing services has not deprived consumers of the opportunity to obtain copies and phonorecords that are fully subject to the first sale doctrine.
Page 152 PREV PAGE TOP OF DOC Segment 1 Of 2
Mr. COBLE. And, Mr. Simon, I'll give my question to you subsequently as well.
This, I think, is the best sense for everyone. It frees you all.
We appreciate your being here and appreciate your testimony.
This includes the first oversight hearing on the Digital Millennium Copyright Act section 104 report.
The record will remain open for one week.
Thank you for your cooperation. The Committee stands adjourned.
[Whereupon, at 3:16 p.m., the Subcommittee was adjourned.]
Next Hearing Segment(2)
(Footnote 1 return)
Specifically, we agreed that ''under current law the process of making streams that would qualify for a license under Section 114(d)(2) of the Copyright Act does not involve the making of a DPD, and thus does not require a mechanical license.''
(Footnote 2 return)
Prior to making the agreement with RIAA, HFA entered into agreements with various Internet businesses—including MP3.com, Streamwaves.com, emusic.com, and many others—to issue mechanical licenses for diverse methods of on-line music delivery, including on-demand streaming, digital ''locker'' services, and downloads.
(Footnote 3 return)
See 17 U.S.C. §115(c)(3)(B)-(D).
(Footnote 4 return)
DMCA Section 104 Report of the Copyright Office (August 2001) at 139. Regrettably, this part of the Report was based on an incomplete record. Questions concerning the status of ''buffer'' copies made during streaming first arose during the comment period. No testimony was taken from economic or technical experts in the field of on-line music delivery.
(Footnote 5 return)
Report at 132.
(Footnote 6 return)
Report at xxiv.
(Footnote 7 return)
Report at 138 (quoting Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 566–67 (1985)).
(Footnote 8 return)
Report at 139 (quoting Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417, 449–50 (1984)).
(Footnote 9 return)
S. Rep. No. 104–128 at 362 (1995).
(Footnote 10 return)
Performers' and Performance Rights in Sound Recordings, 103d Cong. 4 (1993) (statement of Ralph Oman, Register of Copyrights, accompanied by Marybeth Peters, Policy Planning Adviser to the Register of Copyrights).
(Footnote 11 return)
141 Cong. Rec. H10, 098–108 at 10,103 (1995) (statement of Rep. Sensenbrenner).
(Footnote 12 return)
See http://www.totalrecorder.com. Although the Report acknowledges the concerns of music publishers that, as a consequence of software such as Total Recorder, ''streaming audio renders musical works vulnerable to digital copying'' (Report at 146 & n.438), it does not consider those concerns in its fair use analysis or in its recommendation that Congress enact a statutory exemption for ''buffer'' copies.
(Footnote 13 return)
17 U.S.C. §115(d) (emphasis added).
(Footnote 14 return)
17 U.S.C. §201(d)(2).
(Footnote 15 return)
141 Cong. Rec. S11957 (1995) (emphasis added).
(Footnote 16 return)
The Business Software Alliance (www.bsa.org) is the voice of the world's software and Internet industry before governments and with consumers in the international marketplace. Its members represent the fastest growing industry in the world. BSA educates computer users on software copyrights; advocates public policy that fosters innovation and expands trade opportunities; and fights software piracy. BSA members include Adobe, Apple Computer, Autodesk, Bentley Systems, CNC Software/Mastercam, Compaq, Dell, Entrust, IBM, Intel, Intuit, Macromedia, Microsoft, Network Associates, Novell, Sybase, Symantec, and UGS.