Prepared Testimony of
Mark Bohannon
General Counsel and Senior Vice President for Public Policy
Software & Information Industry Association (SIIA)
Before the
Subcommittee on Courts, the Internet and Intellectual Property
of the Committee on the Judiciary
U.S. House of Representatives
H.R. 2344, THE “INTELLECTUAL PROPERTY
PROTECTION RESTORATION ACT OF 2003”
June 17, 2003
Summary
· States’ claims of sovereign immunity are having a detrimental effect on the enforcement of our nation’s intellectual property laws.
· The Supreme Court’s decision to grant states sovereign immunity means that, because there is no risk of monetary damages, there is no effective deterrent to prevent states from infringing either intentionally or unintentionally copyrighted works.
· The impact on our members involves real cases with meaningful financial consequences. Our testimony offers some very graphic examples that show that the loophole created by the Supreme Court is becoming a shield behind which states are increasingly hiding.
· The result is a fundamental inequity that exists between states and private parties. While states are immune from damages for infringement, they are free to sue private sector organizations for violations of copyright.
· The inequity is magnified by the fact that states are immune even when they act as commercial players in the market. Increasingly, state agencies and state-chartered bodies are competing with private sector service and product providers and companies will face competition from the states without effective tools to protect their intellectual property investments.
·We are pleased to testify today in strong support of H.R. 2344.Statement Text
Mr. Chairman, Ranking Member Berman and members of the Subcommittee, I appreciate the opportunity to testify before you today on the detrimental effects that states’ claims of sovereign immunity are having on the effective enforcement of our nation’s intellectual property laws. We also welcome the opportunity to comment on your bill, H.R. 2344, the “Intellectual Property Protection Restoration Act of 2003.”
I am Mark Bohannon, General Counsel and Senior Vice President, Public Policy for the Software & Information Industry Association. With over 600 member companies, SIIA is the principal trade association of the software code and information content industry. Our members are industry leaders in the development and marketing of software and electronic content for business, education, consumers and the Internet. SIIA's members are software companies, ebusinesses, and information service companies, as well as many electronic commerce companies. Our membership consists of some of the largest and oldest technology enterprises in the world as well as many smaller and newer companies.
They are united in their concern that the Supreme Court in its Florida Prepaid decisions, and the lower court decisions that have followed, have created a major loophole in our laws that is threatening the effective enforcement of our intellectual property laws. These judicial actions directly and adversely affect our members’ ability to protect their patents, trademarks and copyrights against state entities and to protect themselves against state entities competing in the same marketplace.
The Supreme Court's decision has put SIIA and its members in an untenable situation: because there is no risk of monetary damage, there is no effective deterrent to prevent states from infringing either intentionally or unintentionally copyrighted software, movies, sound recordings, literary works and other copyrighted products. If and when state agencies and entities are discovered to be infringing, the best we can hope for is to get them to stop - but only through the costly and time-consuming effort of going to court to get an injunction. Injunctions, while appropriate in some situations, simply do not satisfy the need for effective deterrence and resolution of damages.
The impact on our members is not a constitutional abstraction. It involves real cases with meaningful financial consequences. During the six years leading up to issuance of the Florida Prepaid decision in 1999, we identified at least 77 matters involving infringements by State entities. Of these 77 matters, approximately 50% involved State institutions of higher learning. The other 50% consisted of State hospitals, bureaus, public service commissions, and other instrumentalities.
SIIA was extremely conservative in determining which matters involved "state entities" as a basis for our study. If there was any doubt whether an entity was a state entity, it was excluded from the scope. Furthermore, we only included in our study obvious and flagrant instances of piracy. We are able to make this determination largely because after SIIA learns of a possible infringement, an audit of the infringing entity’s computers is completed. The audit helps us conclusively determine what software exists on an entity’s computers and how much of that software is licensed and how much is illegal. Moreover, the SIIA study covers only those matters reported to SIIA. We have no doubt that a far greater number of State infringements than we are made aware of go undetected and unreported.
In the past year, some very graphic experiences show that the loophole created by the Supreme Court is becoming a shield behind which states are increasingly hiding. The most dramatic example of this occurred in February of last year.
Through a confidential source, SIIA was alerted to the piracy of hundreds of computer software programs on computers owned by a state hospital center in Baltimore, Maryland. With the hospital’s approval and full cooperation, their computers were audited to determine the extent of the piracy. The audit revealed several hundred thousand dollars worth of unlicensed software, which the hospital acknowledged.
It is SIIA’s policy to make every reasonable effort to reach a settlement in these types of cases and to pursue litigation only as last resort when an organization refuses to cooperate. Consistent with our approach, SIIA and the state agency hospital then attempted to work out a settlement. The settlement involved a monetary sum to be paid ranging from a quarter of a million dollars to three quarters of a million dollars, with SIIA and the hospital negotiating in good faith toward a reasonable settlement. Although the actual amount of monetary damages at issue in this case might be disputed, it is evident that the amount was large and directly related to the amount of software piracy taking place in their facilities. Also, as is the case with all SIIA settlement agreements, the hospital would also have to legitimately license the software.
On Monday, February 25, 2002, after months of good faith negotiations, SIIA’s anti-piracy department received a letter from the Maryland state agency hospital asserting their 11th Amendment immunity and referencing the Florida Prepaid and Rodriguez cases. They refused to pay any monetary damages. Thus, while the state agency hospital all but admitted wrong doing and appeared to be willing to settle the case for hundreds of thousands of dollars in damages, once they discovered this giant loophole in the law they took full advantage of it. In addition, due to the shield of sovereign immunity we also have no way to ensure that the hospital has adequately licensed legitimate software or that the agency has put the proper policies and procedures in place to ensure that it does not continue, intentionally or unintentionally, to engage in software piracy.
In another sovereign immunity case, we were pursuing software piracy by a community college in New Hampshire that amounted to approximately $50,000 in damages. The college eventually turned to the Attorney General of New Hampshire who interceded and terminated negotiations by declaring sovereign immunity and refusing to continue any further discussions. In its letter to us, the Attorney General threatened that if we sought an injunction against the state entity - an action that we are legally entitled to take - that they would “discontinue all courses offering training to students in the use of the [] software.” Even more disturbing, the Attorney General also warned us that if we sought an injunction against the community college, they would seek sanctions against us under Rule 11 of the Federal Rules of Civil Procedure for allegedly making a frivolous claim.
While, in our view, these two cases are especially outrageous, they represent only the tip of the iceberg. There are more cases like it - and they increasingly reflect a trend where state entities are simply turning matters over to their state attorneys general who respond formulaically and hide behind the shield of immunity. SIIA is currently involved in several other cases in which the state has already informed us orally that it intends to assert its sovereign immunity. Quite clearly, this is a problem that is getting worse, not better.
These cases, and others not documented here, illustrate the fundamental imbalance of the Court’s sovereign immunity decisions. There is no incentive for the state entity to comply with federal copyright law or to adopt and implement policies and procedures to be compliant with the law. It is precisely this kind of inequity that Congress attempted to remedy when it passed the Copyright Remedy Clarification Act (CRCA) in 1990, and that we are asking the Committee to remedy.
The result is a fundamental inequity that exists between states and private parties. While states are immune to damages for infringing the intellectual property rights of others, they remain free to sue private sector (both for-profit and non-profit) organizations under federal intellectual property laws for alleged infringements of their patents, copyrights and trademarks and collect damages.
This inequity is magnified by the fact that, in many cases, state entities receive immunity even when the action involves commercial activity in the marketplace. The examples from the lead decisions on sovereign immunity involving claims of intellectual property are illustrative: In Florida Prepaid, the case involved use of a financing methodology patent by a state-chartered agency. The state agency competed directly with private sector vendors in offering college savings programs. In Arte Publico v Chavez, the high-profile Fifth Circuit opinion applying Florida Prepaid to copyright, the claim of infringement was against the Arte Publico Press, a for-profit arm of the state-charted University of Houston that sells to the public. Increasingly, states are undertaking initiatives that make agencies and state-chartered bodies active commercial players competing with private sector service and product providers. The Supreme Court’s grant of immunity to the states’ means that more companies will face competition from the states without effective tools to protect their intellectual property investments.
In this context, it is important to recognize that states are today major owners of intellectual property and have benefited from federal law and policy to achieve this result. For example, as a result of the laws passed by Congress, states are free to file patents and trademarks and, unlike the federal government, are permitted to assert copyright. States are increasingly seeing their intellectual property as strategic assets and utilizing sophisticated licensing management strategies to commercialize their portfolio. Moreover, federal technology policy has for more than two decades ensured that states, including Universities, are entitled to take title to inventions arising out of the billions of federal research and development dollars that are invested through grants, contracts and financial assistance in health, science, agriculture and defense.
Sovereign immunity has not only caused problems for those SIIA members who compete in the marketplace with products and services provided by state entities, but also for those SIIA members who sell, license or co-create their products and services to or with state entities. For example, in order to obviate the sovereign immunity issue from raising its ugly head in a dispute involving a contract entered into by a company and a state entity, some SIIA members attempt to include binding arbitration clauses in their contracts. However, state entities will not agree to such clauses, instead insisting that the court venue must be in their own state. While the state entities involved in these contractual negotiations rarely give as their justification the need to play the sovereign immunity trump card in any possible intellectual property or other dispute, from our vantage point this is clearly a leading factor in these state entities aversion to such clauses. Our members have run into other difficulties during contract negotiations with state entities relating to intellectual property which they believe to be attributable to the great disparity in negotiating power resulting from a state’s ability to act first and claim sovereign immunity later.
SIIA fully supports a legislative solution that eliminates the inherent unfairness of the present situation that permits states to claim monetary damages when their property rights are trampled on, but exempts states from being held responsible when they violate the intellectual property rights of others. We urge the prompt consideration and passage of legislation that meets the constitutional standards set by the Supreme Court and also effectively protects rights holders against State usurpation of their copyrights. We believe that the bill introduced by Chairman Smith, Ranking Member Berman and Mr. Coble - H.R. 2344 -- accomplishes these goals. Therefore, I am pleased to testify today in strong support of H.R. 2344.
We recognize and acknowledge the complex issues involved in the 11th Amendment and its impact in a wide variety of contexts. We do believe that there is a framework that can pass constitutional scrutiny that will fix the current imbalance and produce a more solid, predictable relationship with the states. Ultimately, our ability to achieve such a framework depends on the willingness of the states to negotiate in good faith toward a compromise that is both constitutional and effective. To date, the states have been disinclined to engage in such an exercise because they have no incentive to do so. After all, any legislation in this area would benefit private intellectual property owners and would erode the sovereign immunity that states now enjoy. While we appreciate that the states might not find this appealing, they cannot continue to have it both ways where they benefit from the protection of their intellectual property while being immune to damages when they usurp others’.
We hope that this dynamic will change and that states will see the need to address the injustices that exist in the present system. Certainly, we believe that today’s hearing and the recent introduction of H.R. 2344 (and a similar bill introduced by Senator Leahy, S. 1191) are very positive steps in that direction. We look forward to working with the Congress and the states to achieve a legislative solution that eliminates the unfairness we discuss today.
Thank you again for all your work on the intellectual property issues that have arisen before your Subcommittee and thank you in advance for your commitment and work to address our concerns in this area. I will be happy to answer any questions that the Subcommittee may have.