Testimony of
BATUR OKTAY
CORPORATE COUNSEL
ADOBE SYSTEMS, INCORPORATED
on behalf of the
BUSINESS SOFTWARE ALLIANCE
before the
SUBCOMMITTEE ON COURTS AND INTELLECTUAL PROPERTY
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES
Washington, D.C.
on
Implementation of the NET Act and Internet Piracy
May 12, 1999
Introduction
Good afternoon, Mr. Chairman and members of the Subcommittee. My name is Batur Oktay, and I am Corporate Counsel at Adobe Systems, Incorporated. I am pleased to have the opportunity to testify today on behalf of the Business Software Alliance ("BSA"). Please allow me at the outset, Mr. Chairman, to express my appreciation to you and the other members of the Subcommittee for holding this hearing to examine the implementation of the No Electronic Theft ("NET") Act and the problem of Internet piracy. Internet piracy is an issue of particular importance to Adobe and the other BSA member companies as it represents a real threat to U.S. leadership in software development. As you know, Mr. Chairman, BSA, represented by Adobe and Microsoft, appeared before the Subcommittee in September of 1997 supporting enactment of the NET Act. We applaud you for doing so. Now, as I am sure you would agree, it is critical that the law be enforced.
I would like to begin with a few words about Adobe and the BSA. Founded in 1982, Adobe helped launch the desktop publishing revolution. Today, the company offers a broad range of application software, software development tools, and programming-language products for creating and distributing visually rich communication materials across all media. Adobe's revenue is approaching one billion dollars and the company employs nearly 3,000 people worldwide. Adobe is headquartered in San Jose, California, has a strong presence in Washington State, as well as employees in Massachusetts, Michigan, Texas and ten other states.
The Business Software Alliance represents leading U.S. software publishers and, as such, the fastest-growing industry in the world. BSA works in over 65 countries educating computer users about intellectual property rights; advocating a public policy agenda that fosters innovation and expands trade opportunities; and fighting software piracy. BSA worldwide members include Adobe, Attachmate, Autodesk, Bentley Systems, Corel, Lotus Development, Macromedia, Microsoft, Network Associates, Novell, Symantec, and Visio. Additional members of BSA's Policy Council include Apple Computer, Compaq, IBM, Intel, Intuit, and Sybase.
The Software Industry - An American Success Story
The U.S. software industry is one of the great success stories in modern business history. Not only has the industry emerged as one of the fastest-growing segments of the U.S. economy, but it has fueled an information revolution. Today, consumers enjoy unprecedented access to information that is changing the way we live and work.
To illustrate our industry's phenomenal growth, I would like to share a few statistics with you. Between 1980 and 1992, the U.S. domestic economy grew at an average rate of less than 3% a year. During the same period, the U.S. computing and software industry averaged 28% annual growth. From 1980 through 1996, the U.S. economy grew at an average of slightly over 3% a year; the software industry grew at an average annual rate of 12.5% during the same period.
These numbers are impressive - but what do they mean in real terms? In addition to bringing about productivity gains to businesses and unparalleled access to information for consumers, these numbers mean two things: more jobs and more tax revenue.
Between 1988 and 1994, the U.S. software industry doubled its employment in the United States so that by 1996 - the most recent year for which figures are available - 620,000 Americans were directly employed by our industry. This number does not take into account the hundreds of thousands of jobs created by our industry's economic "multiplier" effect - the ripple of job creation sent through the economy when our employees purchase new homes, buy second cars, or send their children to college.
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These domestic figures are impressive, but they are just part of the picture. Significantly, the software industry has achieved tremendous success in the international marketplace as well, and our industry's future is inextricably linked to our success abroad. Seventy percent of the world software revenue comes from U.S. products, and exports account for approximately half of the U.S. industry's output. As the global market for software continues to grow, international revenue will play an even more important role in our industry's continuing success. Today, international sales account for over 50% of Adobe's revenues, a figure which is typical for BSA's member companies.
Impact of Software Piracy on Industry and U.S. Economy
Mr. Chairman, as you and the other members of the Subcommittee know, the success of the U.S. software industry is due in large part to this country's historical commitment to strong intellectual property protection. It is no coincidence that the United States - the world's leading advocate of intellectual property rights - is also home of the world's largest software industry. The software industry's growth and its continued contribution to our economy is directly dependent on our ability as an industry and a nation to reduce software piracy.
Software piracy is, unfortunately, all too pervasive. Research by the firm, International Planning and Research ("IPR"), estimates that of all the software installed onto computers worldwide in 1997, 40% was illegal. The market value of this stolen software was $11.4 billion - up $200 million from the year before. In the United States, IPR estimates the piracy rate at 27%, or $6.5 billion a year.
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While our industry is still experiencing significant growth, piracy continues to take a toll on our industry's productivity and output. A multi-year study conducted by Price Waterhouse Coopers ("PWC") on behalf of BSA, Contributions of the Packaged Software Industry to the Global Economy, a copy of which I will submit for the hearing record, quantifies the economic impact of our industry in the United States and worldwide and shows that software piracy translates directly into lost jobs, lost wages, reduced tax revenues, and diminished investment in new product development.
The PWC study documents the industry's tremendous growth rate which, by 2005, means the software industry:
will double its employment to over two million jobs; and
more than double its tax payments to the government.
But as impressive as these statistics are, they are only half of the picture. The other half consists of the enormous job and revenue losses suffered as a result of piracy. The PWC study estimates that the elimination of software theft in the United States by 2005 would:
create over 216,000 additional jobs in the United States and;
generate an additional $1.6 billion in additional federal and state corporate and personal income tax revenues in the United States.
Who bears the brunt of these losses? Not just the software industry, but everyone. Reduced employment and lower government revenues manifest themselves throughout the economy. Moreover, software piracy has an additional, corrosive impact. Piracy lowers software developers' incentives to create new products because it raises the cost of doing business and, in so doing, makes it less likely that they can recoup their investment. After all, the vast majority of software products - which require years of
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development and great amounts of capital to launch - never see the light of day. The greater the costs of doing business (and hence, the higher the barriers to entry into the industry), the harder it is for small and start-up software businesses to emerge.
Internet Piracy
Over the years, the software industry has been forced to contend with piracy in many different forms, including end-user copying, hard disk-loading, CD-ROM production and counterfeiting. Internet piracy, however, has emerged as a new and virulent strain that threatens to make all other forms of piracy appear almost quaint by comparison. Some of the same features that make the Internet a tool of unparalleled economic promise contribute to the problem software companies face in protecting their works from infringement.
First, the number of computer users with access to pirated software on the Internet is exponentially larger than the number that can acquire pirated software through more traditional channels. Contrast, for example, the number of people who can crowd around a card table at a flea market with the number that can simultaneously access and download software from the Internet. In the first case, physical space, geographic location and hours of operation limit the traffic in pirated wares. On the Internet, websites reach a border less marketplace, 24 hours a day, seven days a week, 365 days a year.
Second, ease of access to pirate websites and the like is increasing every day. There was a time when a person had to be a relatively sophisticated computer user to find pirated software on the Internet and an extremely patient person to download it. Now, with advances in the technology, everything -- including downloading from graphical pirate websites -- is all "point and click." And with ever-faster transmission speeds,
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pirated copies of popular software programs can be downloaded in a matter of minutes.
Third, it is simply more difficult to identify the persons responsible for creating and operating pirate websites and otherwise trafficking in pirated software on the Internet. They often exploit the privacy and anonymity that the Internet provides. Faceless transactions replace hand-to-hand exchanges. In short, it is often necessary to employ intensive efforts and advanced investigative techniques to track down Internet pirates and collect the evidence necessary to bring them to justice.
Today, the Internet is literally glutted with auction and software web sites that offer infringing copies of software programs to the tens of millions of Internet users worldwide. Adobe Photoshop, one of our flagship products, seems particularly popular with the new breed of cyberpirates. For example, log files for one pirate website investigated by BSA revealed that Photoshop had been unlawfully downloaded in excess of one hundred thousand times during roughly a six month period of time. Photoshop, by the way, retails for approximately $600. Even if one assumes that not everyone who downloaded the program would have paid for a legal copy, it is obvious that Adobe suffered a significant revenue loss from the activities of this one website alone. There are, I am sorry to say, thousands -- if not hundreds of thousands -- of pirate websites operating as we speak.
Of course, software publishers aren't the only victims of piracy on the Internet. Consumers that order or download infringing programs risk acquiring software that is defective or that carries with it a virus that damages their computer and/or vital data.
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Let me briefly demonstrate how easily it is to find pirated software on the Internet.
Implementation of NET Act
Mr. Chairman, Congress foresaw this situation developing when in 1997 it passed the Net Act. We remain grateful for your efforts and those of Representatives Goodlatte and Cannon and the other members of the Subcommittee for taking that important action. In passing the Net Act, Congress clearly recognized that criminal prosecution of persons using -- or perhaps more accurately misusing -- the Internet to engage in large-scale copyright infringement is an essential element of any effective strategy for combating software piracy. Many of the people who engage in Internet piracy are impecunious, unconcerned by the prospect of facing a civil judgment and therefore unresponsive to industry efforts to affect their behavior through civil actions. For this reason, Congress sought to bring to bear the deterrence that only criminal prosecution could provide. Unfortunately, since 1997, Internet piracy has predictably worsened while prosecutions under the Act have yet to materialize.
The Net Act was enacted to ensure that persons who illegally traffic in copyrighted works do not escape criminal prosecution simply because they fail to derive a pecuniary benefit from their actions. U.S. v. LaMacchia, 871 F.Supp. 535 (D. Mass. 1994). "Non-profit" pirates continue to operate -- and actually proliferate -- on the Internet. The Net Act also sought to make criminal prosecutions more likely and more effective by directing that the U.S. Sentencing Commission consider reforming the guidelines that apply to criminal copyright infringement so as to increase their deterrent effect.
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Since the passage of the Net Act, and especially over the past eight months, BSA has worked closely with the Department of Justice and the Federal Bureau of Investigation in providing referrals, technical assistance and training to help generate and ready cases for prosecution. We are grateful for the response we have received, particularly from the Computer Crime and Intellectual Property Section and the FBI's Washington Field Office. We are aware of a few prosecutions brought against individuals who use the Internet to advertise pirated software for sale. These cases, however, have been few and far between. Also, with the exception of the Cyberstrike initiate launched some time ago, there has been seemingly little attention paid to whether these cases are being publicized. It is, in our judgment, absolutely necessary that law enforcement activity in this area be broadly communicated so that the public receives the message that Internet piracy can lead to criminal prosecution.
We are disappointed, in any event, that despite much good work on the part of both the private sector and the law enforcement agencies, there have been no Net Act prosecutions. Left unprosecuted, these types of websites -- which are brazen about their own illegality -- send the message that Internet pirates can operate with impunity, that there is no effective enforcement, that intellectual property protection on the Internet is unavailable. More domestic enforcement activity would also better position the U.S. to exercise leadership in advocating stronger protections for intellectual property overseas.
BSA stands ready to be of assistance in any way we can. To the extent more training would be of value, BSA stands ready to provide it. To the extent more or better referrals is the answer, we will redouble our efforts. We are fully committed to supporting the agents and prosecutors who handle these cases in any appropriate manner.
BSA recognizes that the failure of the U.S. Sentencing Commission to act within the timeline set by Congress under the Net Act and the lack of commissioners has
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directly contributed to the lack of prosecutions. We understand that Congress directed the Commission to undertake guideline reform in part to help generate prosecutions. Until new commissioners are appointed to the Commission, no action can be taken on promulgating sentencing guidelines for enforcement of the NET Act. The BSA has been working with Representatives Goodlatte and McCollum to address this situation. We are hopeful that the Administration will soon send a slate of Commissioner nominations to the Senate for confirmation in the very near future.
Proposed Amendments to the Copyright Act
Additionally, BSA would like to commend Representative Rogan for his efforts to update the Copyright Act in the enforcement area. Representative Rogan's bill recognizes the critical need to ensure that the Copyright Act is an effective enforcement tool. To be that, it must be kept up-to-date. The changes to the Copyright Act proposed by Representative Rogan would (1) update the current level of statutory damages in the Copyright Act; (2) provide an effective deterrent for persons who engage in a pattern or practice of infringement; and (3) clarify that for bankruptcy purposes a judgment for willful copyright infringement may not be discharged.
The current level of statutory damages in the Copyright Act has not been increased in over a decade - since 1988 - and is overdue. The establishment of a tier of statutory damages for repeat infringers has precedent in both the Satellite Home Viewer Act, 17 U.S.C. Sec. 119(a)(5)(b), and the Digital Millennium Copyright Act, 17 U.S.C. Sec. 1203(c) (4).
With respect to the clarification of statutory damages for purposes of bankruptcy proceedings, we believe it is important that it be made clear that this amendment does not change the well-established case law which defines the level of behavior necessary to establish willful copyright infringement.
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We also understand the Subcommittee is considering legislation to streamline the process of perfecting security interests in intellectual property. The BSA supports these efforts.
Conclusion
Mr. Chairman, members of the Subcommittee, we appreciate you joining us in protecting American's creativity and ingenuity. The U.S. leads the world in software development and sales. To carry this success into the new information age, we must continue to protect creativity. We commend the members of the Subcommittee for being leaders and appreciate having the opportunity to appear before you today. BSA and Adobe look forward to continuing to work with you in our ongoing efforts to eradicate piracy. Thank you.
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