Testimony
Of
Tim Starback
Director of Marketing, Emigre, Inc.
On Behalf of the
Software & Information Industry Association
Before the
Subcommittee on Courts and Intellectual Property
House Judiciary Committee
Oversight HEARING on
Implementation of the NET Act and
Enforcement Against Internet Piracy
May 12, 1999
Introduction
Good afternoon, Mr. Chairman and Members of the Subcommittee, and thank you for inviting me to testify before you today on the sentencing guidelines in the No Electronic Theft (NET) Act and the "Copyright Damages Improvement Act of 1999," introduced by Congressman Rogan and Chairman Coble. My name is Tim Starback and I am a marketing executive at Emigre, Inc.
Emigre, Inc. is a digital type foundry, publisher, and distributor of graphic design-related software and printed materials based in Sacramento, California. Founded in 1984, Emigre was one of the first independent type foundries to focus on personal computer technology. Emigre holds exclusive license to over 200 original typeface designs, for which Emigre has won numerous awards, including the 1994 Chrysler Award for Innovation in Design and the 1996 Publish Magazine Impact Award. Emigre's full line of typefaces, ornaments, and illustrations is available in Type 1 PostScript and TrueType for both the Macintosh and PC.
I am here today to testify on behalf of the Software & Information Industry Association (SIIA)¾the principal trade association of the software code and information content industry. SIIA represents over 1,200 high-tech companies¾including Emigre¾that develop and market software and electronic content for business, education, consumers, the Internet, and entertainment. SIIA was formed on January 1, 1999, as a result of a merger between the Software Publishers Association (SPA) and the Information Industry Association (IIA). Its member companies account for 85 percent of U.S. revenue for packaged and online software. Hundreds of these companies, including Emigre, look to SIIA to protect their intellectual property rights around the world.
SIIA appreciates the opportunity to testify on the two very important issues that are the subject matter of this hearing today: (1) the sentencing guidelines for criminal copyright infringements under the NET Act, and (2) the "Copyright Damages Improvement Act of 1999." Both these matters address the very real problem of containing and deterring copyright infringement in the digital world. If we do not take the appropriate steps to address this problem expeditiously and meaningfully, copyright infringement¾of both electronic and traditional materials¾threatens to become an even bigger problem than it is today.
Emigre is not a large company. We have only five employees and our revenues are significantly less than comparable larger software companies. Like most small or mid-sized software companies, Emigre is hit hard when one of our creations is pirated or infringed. Unlike larger software companies that may have the resources to "cushion the blow" from piracy, these smaller companies are not as resilient because we often do not have the resources or facilities to "pick up the pieces" left behind after a software pirate does it dirty work.
Emigre spends a significant amount of money, time, and resources on research and development to create and develop new software programs and bring them to the marketplace where consumers can enjoy the fruits of our labors. As is the case with any company largely dependent on research and development and the creation of innovative products for its livelihood, some of the ideas--despite significant investment and effort--never make it past the drawing board. Still others may make it past our front door but for one reason or another do not become commercial successes. That means only a relatively small percentage of Emigre's software products ever can be considered commercial successes.
Because of the discrepancy between the high cost of our software innovations and the low number that become commercial successes, it is essential to the continued viability of small companies that we reinvest much of the "profit" made on successful products into the creation of new ones. It is only through reinvesting in ourselves that small companies can remain viable in the highly competitive computer software marketplace.
For Emigre and other companies like it that have successfully fought to carve out a niche in the industry, software pirates can single-handedly destroy the revenue stream essential for development of new software innovations, let alone any potential profit. The inevitable result is that these small companies often become economically unstable and often "go under"¾all because software pirates have decided to steal their software and make it available to others.
Software piracy committed in the United States is a severe problem. In 1997, piracy of business applications alone in the United States resulted in software publishers suffering losses of close to $3 billion in retail sales. Since 1994, business software pirated in the United States has cost publishers about $12 billion.
Piracy is committed in many ways: between friends and co-workers who want to share the latest products or by businesses seeking to reduce costs or through illegal rental, counterfeiting, and increasingly over the Internet. Regardless of how or where it occurs, piracy affects more than just the largest software publishers. Of SIIA's over 1,200 member companies, 60 percent have annual revenues of less than $2 million. Piracy in the United States and abroad seriously damages these companies' ability to compete successfully in the global marketplace and develop the next generation of cutting-edge software.
Without adequate copyright protection, companies¾large and small alike¾that create valuable software will find that others will copy and distribute their programs without permission and without remuneration, thereby decreasing the incentive and ability to continue creating and marketing their products. An essential element of adequate copyright protection is the availability of effective remedies to combat piracy. These remedies must be strong enough to remove any financial gain or other non-monetary incentive from the infringing act. They should also be sufficient to deter any future acts of infringement.
The two matters before this Subcommittee today bear significantly upon the adequacy of the sanctions for copyright infringement under the U.S. Copyright Act. With regard to the NET Act sentencing guidelines, the issue that brings us here today is how much monetary damage needs to be inflicted upon the copyright owner before criminal sanctions may be imposed. While this broad issue was raised and resolved when the NET Act was passed, it is necessary to revisit this matter because the sentencing guidelines presently in force do not reflect Congress' intent.
Steps should be taken immediately to change the sentencing guidelines of the NET Act to reflect Congressional intent namely that the phrase "total retail value" in section 506 of the Copyright Act be interpreted to mean "total infringed upon value" rather than "total infringing value." To effectuate this change, SIIA further urges that the Administration and Congress work together to appoint expeditiously all seven commissioners to the Sentencing Commission. At the present time, the Commission has no Commissioners.
SIIA also strongly supports the Copyright Damages Improvement Act. SIIA believes it is appropriate and necessary to amend section 504 of the Copyright Act to increase the level of statutory damages and to create a new category of damages applicable to repeat offenders. These amendments are warranted given inflation and changes in business practices and technology that have taken place over the last two decades.
SIIA also supports the provisions in the bill to clarify that an entity may not discharge damages owed for copyright infringement under bankruptcy proceedings where such infringement was willful.
NET Act Sentencing Guidelines
On December 17, 1997, President Clinton signed into law the No Electronic Theft (NET) Act. The legislation criminalizes the willful infringement of copyrighted works, including by electronic means, when the infringing party derives no direct financial benefit from the infringement.
The NET Act was a response to the holding in United States v. LaMacchia.(1) In LaMacchia, Mr. LaMacchia, an M.I.T. student, loaded copyrighted materials onto the Internet and invited others to download the material. Unlike most cyber-pirates, however, Mr. LaMacchia did not seek to profit from his wrongful activities, because he offered the materials to others free of charge. Under the criminal provisions of the Copyright Act (17 U.S.C. § 506) in effect at the time the case was decided, culpability for criminal copyright infringement could only be established when the infringer's acts were both "willful" and undertaken for profit. Because Mr. LaMacchia received no direct financial benefit from his wrongful activity, he was able to escape criminal liability through this loophole in the criminal provisions of the Copyright Act.
The Administration and Congress sought to close this loophole by enacting the NET Act. Under the NET Act, even absent any direct financial benefit, individuals risk criminal prosecution for willful, electronic infringement of copyrighted materials when they infringe a party's copyright by reproducing or distributing one or more copyrighted works (during any 180-day period) having a "total retail value of more than $1,000." See 17 U.S.C. § 506. The Act further provides for the imposition of penalties--namely imprisonment up to six years, and fines--depending upon the seriousness of the infringement and the damage to the copyright holder.
In addition to closing the loophole in the criminal provisions of the Copyright Act, the NET Act falls under the directive to the United States Sentencing Commission ("Commission") to implement sentencing guidelines "sufficiently stringent to deter such a crime," and "provide for consideration of the retail value and quantity of the items . . . ." See 28 U.S.C.A. § 994 NOTE.
An issue has arisen as to whether the phrase "retail value" in the NET Act directive is to be measured by the value of the infringed-upon item or the value of the infringed item, in the context of determining criminal culpability under section 506 of the Copyright Act. Unfortunately, this is not a mere issue of semantics. Rather the interpretation of this phrase has real world effects on the ability of copyright owners and law enforcement officials to pursue known pirates. It also adversely affects the extent of punishment that may be imposed against a known pirate under the guidelines.
To demonstrate why use of the "infringed value," in lieu of the "infringed-upon value," is problematic the following example is instructive. Suppose a software company has produced and marketed certain software having a retail value of $300 and that a person is selling pirated copies of the software for $2. In this example, the "infringed-upon value" of the software would be $300, but the value of the "infringed value" would be only $2.
At present, the sentencing guidelines for intellectual property offenses specify that the retail value is based on the value of the infringed item. In the context of the NET Act and the directive to deter such crimes, however, such an interpretation makes no sense--as the infringed value is often zero because the infringer is giving the copyrighted materials away for free, as was the case in LaMacchia.
Therefore, the sentencing guidelines' interpretation of the retail value as the infringed value has a substantive adverse affect on software producers because it allows those the statute was meant to punish to escape criminal culpability for their wrongful acts. This incorrect interpretation also creates a procedural impediment to law enforcement officials who attempt to prosecute software pirates. By requiring law enforcement officials to identify software that totals an infringed retail value of $1,000, the burden on law enforcement officials is increased exponentially.
For instance, in the example noted above, instead of identifying four (4) infringing programs, the law enforcement officials would need to identify over five hundred (500) infringing programs¾an increase of 12,500 percent¾in order to prosecute the offender.(2) Thus, this interpretation makes it more difficult for law enforcement officials to prosecute known pirates. Moreover, because the amount of any fine and the length of any sentence imposed on the pirate is determined by the total retail value involved in the infringement, interpreting the "total retail value" to mean the "total infringed value" also makes it more difficult for law enforcement officials to exact the appropriate punishment. Surely, these consequences were not intended by Congress or the Administration when the NET Act became law.
Unless the present sentencing guidelines are clarified, we will continue to handcuff law enforcement officials by not providing them with the appropriate tools to punish pirates for their crimes, and thus, fail to accomplish the NET Act's goal of deterring acts of infringement. The Commission has the authority to clarify this matter by amending its guidelines as necessary. See 28 U.S.C. § 991, et. seq. Currently, the Commission has vacancies for all seven of its voting Commissioners. Without any voting Commissioners, the Commission is unable to make any changes to the sentencing guidelines.
Thus, it is essential that the seven Commissioners be appointed as soon as possible. Until the Commissioners are in place the sentencing guidelines cannot be modified to reflect the true intent of the Congress and the Administration by clarifying that the phrase "retail value," as used in the NET Act directive, means "infringed-upon value."
Use of "infringed value" to determine criminal culpability is a very real problem in search of a very real solution¾quickly. The mere fact that software pirates are not making a profit off the software, as in the example above, does not change the illegal nature of the activity. Nor does the fact that the piracy may take place over the Internet rather than in a non-network environment change the illegal nature of the infraction.
SIIA urges the Commission to take immediate steps to change the sentencing guidelines of the NET Act to interpret the phrase "total retail value" as it appears in section 506 of the Copyright Act to mean "total infringed upon value" rather than "total infringing value." SIIA further requests that the Administration and Congress work together to expeditiously appoint Commissioners to the Sentencing Commission so that they may promptly effectuate this change in the sentencing guidelines.
II. The Copyright Damages Improvement Act of 1999
SIIA strongly supports the amendments proposed in the "Copyright Damages Improvement Act of 1999," introduced by Chairman Coble and Congressman Rogan and commends them for recognizing the need for such amendments and for taking the lead in this area of significant importance to the U.S. economy and America's software and information producers.
SIIA believes it is appropriate and necessary to amend the Copyright Act to increase the levels of statutory damages, and to create a new tier of damages applicable to repeat offenders. Such amendments are necessary for several reasons, most notably to account for inflation and other changes in business practices and technology that have taken place over the past decade.
Section 504(c) of the Copyright Act presently provides that a copyright owner may opt to recover statutory damages for infringement in lieu of actual damages and lost profits. The amount of statutory damages that may be awarded by a court range from $500 to $20,000 per copyrighted work infringed. When the infringer is able to establish that its infringement was innocent, however, the court may award statutory damages as low as $200 per work infringed. Conversely, when willful infringement is proven statutory damages may be awarded up to $100,000 per work infringed. These monetary values have remained unaltered since 1988.
The bill would amend the basic range of statutory damages that may be awarded from its existing range of $500 to $20,000 to a new range of $750 to $30,000. It also would increase the upper threshold for willful infringement from $100,000 to $150,000.
The bill would also create a new tier of statutory damages for repeat infringers. Specifically, the bill provides that when a copyright owner establishes that the defendant has engaged in infringement repeatedly or has engaged in a pattern or practice of infringement, the court may increase the statutory damage award to as high as $250,000 per work infringed.
Given that the levels of statutory damages have not been changed for over ten years and there have been numerous significant changes in the economy, business practices, and technology during that ten-year period, SIIA believes that the time is ripe to increase statutory damage levels. Doing so will ensure that the sanctions provided under U.S. copyright law continue to be sufficient to remove any financial gain from the infringement and to deter future infringements.
There can be no doubt that the United States is the world leader in the production and distribution of intellectual property, and in particular software and information products and services. This growth has been largely due to the high level of protection granted to American innovators and creators and the sanctions that may be imposed under the U.S. copyright law against those who violate those protections.
If the United States is to continue its leadership role in the area of intellectual property protection and products, it must regularly re-examine its laws to determine whether further improvements are needed and whether existing protections remain effective and vibrant. Now is such a time.
Over the past decade, systematic infringement of software in particular has become of increasing concern to businesses and software developers throughout the world. Recently, the problem has grown much worse. The proliferation of computers and computer networks and the convergence of computer and communications technology has made the illegal reproduction and distribution of copyrighted software much easier to accomplish and more difficult to police.
Software piracy can be committed in a wide variety of ways, including software counterfeiting,(3) hard disk loading,(4) unauthorized renting,(5) uploading and downloading,(6) softlifting,(7) and OEM unbundling.(8) The numerous ways in which software piracy occurs in conjunction with the ease of duplication and the high quality of pirated software presents a problem unique to the software industry. Unlike other products subject to illegal copying, such as audio and videotapes, there is little or no degradation in the quality of software from copy to copy. Even worse, a program that reflects unprecedented technology, years of effort and millions of development dollars can be duplicated in minutes with the touch of a button. Any PC user can duplicate a product priced from $20 to $20,000 for no more than the cost of a few blank diskettes or at no cost, and that user can make one, a dozen or a thousand perfect copies.
These changes in technology and business practices, as well as the need to account for inflation that has taken place over the past ten years, necessitates an increase in the level of statutory damages. In addition, increasing statutory damages as provided in the bill should aid the U.S. government in its attempts to convince countries throughout the world to improve the sanctions for copyright infringement provided for under their copyright laws.
These factors also support a new tier of statutory damages for repeat offenders. The potential to obtain increased damages against repeat infringers is hardly a novel concept. This concept is codified in many of the copyright laws of our trading partners. Increased damages are also available under U.S. patent and trademark laws. Thus, adding a new tier of statutory damages applicable to repeat offenders will merely make U.S. copyright law consistent with other U.S. intellectual property laws and the copyright laws of other countries. It also expressly recognizes that there are certain individuals in the world that need the threat of stronger punishment to be dissuaded from engaging in software piracy. This is especially true in the electronic world we live in today, where anyone can become a software pirate with the push of a button or click of a mouse. For these reasons, SIIA supports the adjustments to statutory damages in the Copyright Damages Improvement Act.
SIIA also supports the bill's amendment to section 504(c) clarifying that "willful" copyright infringement is considered to be "willful and malicious injury" under the Bankruptcy Code. The addition of the text proposed by the bill will clarify that copyright infringements that are deemed to be willful may not be discharged in bankruptcy proceedings.
SIIA believes that this amendment is necessary to close yet another loophole used by cunning pirates to avoid having to pay civil damages for copyright infringement. Unfortunately, some courts have allowed willful infringers to avoid sanctions merely by filing for bankruptcy. By amending the copyright law as proposed, this "bankruptcy loophole" will be closed.
III. Conclusions
SIIA strongly supports efforts to immediately change the sentencing guidelines of the NET Act to interpret the phrase "total retail value" in section 506 of the Copyright Act be interpreted to mean "total infringed upon value" rather than "total infringing value" and urges that the Administration and Congress to expeditiously appoint Commissioners to the Sentencing Commission, so that the Commission can effectuate this change. The Association and its members would welcome the opportunity to work with the Commission in changing the sentencing guidelines in accordance with our recommendations.
SIIA also strongly supports amendments to section 504 of the Copyright Act to increase the level of statutory damages and to create a new category of damages applicable to repeat offenders. These amendments are warranted given inflation and changes in business practices and technology that have taken place over the last decade. SIIA also supports the provisions in the bill to add language to section 504(c) clarifying that an entity may not discharge damages owed for copyright infringement under bankruptcy proceedings where such infringement was willful.
Mr. Chairman, the Association and its members are committed to working with the Subcommittee and your colleagues to see that this important bill becomes law. Thank you again for the opportunity to appear before the Subcommittee. I will be glad to answer any questions.
0 871 F. Supp. 535 (D. Mass. 1994).
0 As stated above, only those who infringements reach a total retail value of $1,000 may be prosecuted.
0 Software counterfeiting is the illegal duplication and sale of copyrighted software in a form designed to make it appear to be legitimate.
0 Hard disk loading occurs when one installs unauthorized copies of software onto the hard disks of personal computers, often as an incentive for the end user to buy the hardware from that particular hardware dealer.
0 Unauthorized renting is the unauthorized selling of software for temporary use, like you would a video.
0 Uploading and downloading refers to the making of unauthorized copies of copyrighted software available to end users connected by modem to on-line service providers and/or the Internet.
0 Softlifting occurs when someone purchases a single licensed copy of software and then loads it onto several computers, contrary to the license terms. For example, the sharing software with friends, co-workers and others.
0 OEM unbundling is the selling of stand-alone software that was intended to be sold packaged with specific accompanying hardware.