[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
ANTI-COUNTERFEITING AMENDMENTS OF 2003
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
H.R. 3632
__________
FEBRUARY 12, 2004
__________
Serial No. 61
__________
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
CHRIS CANNON, Utah SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
SPENCER BACHUS, Alabama MAXINE WATERS, California
MARK GREEN, Wisconsin MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida WILLIAM D. DELAHUNT, Massachusetts
MELISSA A. HART, Pennsylvania ROBERT WEXLER, Florida
MIKE PENCE, Indiana TAMMY BALDWIN, Wisconsin
J. RANDY FORBES, Virginia ANTHONY D. WEINER, New York
JOHN R. CARTER, Texas
Blaine Merritt, Chief Counsel
David Whitney, Counsel
Melissa L. McDonald, Full Committee Counsel
Alec French, Minority Counsel
C O N T E N T S
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FEBRUARY 12, 2004
OPENING STATEMENT
Page
The Honorable Lamar Smith, a Representative in Congress From the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 1
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................ 2
WITNESSES
Mr. Richard LaMagna, Senior Manager, Worldwide Investigations,
Microsoft
Oral Testimony................................................. 5
Prepared Statement............................................. 6
Mr. Emery Simon, Counselor, Business Software Alliance (BSA)
Oral Testimony................................................. 11
Prepared Statement............................................. 12
Mr. Brad Buckles, Executive Vice President, Anti-Piracy,
Recording Industry Association of America, Inc. (RIAA)
Oral Testimony................................................. 13
Prepared Statement............................................. 15
Mr. David Green, Vice President and Counsel, Technology and New
Media, Motion Picture Association of America (MPAA)
Oral Testimony................................................. 20
Prepared Statement............................................. 21
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress From the State of Virginia.......... 31
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress From the State of Michigan, and
Ranking Member, Committee on the Judiciary..................... 31
Prepared Statement of the Honorable Howard L. Berman, a
Representative in Congress From the State of California........ 32
ANTI-COUNTERFEITING
AMENDMENTS OF 2003
----------
THURSDAY, FEBRUARY 12, 2004
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2141, Rayburn House Office Building, Hon. Lamar Smith
(Chair of the Subcommittee) presiding.
Mr. Smith. The Subcommittee on Courts, the Internet, and
Intellectual Property will come to order. Today's hearing is on
H.R. 3632, the ``Anti-counterfeiting Amendments of 2003.''
Let me say at the outset we have a sparse attendance today.
That is not necessarily due to the a lack of interest in the
subject. It is due primarily to the fact that we finished votes
for the week yesterday and we are not in session today and,
frankly, we are fortunate to have Mr. Berman here.
But, nevertheless, we will establish a record today. This
is a hearing; and it will lead, we hope, to a constructive
markup in weeks to come. So everything we do here today is
important to all of us, either now or in the future.
I am going to recognize both of us for opening statements.
Then we will proceed to introducing the witnesses and having
questions.
Counterfeiting is deceit, the functional equivalent of a
lie. It results in lost profit, lost jobs, and lost tax revenue
on a scale that threatens otherwise vibrant industries.
Software piracy remains a serious problem throughout the world,
accounting for 25 percent of the software used in the United
States and 40 percent of the software used worldwide.
The software industry loses $11 billion each year from
counterfeiting and other forms of software piracy. These
revenue losses translate into lost jobs and a hit on the
American economy. Because of the opportunities for high profits
and the low risk of prosecution, software counterfeiting has
become part of a web of international organized crime.
Although crime groups based in Asia produce the largest
quantity of counterfeits, manufacturing and distribution
centers exist throughout the world. In fact, California is a
major entry and assembly point for counterfeit software and CD-
ROMs and components.
For many years, software publishers have attempted to
thwart counterfeiting activity by developing physical
authentication components to help consumers and law enforcement
agencies distinguish between genuine software and sophisticated
counterfeits. For example, one of our witnesses today
represents a company, Microsoft, that packages its product with
a certificate of authenticity, or COA, that incorporates
special inks, holograms, and microtexts.
As these physical authentication components increase in
sophistication, counterfeiters find it increasingly difficult
to create counterfeits that look like the genuine components.
To bypass this problem, counterfeiters combine genuine
components with counterfeit CD-ROMs and packaging, the goal
being to deceive the consumer. The genuine components are
obtained through theft or other illicit means and then sold as
separate commodities through the Internet and other
distribution channels.
Genuine COAs and other physical authentication components
are in high demand because they significantly increase the
marketability and selling price of counterfeit software. Even
though stand-alone COAs have no intrinsic value or legitimate
use, they sell for as much as $80 apiece because of their value
to counterfeit operations.
Since neither State nor Federal law specifically prohibits
trafficking in genuine authentication components, prosecutors
in several recent counterfeiting raids in fact have refused to
even pursue prosecution.
Federal law does not expressly prohibit such activities, so
genuine COAs and other physical authentication components are
widely sold throughout the United States with impunity,
facilitating the sale of counterfeit software and frustrating
efforts to combat an increasingly important link in the
counterfeit supply chain.
H.R. 3632 closes this loophole and empowers Federal
authorities to prosecute counterfeiting activity on a greater
scale with better result.
We have a distinguished panel today that can speak to the
need for this legislation and I hope also to receive shortly
the views of the Department of Justice as well.
That concludes my opening statement; and the gentleman from
California, Mr. Berman, is recognized for his opening
statement.
Mr. Berman. Thank you very much, Mr. Chairman.
The sheer drama, the theater of a hearing on the Anti-
counterfeiting Amendments of 2003 caused me to stay over and
attend today's hearing.
In last Congress, similar bills were introduced in both the
House and the Senate, but the Subcommittee has never had a
chance to analyze this issue. So I am looking forward to
hearing from our witnesses.
Each day thieves around the world steal millions of dollars
worth of American intellectual property from the rightful
owner. American innovation is the cornerstone of the economy.
The copyright industry alone employed over 8 million Americans
in 2001. Software piracy alone has cost the U.S. economy
thousands of jobs and drains almost $11 billion each year.
According to the International Anticounterfeiting
Coalition, U.S. Customs seized more than $98 million in
counterfeit and pirated goods in 2002, a 58 percent increase
over 2001. To exacerbate the problem, counterfeiters of
software music, CDs and motion pictures are no longer limiting
themselves to pirating the actual goods. They are now tampering
with a component of the goods, the authentication features
which are used to ensure the genuineness of the product. This
is what the bill is designed to address.
Just 2 weeks ago, Microsoft filed a suit in Federal Court
alleging the theft of counterfeit software and related items.
The claim alleges that the defendants distributed counterfeit
certificate of authenticity labels.
Federal law currently provides a remedy for this type of
counterfeiting. However, what it does not do is address the gap
in Federal law that fails to address trafficking in genuine
labels which are then used, attached--connected with
counterfeit or pirated goods.
Last year, the Microsoft witness who is with us today
testified before this Subcommittee about the global threat of
software counterfeiting. In his written testimony he described
the cheap, fake software sold on street corners which is
typically marketed as the genuine article to unsuspecting
customers who would never knowingly purchase counterfeit goods
but love to get genuine goods at 10 percent of what they would
otherwise cost them.
To create the look of genuine packaged software,
counterfeiters use state-of-the-art technology to create near-
perfect copies of CD-ROMs as well as the packaging
documentation and other components.
For many years, Microsoft and I am sure many other
companies have worked to outpace counterfeiting technology by
developing physical features that help consumers and law
enforcement agencies distinguish legitimate software from
sophisticated counterfeits. However, as software makers have
worked hard to ensure protection of their intellectual
property, the counterfeiters have worked harder and smarter.
Microsoft has include a certificate of authenticity that
incorporates special inks, holograms, and microtext in its
software. So far, the counterfeiters have found it impossible
to replicate the technology. But as the technology used to
protect intellectual property has gotten more sophisticated, so
have the counterfeiters. Because physical anticounterfeiting
features are increasingly difficult to reproduce,
counterfeiters are now combining pirated CD-ROMs and packaging
them with the genuine authentication components obtained
through fraud or theft.
Through a gap in the law, we have actually created a
separate market for merely the authentication components. The
bill expands the scope of counterfeit rules to include other
physical authentication components such as certificates. In
addition, it addresses the situation where genuine certificates
are distributed not in connection with the product of the
copyright owner or where the label is altered to falsify the
number of authorized copies.
The bill also authorizes the forfeiture of equipment used
to manufacture these labels, instead of only a pirated product,
and provides for civil remedies for violation of the act.
While this bill confronts the concept of trafficking
physical components parts, I would be interested in hearing
from our witnesses about interpretation or expansion of the
bill to include digital components.
In an age where the technology is rapidly developing, it
seems to me there is a need to address the evolution of digital
authentication features and the potential for copying or
counterfeiting them as well. The legal dichotomy of physical
and digital should be a distinction without a difference.
Whether a physical or digital feature is counterfeited is
equally problematic.
I don't intend for this to become another digital
management debate. I do, however, wish to address punishing and
preventing counterfeiting. Counterfeiters do not only prey on
the copyright owners. They prey on the consumers who have
certain expectations when buying what appears to be a genuine
product.
So if the Chairman is so inclined at some point, I look
forward to working with him on these issues before the markup.
Thank you, Mr. Chairman; and I yield back.
Mr. Smith. Thank you, Mr. Berman.
Let me introduce our witnesses today.
The first witness is Rich LaMagna, who is the Senior
Manager of Worldwide Investigations at Microsoft, where he
manages global antipiracy investigations. He provides policy
and operational guidance to members of Microsoft's worldwide
anticounterfeiting team. He received a BA from Gettysburg
College and a Masters of Arts from Georgetown University. He is
a graduate of the Foreign Service Institute and is fluent in
Cantonese, Mandarin and French. We will not ask you to
demonstrate any of those today.
The next witness is Emery Simon, who is a policy counselor
to the Business Software Alliance. BSA members include the
leading American software and computer companies in the
business of developing creative software solutions for the
workplace, school, and the home. Mr. Simon earned a law degree
from Georgetown University, a masters degree in international
affairs from Johns Hopkins University and a bachelors degree
from Queens College.
Our next witness is Brad Buckles, who is Executive Vice
President of the Recording Industry Association of America. Mr.
Buckles heads RIAA's antipiracy unit, which includes
investigators throughout the United States who work with law
enforcement agencies to combat piracy. Mr. Buckle retired from
his post as Director of the U.S. Bureau of Alcohol Tobacco,
Firearms and Explosives after 30 years of service. Before
joining the ATF, Mr. Buckles earned his bachelors degree from
the University of Wyoming and a law degree from Washburn
University.
Our last witness is David Green, who joined the Motion
Picture Association of America last year as vice president and
counsel of technology and new media. Mr. Green focuses on legal
issues related to the Internet and other digital electronic
distribution systems. Mr. Green joined MPAA after 16 years at
the U.S. Department of Justice. He graduated from Oberlin
College and received his law degree from the University of
Pennsylvania Law School.
Welcome to you all. We have your complete statements; and,
without objection, they will be made a part of the record. Even
though we are not in a huge rush today, I would like to ask you
to limit your testimony to 5 minutes; and then we will follow
up with questions.
We will begin with you, Mr. LaMagna.
STATEMENT OF RICHARD LAMAGNA, SENIOR MANAGER, WORLDWIDE
INVESTIGATIONS, MICROSOFT
Mr. LaMagna. Thank you, Mr. Chairman. It is a pleasure to
be here again.
Mr. Chairman, Members of the Subcommittee, thank you for
the opportunity to testify on this important and much-needed
anticounterfeiting legislation.
My name is Richard LaMagna, Senior Manager of Worldwide
Investigations at Microsoft. I joined Microsoft in 1999 after a
28-year career as a Special Agent with the DEA and the FBI
investigating international drug trafficking organizations.
Mr. Chairman, Microsoft supports and commends you for
introducing H.R. 3632, the Anti-counterfeiting Amendments Act
of 2003, legislation that would prohibit an increasingly
pervasive activity that directly facilitates counterfeit
software sales. Microsoft views this legislation as the single
most important step that Congress can take to fight software
counterfeiting in this country.
Software counterfeiting is a particularly pernicious and
widespread form of criminal piracy that defrauds American
consumers and funds a wide array of organized criminal
enterprises. As a founding member of the Business Software
Alliance, Microsoft has for many years worked closely with the
BSA and law enforcement to halt the manufacture and sale of
counterfeit software. These efforts have led to annual seizures
of almost $2 billion in counterfeit Microsoft products.
Software counterfeiters go to great lengths to make pirated
software look genuine in an effort to deceive the consumer and
maximize illicit products. Here is an example of counterfeit
Office 97, a version of Microsoft's most popular product suite.
Even the most sophisticated consumer would have great
difficulty in distinguishing this counterfeit package from the
genuine item.
Software counterfeiters use state-of-the-art technology to
counterfeit CD-ROMs and packaging that bears all the hallmarks
of the genuine products. For many years, Microsoft has worked
to develop physical security components that help consumers and
law enforcement agencies distinguish legitimate software from
sophisticated counterfeits, much in the same way the U.S.
Government uses physical security features to authenticate its
paper currency. For example, Microsoft's certificate of
authenticity, known as the COA, incorporates several
proprietary technologies, including special inks and microtext.
Because these physical security components are increasingly
difficult to reproduce, counterfeiters are now combining pirate
CD-ROMs and packaging with genuine components obtained through
theft of fraud.
Mr. LaMagna. For the past few years more than a half a
million certificates of authenticity, which we call COAs, with
a market value of over $50 million have been stolen from
manufacturing facilities in the U.S. and Europe. The stolen
COAs are then sold to counterfeiters through a variety of
brokers and distribution networks, including over the Internet.
Currently Federal law does not provide adequate remedies to
prevent trafficking in genuine fiscal security components even
though there is no legitimate business purpose for this
activity. The persons who traffic in COAs and other physical
security components know full well that the components have no
intrinsic value or use other than to facilitate the sale of
counterfeit software. Nevertheless, because these brokers
carefully remain a few steps removed from the thefts or the
counterfeit sales, prosecutors find it impossible to take any
legal action even though the components will unquestionably
fall into the hands of counterfeiters.
H.R. 3632 would amend section 2318 of title 18 to prohibit
trafficking in genuine physical components used by Microsoft
and other copyright owners to verify that a copyrighted work is
legitimate and not counterfeit. With this narrowly-tailored
amendment to section 2318, Federal law enforcement and
copyright owners will have the tools needed to prevent
trafficking in genuine physical security components.
Microsoft looks forward to working with the Chairman and
the Members of this Subcommittee to obtain passage of this
important anticounterfeiting legislation. It is imperative that
our laws keep pace with developments in software
counterfeiting, particularly given the involvement of
international organized crime in the counterfeiting trade. Like
drug traffickers, software counterfeiters have global networks
of well-financed and sophisticated criminal groups capable of
producing and distributing billions of dollars worth of
counterfeit software each year.
Federal and local law enforcement in California, with the
help of Microsoft's investigative team, seized one shipment of
software worth over $100 million. The raid disrupted a major
international counterfeiting operation financed by criminal
groups in Asia.
The anticounterfeiting amendments will help combat the
growing threat of international counterfeiting crimes by
ensuring that U.S. laws address all aspects of counterfeiting
activities.
In closing, Microsoft strongly supports this important
legislation and urges this Subcommittee to pursue its swift
enactment.
Thank you, Mr. Chairman.
[The prepared statement of Mr. LaMagna follows:]
Prepared Statement of Richard C. LaMagna
Mr. Chairman, Members of the Subcommittee, thank you for the
opportunity to testify on this important and much-needed anti-
counterfeiting legislation. My name is Rich LaMagna, and I am Senior
Manager of Worldwide Investigations at Microsoft Corporation. I joined
Microsoft in 1999 after a 28-year career as a Special Agent with the
DEA and the FBI investigating international drug trafficking
organizations.
Mr. Chairman--Microsoft commends you for your leadership in
introducing the Anticounterfeiting Amendments of 2003, legislation that
would prohibit a narrowly-defined but pervasive category of activities
that directly facilitate counterfeit software sales. Microsoft views
this legislation as the single most important step that Congress can
take to fight software counterfeiting in this country.
i. the scope and impact of software counterfeiting
A. LEconomic Contribution of the Commercial Software Industry
Over the past 25 years, computer software has fundamentally
reshaped every facet of our lives and helped secure this country's
economic leadership. By the late 1990s, the software industry employed
more than 800,000 U.S. workers with aggregate wages of $55.6 billion.
By the year 2008, the software industry is expected to employ more than
1.3 million workers in the United States alone.
Annually, the software industry contributes more than $28 billion
in tax revenues to federal and state governments, benefiting a host of
national and community programs. This tax contribution is expected to
reach $50 billion by the year 2008. Also significant is the industry's
contribution to the U.S. balance of payments. While the U.S. trade
deficit reached new record highs in 2000, the U.S. software industry
generated a trade surplus of more than $20 billion. The software
industry's growing trade surplus means more jobs and tax revenues for
the U.S. economy.
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 for intellectual property rights--is also home to the
world's largest software industry. The software industry's continued
growth and economic contributions are directly dependent on our ability
as an industry and a nation to eliminate software theft.
B. LEconomic Impact of Software Piracy and Counterfeiting
For almost fifteen years, the software industry has battled against
software theft, recognizing that widespread piracy threatens the very
existence of our industry. Despite these efforts, software piracy
remains a serious problem throughout the world, accounting for one-
quarter of the software used in the United States, and 40 percent of
the software used worldwide. In parts of Asia and the former Soviet
Republic, piracy rates approach 90 percent, virtually eliminating sales
of legitimate software.
The software industry loses $13 billion each year from
counterfeiting and other forms of software piracy. Annual seizures of
counterfeit Microsoft products exceed $1.7 billion. These revenue
losses directly translate into lost jobs and opportunities for the U.S.
economy. By the late 1990's, software piracy had cost the U.S. economy
more than 109,000 jobs and almost 1 billion in tax revenues; by 2008,
piracy-related losses will nearly double, accounting for 175,000 lost
jobs and $1.6 billion in lost tax revenues.
ii. trends in software counterfeiting operations
Unlike the cheap fakes sold on street corners, counterfeit software
is typically marketed as genuine product to unsuspecting consumers who
would never knowingly purchase illegal products. To create the look of
genuine packaged software, counterfeiters use state-of-the-art
technology to create near-perfect copies of Microsoft CD-ROMs,
packaging, documentation and other components. Because counterfeiters
bear none of the R&D, marketing or support costs that determine the
price of legitimate software, these criminal operations are able to
reap enormous profits from the sale of counterfeits.
A. LTrafficking in Physical Anti-counterfeiting Features
For many years, Microsoft has worked to outpace counterfeiting
technology by developing physical product features that help consumers
and law enforcement agencies distinguish legitimate software from
sophisticated counterfeits, much in the same way the US Government
authenticates its paper currency. For example, Microsoft packaging has
for many years included a certificate of authenticity (``COA'') that
incorporates special inks, holograms and micro-text. Microsoft has
invested several millions of dollars to develop an edge-to-edge
hologram that covers the entire surface of the CD-ROM. (Examples of
these features are included in Attachment A to this testimony.) The
edge-to-edge hologram involves a highly sophisticated, proprietary
technology that is etched into recent versions of Microsoft Office.
Because these physical anti-counterfeiting features are
increasingly difficult to reproduce, counterfeiters are now combining
pirate CD-ROMs and packaging with genuine components obtained through
theft or fraud. In recent years, more than 100 robberies of authorized
replicators in the US and Europe have netted 540,000 Microsoft COAs
with an estimated value of $50 million. According to our sources,
genuine COAs, end user manuals, end user license agreements and other
physical components are in high demand among counterfeiters because
they significantly increase the marketability and selling price of
counterfeit software.
So far, counterfeiters have found it impossible to replicate the
edge-to-edge technology. As an alternative, they have developed
holographic stickers that, when attached to the CD-ROM, closely
resemble the look of the edge-to-edge hologram. Recent versions of
these fake stickers found in Asia are of such high quality, few
consumers would be able to detect the counterfeit.
B. Anticounterfeiting Amendments of 2003
Currently, federal law does not provide adequate civil and criminal
remedies to prevent trafficking in genuine physical security
components, even though there is no legitimate business purpose for
this activity. The persons who traffic in COAs and other physical
security components know fully well that the components have no
intrinsic value or use other than to facilitate the sale of counterfeit
software. Nevertheless, because these brokers are a few steps removed
from the component thefts or the counterfeit sales, prosecutors find it
impossible to take any legal action, even though the components will
unquestionably fall into the hands of counterfeiters.
H.R. 3632 would amend Section 2318 of Title 18 to prohibit
trafficking in genuine physical security components used by Microsoft
and other copyright owners to verify that a copyrighted work is
legitimate and not counterfeit. With this narrowly-tailored amendment
to Section 2318, federal law enforcement and copyright owners will have
the tools needed to prevent trafficking in genuine physical security
components. Microsoft looks forward to working with the Chairman and
the Members of this Subcommittee to obtain passage of this important
anti-counterfeiting legislation.
iii. involvement of organized crime in software counterfeiting
operations
Because of the enormous opportunities for profits and the low risk
of prosecution or significant punishment, software counterfeiting has
become part of an intricate web of international organized crime.
Although Asian crime groups produce the largest quantity of
sophisticated counterfeits, manufacturing and distribution centers
exist throughout the world. In fact, California is a major entry and
assembly point for counterfeit software CD-ROMs and components.
The federal government explicitly acknowledged the growing
involvement of organized crime when it created a new ``Intellectual
Property Rights Initiative'' in 1999 to strengthen enforcement against
intellectual property crime. At a congressional hearing, former Customs
Commissioner Ray Kelly stated that--
Our investigations have shown that organized criminal groups
are heavily involved in trademark counterfeiting and copyright
piracy. They often use the proceeds obtained from these illicit
activities to finance other, more violent crimes. These groups
have operated with relative impunity. They have little fear of
being caught--for good reason. If apprehended, they face
minimal punishment. We must make them pay a heavier price.
Global counterfeiting flourishes because counterfeiters face little
risk of prosecution or meaningful punishment. In the United States,
Microsoft and other intellectual property owners have worked closely
with Congress and federal authorities to ensure that counterfeiting
laws, enforcement, and penalties keep pace with counterfeiting crimes.
In recent years, these efforts have led to important reforms, including
improved sentencing guidelines for intellectual property crime,
increased appropriations for IP-related law enforcement activities, and
the creation of the FBI Cyber Division.
In addition, Microsoft invests millions of dollars each year to
assist law enforcement in investigating criminal counterfeiting
operations. Microsoft's worldwide anti-piracy team consists of more
than 100 attorneys, forensic experts, and in-house and outside
investigators, who work closely with law enforcement agencies in this
country and throughout the world to investigate and prosecute
international networks of criminal counterfeiters. In the United
States, Microsoft's investigative team has worked closely with federal
and local law enforcement to bring about several important
counterfeiting seizures, many of which involved organized crime:
LIn February 2000, the FBI and LA Sheriff's Office led
12 raids against suspected criminal counterfeiters, resulting
in the arrest of 12 individuals. Law enforcement officials
seized several thousand counterfeit copies of Microsoft
software, worth more than $5 million. The persons arrested were
part of a well-organized international counterfeiting
operation, with ties to Asian organized crime.
LIn November 2001, the LA Sheriff's office, aided by
U.S. Customs, the Secret Service and Microsoft investigators,
executed one of the most significant raid and seizure of
Microsoft software and components in U.S. history, with an
estimated retail value of $100 million. The raid interrupted a
major counterfeit software distribution pipeline that moved
containers of counterfeit software and other illegal components
from Taiwan through the Port of Los Angeles. Taiwanese
authorities later confirmed that the counterfeiting operation
was financed by Asian criminal groups.
LIn April 2002, the FBI and several other federal and
local law enforcement agencies dismantled a highly organized
international counterfeiting ring, with assembly and
distribution arms in Northern California, Washington and Oregon
and direct ties to Asian criminal groups. The undercover
investigation, known as ``Operation Cyberstorm,'' led to the
arrest of 28 individuals and the seizure of approximately $100
million in counterfeit software and components. The
counterfeiters were also involved in money laundering and
credit card fraud.
These cases demonstrate the critical importance of close,
multilateral cooperation between industry and law enforcement. For
example, in the 2001 raid described above, Taiwanese authorities worked
closely with US law enforcement and Microsoft to investigate and
prosecute the Asian leaders of the operation. Unfortunately, few
foreign law enforcement agencies share this commitment to anti-
counterfeiting enforcement; and, as a result, the foreign criminals
that finance and control worldwide counterfeiting operations are rarely
prosecuted or punished.
In closing, we face a daunting challenge. How can we successfully
fight a well-financed, global network of counterfeiting rings, when the
criminals who control these operations bear little risk of prosecution
and meaningful punishment outside the United States? Clearly, we cannot
succeed, until all governments recognize that software counterfeiting
is a serious crime that demands the same level of enforcement and
cooperation that we bring to other global organized crime activities.
We encourage federal law enforcement agencies to join together in
sending a clear, unified, and unequivocal message to foreign
authorities that software counterfeiting is a major crime priority that
demands tough penalties, a sustained commitment of law enforcement
resources, and multilateral cooperation among national authorities and
industry.
Moreover, we urge the Subcommittee to support the
Anticounterfeiting Amendments of 2003. This important legislation will
help combat the growing threat of international counterfeiting crimes
by ensuring that U.S. laws address all aspects of counterfeiting
activities.
Thank you.
Mr. Smith. Thank you, Mr. LaMagna.
Mr. Simon?
STATEMENT OF EMERY SIMON, COUNSELOR, BUSINESS SOFTWARE ALLIANCE
(BSA)
Mr. Simon. Good morning, Mr. Chairman, Mr. Smith and
Members of the Subcommittee. Thank you for the opportunity to
appear before you today on a matter of great importance to the
software industry, the widespread distribution and sale of
counterfeit software to American consumer. I am Emery Simon and
I appear today on behalf of the BSA.
Let me say at the outset clearly, BSA strongly support
enactment of H.R. 3632 as introduced, and commends you, Mr.
Chairman, for having introduced this bill. Its enactment will
provide software companies with an important tool to combat
piracy and counterfeiting by closing a deficiency in the law,
namely, the illicit use of legitimate authentication means to
mislead the public into thinking they are acquiring genuine
software products when they are not. This practice hurts
consumers as well as the reputation of BSA member companies. I
think both of those are points worth emphasizing. The consumer
thinks that he or she is getting a decent good product, when in
fact they are not.
The bill addresses a specific and serious problem. By
itself it will not stop piracy and counterfeiting, but it is an
important step and it should be enacted promptly. The fact that
it does not address all aspects of the piracy problem, for
example, online piracy, which is not the goal of this bill,
should not be an excuse for postponing its enactment.
BSA represent the world's leading developers of software,
hardware and Internet technologies. For more than 15 years BSA
member companies have worked to reduce piracy rates through a
combination of education, enforcement and law reform. Today
BSA's enforcement program extends to more than 65 countries
around the world including the United States. Because computer
software is a high-value good, it represents the greatest share
of pirated American intellectual property on a dollar basis.
Congressional attention to the piracy problem has been
invaluable in meeting the serious challenges faced by copyright
owners in the past. Enactment of the Anti-counterfeiting
Amendments of 2003 will help publishers of software and other
copyrighted works assure their important contributions to the
economy can continue.
I would like to provide the Subcommittee with a sense of
the scope and severity of the software piracy and
counterfeiting problem. Software industry growth, fueled by the
ever-increasing demand for software has become a powerful
economic force in the United States, contributing each year
hundreds of thousands of skilled, high-paid jobs, tens of
billions of dollars in tax revenue. Globally, four out of every
ten, 40 percent, of the software programs are pirated.
According to an economic study BSA recently commissioned,
reducing the 40 percent rate by just 10 percent to 30 percent
will result in dramatic good things, the creation of 1.5
million jobs, increased economic growth of about $400 billion
we estimate, and additional tax receipts at the Federal, State
and local level of $64 billion.
In recent years we've seen a dramatic increase in the
amount of counterfeiting software imported into the United
States from overseas, especially from Asia. Moreover,
international counterfeiting rings, many of which have ties to
organized crime, as you mentioned, Mr. Chairman, are
significantly more sophisticated in their methods of producing
look-alike software. Unlike the obvious fakes sold on street
corners, counterfeit software is marketed as genuine product to
unsuspecting consumers. To create the look of genuine packaged
software counterfeiters attach the industry's state-of-the-art
physical security features to counterfeit software and
packaging to create near-perfect copies capable of deceiving
even the most sophisticated American consumer. The genuine
physical security features, for example, certificate of
authenticity, enter the marketplace through theft primarily or
fraud, and are sold to counterfeiters through a variety of
middlemen.
BSA applauds the recent efforts by the Federal law
enforcement agencies to devote more resources to fighting
counterfeiting. The aggressive pursuit of international
organized criminal counterfeiting rings is extremely important,
but it's also important to pursue these at home, and this
legislation will help greatly.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Simon follows:]
Prepared Statement of Emery Simon
Good morning. Chairman Smith and Members of the Subcommittee, thank
you for the opportunity to appear before you today to testify on a
matter of great concern to the software industry--the widespread
distribution and sale of counterfeit software to American consumers. My
name is Emery Simon and I appear before you today on behalf of the
Business Software Alliance.\1\
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\1\ BSA members include Adobe, Apple, Autodesk, Avid, Bentley
Systems, Borland, Cisco Systems, CNC Software/Mastercam, HP, IBM,
Intel, Intuit, Internet Security Systems, Macromedia, Microsoft,
Network Associates, PeopleSoft, RSA Security, SolidWorks, Sybase,
Symantec and VERITAS Software.
---------------------------------------------------------------------------
BSA represents the world's leading developers of software,
hardware, and Internet technologies. For more than fifteen years, BSA
member companies have worked to reduce crippling piracy rates through a
combination of education, enforcement and law reform. Today, BSA's
enforcement program extends to more than 65 countries around the world,
including the United States. Because computer software is a high-value
good, it represents the greatest share of pirated American intellectual
property on a dollar basis.
Congressional attention to the piracy problem has been invaluable
in meeting the serious challenges faced by copyright owners in the
past. Enactment of the Chairman's bill, the ``Anti-counterfeiting
Amendments of 2003,'' will help ensure that publishers of software and
other copyrighted works can continue to make important contributions to
the U.S. economy.
Today I would like to give the Subcommittee some statistics that
provide a sense of the scope and severity of the software piracy and
counterfeiting problem. Software industry growth, fueled by the ever-
increasing demand for software, has become a powerful economic force in
the United States, contributing each year hundreds of thousands of
skilled, highly paid jobs and tens of billions of dollars in tax
revenues. Globally, 4 out of 10 software programs--40%--are pirated.
According to an economic impact study by IDC commissioned by BSA in
2003, reducing the 40% worldwide piracy rate by 10 percentage points to
30%, will result in the creation of an additional 1.5 million jobs,
increased economic growth of $400 billion and an additional $64 billion
in new taxes to help governments fund public programs like education,
health care and law enforcement.
Software theft, including counterfeiting, causes severe economic
harm, threatening creative industries while inhibiting the development
of e-commerce. Losses due to software piracy and counterfeiting are on
the rise, estimated at nearly $11 billion in 2001, and rising to $13
billion in 2002. The economic impact of software piracy extends far
beyond the confines of the software industry, harming economies
worldwide in the form of greatly diminished tax revenues, a substantial
number of lost jobs, and losses in education, infrastructure, and
research and development.
In 1998 alone, software piracy cost the U.S. economy 109,000 jobs,
$4.5 billion in wages and nearly $991 million in tax revenues. By 2008,
those numbers will rise to 175,000 lost jobs, over $7 billion in lost
wages and more than $1 billion in lost tax revenues. Better management
of this problem could produce 1 million additional jobs and nearly $25
billion in additional government revenues worldwide by next year.
In recent years, we have seen a dramatic increase in the amount of
counterfeit software imported into the U.S. from overseas, especially
from Asia. Moreover, international counterfeiting rings, many of which
have ties to organized crime groups, are significantly more
sophisticated in their methods of producing ``look alike'' software and
components. Unlike the obvious fakes sold on street corners,
counterfeit software is marketed as genuine product to unsuspecting
consumers. To create the look of genuine packaged software,
counterfeiters attach the industry's state-of-the-art physical security
features to counterfeit software and packaging to create near-perfect
copies capable of deceiving even the most sophisticated American
consumer. These genuine physical security features--for example,
certificates of authenticity--enter the marketplace through theft or
fraud and are sold to counterfeiters through a variety of middlemen.
Software counterfeiting is a most profitable crime. And yet the
sale of physical security features to facilitate widespread
counterfeiting is not a criminal offense.
BSA applauds the recent efforts by federal law enforcement agencies
to devote more resources to fighting counterfeiting. The aggressive
pursuit of international, organized criminal counterfeiting rings is
extremely important to our members.
At the same time, U.S. anti-counterfeiting laws need to keep pace
with the evolving nature of the software counterfeiting problem, so
that our law enforcement agencies have the tools necessary to
investigate and prosecute important links in the counterfeit supply
chain. The Chairman's bill, the ``Anti-counterfeiting Amendments of
2003'' would provide law enforcement with an important weapon in the
battle against counterfeiting in this country.
Mr. Smith. Thank you, Mr. Simon.
Mr. Buckles.
STATEMENT OF BRAD BUCKLES, EXECUTIVE VICE PRESIDENT, ANTI-
PIRACY, RECORDING INDUSTRY ASSOCIATION OF AMERICA, INC. (RIAA)
Mr. Buckles. Mr. Chairman, Members of the Subcommittee, on
behalf of the Recording Industry Association of America, I want
to thank you for inviting me to appear before the Subcommittee
today on this important piece of legislation.
In my capacity as the head of the Anti-Piracy Unit at RIAA,
I'm charged with leading the recording music industry's efforts
to combat the distribution of illegal recorded music in U.S.
commerce. The RIAA represents over 500 sound recording
companies that are responsible for manufacturing over 90
percent of all of the legitimate sound recordings released
every year in the United States.
Major and independent record companies release
approximately 30,000 new albums in the United States and abroad
each year. The artists who create the music are supported by a
cast of thousands of people who work behind the scenes as
producers, sound technicians, studio musicians, as well as
artist development, marketing, promotion and distribution
people. They are further supported by even more people who work
in pressing plants, warehouses and record stores.
We therefore cannot afford to allow such an important
component of our economy to fall prey to the ongoing piracy
that we are currently seeing. The creative industries
represented at this table collectively make an enormous
contribution to the vitality of the American economy, but
collectively we also face an attack by piracy to a degree never
before witnessed.
At the RIAA we've seen an exploding growth in piracy over
the past 5 years, and we estimate that hundreds of millions of
dollars are lost every year to music piracy in the domestic
physical market alone. This number is increasing every year and
does not include the estimated losses from piracy on the
Internet through unauthorized peer-to-peer services.
As you recognized, Mr. Chairman, the extreme large profit
margins and comparatively lesser likelihood of criminal
prosecutions has not gone unnoticed by criminal enterprises. We
commend the Subcommittee to being the first to investigate this
problem last session with a hearing dedicated to the
involvement of crime syndicate and terrorist groups with CD and
DVD piracy, which provides quick and untraceable cash to carry
out nefarious activities.
Some music piracy takes the form of rather undisguised
pirated product. They use readily-available computer CD-burning
technology, employ comparatively crude graphics in packaging,
and make very little effort to appear authentic. Other forms of
piracy, however, are far more insidious. They involve more
sophisticated efforts to actually counterfeit the music CD
product as a whole. This form of piracy employs a more
expensive CD pressing technology, high-quality graphics and
packaging, and make the final product appear to look like the
real one. They can command a much higher price. If done well,
they can pass for legitimate. In these cases, not only is the
music industry harmed, but consumers are deceived into
believing that they too are buying the real thing.
In an effort to combat the financial hemorrhaging being
experienced, content owners have begun employing various
authentication components to confirm the legitimacy of their
products. These take the form of holograms or certificates of
authenticity that help the consumer and law enforcement
distinguish between legitimate and illegal products.
Unfortunately, these efforts are beginning to break down as
criminals are becoming increasingly adept at finding ways to
pirate these authentication components. Whether through the
theft of legitimately created authentication components, or
through the illegal manufacture of look-alike of authentication
components, the illegal use of these materials is causing the
sound recording industry harm in several ways. It undermines
are ability to present--to use these authentication components
as symbols of authenticity. They cause further damage to
copyright and trademark owners whose intellectual property is
affiliated with illegal product. And third, they defraud loyal
music consumers who believe they are purchasing the real thing
and supporting their favorite artists.
For these reasons the RIAA strongly supports the Anti-
counterfeiting Amendments of 2003, and we believe that
penalties against trafficking and genuine authentication
components that will be used on pirated physical products is a
good start in addressing the pirate product line that is
affecting a large portion of American industries.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Buckles follows:]
Prepared Statement of Brad Buckles
Mr. Chairman, Members of the Subcommittee, on behalf of the
Recording Industry Association of America (``RIAA''), I want to thank
you for inviting me to appear before the Subcommittee on an important
piece of legislation before you today. My name is Brad Buckles, and I
am Executive Vice President for Anti-Piracy at the RIAA.
In my capacity of Director of the Anti-Piracy efforts of the
recorded music industry, I oversee a professional staff of full-time
employees that represent the ``front lines'' in our daily battle
against piracy. We have ten field offices positioned throughout the
country, staffed by a variety of full-time investigators, attorneys,
analysts, and administrative support whose sole function is to
investigate illegal recorded music distribution and stem the ever-
increasing flow of piratical product into the stream of American
commerce. Augmenting our full-time staff is a sizeable network of part-
time ``stringers'' and paid informants who provide indispensable input
into our investigative efforts.
Prior to joining the RIAA, I served as Director of the Bureau of
Alcohol, Tobacco, Firearms and Explosives (``ATF'') in the Department
of Justice. My years with ATF exposed me to a variety of organized
criminal elements undertaking sophisticated and well-orchestrated
activities that endangered the American public and cheated U.S.
citizens by ravaging the marketplace. In my new capacity with private
industry, I can confidently say that the threats facing the U.S.
creative community--while somewhat different in nature than those that
I witnessed at ATF--are equally threatening to the bedrock of our
American institutions, our American culture, and our American economy.
the value of music in america
The RIAA represents over 500 sound recording companies that are
responsible for manufacturing over 90% of all legitimate sound
recordings released every year in the United States. According to some
independent estimates, major and independent record companies release
approximately 30,000 new albums in the U.S. and abroad every year.
Together these companies and hundreds of others like them strive to
bring new exciting music to the American consumers and benefit the
American economy. While many people think of famous artists when they
think of the music industry, most artists barely make a living by
selling moderate numbers of albums combined with other sources of
income. Artists are supported by a cast of thousands of people who work
behind the scenes as producers, sound technicians, and studio
musicians, as well as artist development, marketing, promotion and
distribution people. They are supported by people who work at the
pressing plants, the warehouses, and the record stores. The
intellectual property industries in this country (including the movie
industry and the software industry represented here today) represent
the largest segment of the American economy--at approximately 5% of the
gross domestic product. In recent years, it has represented the sector
of the economy growing at the fastest rate, and providing the greatest
percentage increase in well-paying jobs. The creative industries
demonstrate one area where American exports are booming, and in many
countries epitomizes their experience of what it means to ``be
American.''
We therefore cannot afford to allow such an important component of
our economy fall prey to the ongoing piracy we are currently seeing.
the piracy problem in america
The creative industries, although a substantial contributor to the
vitality of the American economy, are currently under attack by piracy
to a degree not witnessed previously. Through the advent of digital
technology, individuals can now carry out perfect duplication on a mass
scale previously reserved to sophisticated manufacturing operations
that required the investment of millions of dollars. In recent years,
the technology surrounding computers and CD burning, combined with the
plummeting cost of the related raw materials (such as blank CD-Rs), has
created an environment where substantial CD counterfeiting operations
can be funded for under $10,000. And the same digital technology allows
for perfect serial copying on a large scale without the degradation of
quality that used to accompany analog piracy. In other words, a would-
be pirate can create dozens of secondary copies from a single source,
and each of these derivative copies can in turn create hundreds or
thousands of derivative copies, and so on--with each copy being as
clear as the original.
The exploding nature of piracy can be witnessed in the steady
increase in seizures that the RIAA has witnessed over the past five
years. Approximately 2.5 million counterfeit or pirate CD-Rs were
seized in the first six months of 2003. This number is up 18.1 percent
from almost 2.1 million seizures at mid-year 2002. The seizure of CD-R
burning equipment during 2003 has demonstrated a similar trend.
Likewise, it has been reported that two years ago the annual sales of
blank recording media (CD-Rs, etc.) outpaced the sale of legitimate
pre-recorded music for the first time. The RIAA estimates that hundreds
of millions of dollars are lost every year to domestic sound recording
piracy in the physical market alone. This number is increasing every
year, and does not include the estimated losses from piracy on the
Internet through unauthorized peer-to-peer services.
The ease with which illegal copying can be accomplished, combined
with the low entry costs, the extremely large profit margin, and the
comparatively lesser likelihood of criminal prosecution has not gone
unnoticed by sophisticated criminal enterprises. We are witnessing
increasing evidence of ties between physical piracy operations and
sophisticated syndicates, including organized crime and international
money-laundering rings. Piracy activity is often connected to other
illicit activity as well, such as illegal immigration, tax evasion, and
fraud. We commend the Subcommittee for being the first to investigate
this problem last session with a hearing dedicated to the involvement
of crime syndicates and terrorist groups with CD and DVD piracy which
provides quick untraceable cash to carry out nefarious activities.
h.r. 3632--a good beginning
In an effort to combat the financial hemorrhaging being experienced
by the content owners, many have begun employing various authentication
components to confirm the legitimacy of their products to consumers.
These components may take the form of holograms or certificates of
authenticity, and they help consumers and law enforcement agencies
distinguish legitimate product from illegal product. Because it is much
more difficult to manufacture these authentication components
(especially as compared to manufacturing pirate CDs), they are more
difficult for the criminals to pirate, and until recently the presence
of such components was a fairly reliable indicator that the affiliated
product was legitimate, or that the lack of such an authentication
component was an indicator of piracy.
Unfortunately, the criminals are becoming increasingly adept at
finding ways to pirate these authentication components, thereby
increasing both the attractiveness of their piratical product and the
difficulty in detecting fakes. Whether through the theft of
legitimately created authentication components, or through the illicit
manufacture of look-alike authentication components, the illegal use of
such materials is causing the sound recording industry harm in several
additional ways. First, their use further complicates the enforcement
efforts of the RIAA and its sister organizations worldwide because we
can no longer rely on the presence of these authentication components
as a true symbol of ``authenticity.'' Second, they cause further damage
to copyright or trademark owners whose intellectual property is
affiliated with substandard and illegal products and the fake
authentication components. Third, theyH.H. provide an incentive for
another level of deception and law-breaking as pirates are forced to
either mimic these components or obtain them through illegal means in
order to affix them to counterfeit product.
For these reasons, the RIAA strongly supports the
Anticounterfeiting Amendments Act of 2003. We believe increased
penalties against the illicit use of such authentication components on
physical products is a good start towards thwarting another step in the
``pirate production line'' that is affecting a large portion of
American industries.
While physical holograms and certificates of authentication are
attached to physical products, digital authentication components will
obviously need to be attached to digital music products, and the use of
such advanced authentication components may well be the key to
effective law enforcement in the growing digital music marketplace.
Thus, the concepts and principles contained in this bill can be
extended, and should be extended, to the digital arena. Certainly, we
believe that the illegal use and duplication of digital authentication
components are an issue of great concern and ought to be addressed.
However, we also realize that the application of these
anticounterfeiting amendments to non-physical product is a more complex
undertaking than these amendments which relate solely to physical
product. The interplay with other statutes governing digital piracy and
digital copyright laws create challenging issues of statutory drafting.
In recognition of the importance of making progress on the physical
piracy problem as soon as possible, we support the amendments in their
current form at this time. We strongly urge the Subcommittee, however,
to turn to the issue of digital authentication components in the near
future, so that the benefits of digital authentication technology can
be fully realized.
ATTACHMENTS
Mr. Smith. Thank you, Mr. Buckles.
Mr. Green.
STATEMENT OF DAVID GREEN, VICE PRESIDENT AND COUNSEL,
TECHNOLOGY AND NEW MEDIA, MOTION PICTURE ASSOCIATION OF AMERICA
(MPAA)
Mr. Green. Chairman Smith, Mr. Berman, Ms. Hart, thank you
for this opportunity to testify on behalf of the Motion Picture
Association of America about this very important
anticounterfeiting bill. Over the last 12 months this
Subcommittee has held a number of hearings, and its Members
have introduced several bills that address the rampant physical
and digital piracy of America's intellectual property. We're
grateful that this vital economic issue has commanded the
Subcommittee's attention.
We are here today to testify in support of H.R. 3632, the
``Anti-counterfeiting Amendments of 2003.'' The bill would
approve 18 U.S.C. 2318, the Federal Criminal Law prohibiting
trafficking in counterfeit labels, by expanding the definition
of ``counterfeit'' to include genuine labeling components that
are used in an unauthorized manner. In addition, the bill
provides a civil remedy to enable victims of counterfeiting to
enforce their own rights, an important supplement to the
Federal prosecutorial resources that can realistically be
expected to be devoted to this problem.
To make an already valuable bill even better, we ask the
Subcommittee to ensure that the prohibition on trafficking and
counterfeit labels clearly applies to all authentication
features, whether physical or digital, used to determine
whether a particular good is counterfeit or genuine. Under this
bill, those who traffic in genuine but illicitly used labeling
components can no longer escape prosecution. We must be clear
that the same behavior in the digital world merits the same
consequences.
Let me tell you why this matters. With new technologies
proliferating we envision a near-term future where a consumer
with a few clicks of the mouse will be able to have any movie
ever made delivered digitally right to his or her own computer
or television set. But this exciting digital future is
threatened by piracy. We and our partners in the information
technology, sound recording and consumer electronics industry,
are doing our part to combat piracy by devising ways to protect
content from being illegally distributed online, but we need
the enforcement laws to keep pace with technology.
Microsoft has eloquently testified how their genuine
certificates of authentication, created to make life more
difficult for pirates, have been stolen and sold to
counterfeiters. As we develop similar digital authentication
features, we can expect these features to be counterfeited and
stolen as well. People can go to jail for up to 5 years for
trafficking in holograms or certificates of authentication.
This bill should make clear that they do not get off scot free
when trafficking in the digital equivalent.
We look forward to working with the Subcommittee and other
interested parties to find clarifying language to ensure that
the laudable goals of this legislation are fully realized.
I do want to be very clear that the MPAA supports this
legislation and wants to see it enacted. I also stress that be
advocating that this statute by forward looking, we are in no
way attempting to open a back door for some sort of digital
rights management technical mandate or anything like that. This
is a law enforcement statute pure and simple. Our goal is the
same as that of our friends in the software community, to make
sure that our prosecutors' tools are adequate to fight those
show are offering counterfeit versions of our products now and
in the future.
Thank you, and I look forward to answering any questions
you may have.
[The prepared statement of Mr. Green follows:]
Prepared Statement of David Green
introduction
On behalf of Jack Valenti and the seven companies that comprise the
Motion Picture Association of America,\1\ I very much appreciate this
opportunity to testify today on H.R. 3632, the Anti-counterfeiting
Amendments of 2003. The movie industry contributes significantly to
America's culture and its economy. The livelihoods of nearly one
million men and women in America are impacted by the film industry,
which entertains millions of consumers every day.
---------------------------------------------------------------------------
\1\ Buena Vista Pictures Distribution, Inc. (The Walt Disney
Company); Metro-Goldwyn-Mayer Studios Inc.; Paramount Pictures
Corporation; Sony Pictures Entertainment Inc.; Twentieth Century Fox
Film Corporation; Universal City Studios LLLP; and Warner Bros., a
division of Time Warner Entertainment Company, L.P.
---------------------------------------------------------------------------
Our ability to continue making these types of contributions,
however, is being undermined by wide-scale piracy. World-wide, piracy
costs the film industry $3.5 billion annually in hard goods piracy
alone. The losses associated with the intensifying problem of Internet
piracy are difficult to quantify, but it has been estimated that
400,000 to 600,000 movies are uploaded or downloaded every day on
``file-stealing'' networks like KaZaA and Gnutella.
We commend the Chairman and this Subcommittee for this hearing and
legislation aimed at the piracy problem, and the many other hearings
held and bills introduced on this issue over the last twelve months.
Movie piracy's victims include not only the movie studios, but also all
the actors and behind-the-scenes employees associated with the making
of the film. The consumer, whose entertainment choices are narrowed as
the legitimate return on investments is stolen, is an additional
victim, as is the citizen, whose governments cannot collect the tax
revenues associated with the sale of legitimate goods.
h.r. 3632
MPAA supports H.R. 3632. The bill will help protect consumers and
producers of intellectual property, the victims of piracy, in two
respects.
First, the bill properly expands the definition of ``counterfeit
label'' from merely ``an identifying label or container that appears to
be genuine, but is not,'' to genuine labeling components that are
illicitly distributed. This expansion is an appropriate response to the
growth of trade in and theft of genuine ``authentication devices'' used
to make the counterfeited goods appear legitimate. The new definition
will make it easier for federal prosecutors to charge people who may
not themselves be distributing the final counterfeit product, but are
assisting in the illicit production of those products.
Second, the bill adds a civil remedy for a violation of 18 U.S.C.
Sec. 2318. We recognize the reality that federal investigators and
prosecutors are pressed with a wide range of important
responsibilities, and sometimes will be unable to respond in a timely
manner to even serious instances of trafficking in counterfeit labels.
In these circumstances, it is important for rightsholders to be able to
protect themselves by seeking injunctive relief and damages.
the importance of the digital future
H.R. 3632 is a good bill, and we hope to work with the Subcommittee
and the stakeholders to make it even better. We are concerned, however,
that this bill does not explicitly state that an authentication device
can be digital, as well as physical. While we do not read the current
language as covering just the physical, we are concerned that the
courts could interpret the coverage of section 2318 in such a limited
fashion. The Supreme Court's ruling in Dowling v. United States, 473
U.S. 207 (1985) (holding that the interstate transportation of stolen
property statute did not cover intangible goods such as intellectual
property), stands as a reminder that a failure of Congress to be clear
as to the scope of coverage may lead the courts, employing the rule of
lenity, to interpret a statute too narrowly.
Section 2318 should not be limited to the physical labels; rather,
it should be broad enough to encompass the authentication devices of
the digital age. Digital distribution, and digital piracy, are upon us,
and will loom much larger in the near future. It has become a cliche to
note how much the advent of digital communications has revolutionized
how we work, how we gather information, and how we are entertained. Yet
we at MPAA firmly believe that we are still in the opening moments of
the digital age, and that the wonders still to come will make the novel
technologies of today seem pale in significance.
MPAA and its member companies are devoting enormous amounts of time
and money toward figuring out how to use modern communications tools to
deliver movies--in a consumer-friendly manner--right to people's homes.
Even today, despite the still-relatively modest numbers of homes that
have broadband Internet connections, new services such as MovieLink and
CinemaNow are enabling consumers to download movies to their hard
drives to watch at a later time. Video-on-demand systems allow
consumers to select from a range of modestly-price movies to watch in
their living rooms. But this is only the beginning.
The Internet is speeding up. Cal Tech recently reported one
experiment called ``FAST,'' which can download a quality DVD movie in
five seconds. Another experiment, ``Internet-2,'' has dispatched 6.7
gigabytes--well more than a typical DVD movie--halfway around the world
in one minute. As the experiments of today reach the marketplace of
tomorrow, we envision a near-term future where digital delivery grows
into a full-fledged partner to the sale of physical DVDs. Ours is a
future when any consumer can obtain, with a few clicks of a mouse, any
movie ever made, with choices offered as to whether to watch the movie
once, or keep it forever as part of a video library.
Of course, legitimate and profound concerns about rampant Internet
piracy form a dark cloud obscuring this bright digital future. We are
hard at work with our counterparts in the information technology, sound
recording and consumer electronics industries to devise ways to protect
content from being illicitly distributed online, while providing
flexible models for a range of consumer uses. We are confident that,
working together, we can reach a solution that allows the legal
electronic distribution of movies and other valuable content to
flourish.
Even as we strive to bring about this bounty for consumers, we must
be aware that the pirates and counterfeiters will try mightily to undo
all the good we are trying to achieve. For the physical distribution of
its products, some software companies developed hard-to-copy
``certificates of authenticity'' to stymie counterfeiters, then found
their program hijacked by pirates who were buying or stealing these
certificates to make their counterfeit goods appear authentic. For the
digital distribution of products--such as software, games, music or
movies--digital counterparts of these ``certificates of authenticity''
will be devised to discern whether a work is counterfeit or infringing
of any copyright. As soon as we develop these tools, digital outlaws
will find a way to traffic in them, facilitating the ability of
counterfeiters to defraud consumers into believing that the illegally
copied goods they are peddling are legitimate.
We must make sure that the prosecutors of tomorrow have adequate
legal weapons at their disposal to attack piracy with the same zeal,
whether it occurs in the physical world or online. It makes little
sense to have a provision which allows someone to be sent to jail for
up to five years for trafficking in counterfeit physical labels, while
someone who does the same thing digitally gets off scot-free. Rather,
the legislation should be technology-neutral, focusing on the function
and effect of the counterfeit label being trafficked in, and applied
equally whether the counterfeit label being trafficked in takes a
digital or a physical form. We would be happy to work on language with
the Subcommittee and with others concerned, to ensure the courts will
interpret this provision appropriately.
the ``licensing'' document clause should not be limited
to computer programs
In most aspects of this statute, all copyrighted works, whether
they are movies, music, or computer programs, are treated the same. In
one section, however, a ``licensing document'' comes within the
definition of ``counterfeit label'' if it is used in connection with a
computer program, but not a phonorecord, a copy of a motion picture, or
other work. We think this disparate treatment is unwarranted, and ask
the definition be extended to all types of works protected under the
statute.
Specifically, Section 2 of H.R. 3632 defines counterfeit labels as,
among other things, ``a genuine . . . licensing document . . .
(i) that is used by the copyright owner to verify that a
phonorecord, a copy of a computer program, a copy of a motion
picture or other audiovisual work, or documentation or
packaging is not counterfeit or infringing of any copyright;
and
(ii) that is, without the authorization of the copyright owner-
. . .
L (II) in the case of a computer program, altered or
removed to falsify the number of authorized copies or users,
type of authorized user, or edition or version of the computer
program.''
(Emphasis added.)
MPAA agrees with this definition, but not with its limitation to
computer programs. Rather, as ``Digital Rights Management'' (or DRM)
comes to the fore, movies, entertainment software and music, as well as
computer programs, will increasingly use ``licensing'' documentation,
both physical and digital, to establish the number of authorized copies
or users, type of authorized user, or edition or version of the work.
Anyone who ``traffics'' in false licensing information should be
covered by the statute, regardless of type of work, and regardless of
whether it is physical or digital.
conclusion
We support H.R. 3632 and commend the Chairman and Representatives
Keller, Wexler, Goodlatte, Gallegly, and Carter for its introduction.
We look forward to working with you on the changes and clarifications
discussed above that would make section 2318 a more useful statute for
the future. I look forward to answering any questions that you may
have.
Mr. Smith. Thank you, Mr. Green, and thank you all for your
testimony, which is, I'm glad to say, uniformly supportive of
the legislation, and we will move forward with that.
Mr. Green has made a couple of suggestions which I want to
ask our other witnesses about, but before I do, I want to ask
sort of a general question. A criticism of this type of
legislation a couple of years ago was that it was somehow going
to impede the ability of Americans to buy discount items or
goods. I just wanted to see if there was any witness today who
actually thought that that would be a result of this
legislation?
Mr. LaMagna. Mr. Chairman, if I might address that?
Mr. Smith. Yes, Mr. LaMagna.
Mr. LaMagna. This will in no way impact upon the consumer's
ability to do that. What this law would do, it would be to
prevent people from actually deceiving consumers, and will
deprive them of the ability to authenticate counterfeit and bad
products by using a genuine certificate of authenticity. This
will not interfere with the----
Mr. Smith. That is exactly the point and the goal of the
legislation, and I just want to make sure there wasn't any
misunderstanding in that regard.
Let me ask everyone----
Mr. Simon. Mr. Chairman, if I might, just a small point?
Mr. Smith. Yes, Mr. Simon.
Mr. Simon. The software industry used to price its products
differently in different markets. With the advent of the
Internet and the fact that you can now buy a lot of products
and download them, the vast majority of software is now priced
pretty much the same price regardless of the market. So the
incentives for grade-market goods, which was buying in a low-
price market and exporting it to a high-price market, at least
for software, have substantially----
Mr. Smith. There's not much of a gray market out there
then.
Mr. LaMagna. That is correct, sir.
Mr. Smith. Okay, thank you, Mr. Simon.
Let me address my next question to everyone other than Mr.
Green, because it plays off a couple of suggestions that Mr.
Green has made, and then, Mr. Green, I'll ask you to respond as
well.
The first suggestion Mr. Green made for a change in the
legislation is to expand the bill to cover digital works. Mr.
LaMagna, we'll start with you and work down the panel. What is
your response to that suggestion?
Mr. LaMagna. Mr. Chairman, we share concerns of our
colleagues of the motion picture industry, and we fully
recognize that this is an issue which must be addressed. With
the digital age upon us, we must address some of these issues.
However, we feel this is a very complex issue that is something
that should be addressed in different fora. We are
participating in those fora with other industries, but this
particular bill addresses a very narrow problem in which
Microsoft is losing money to the tune of millions of dollars,
and it really addresses the physical product and is of a
different nature entirely.
Mr. Smith. Thank you, Mr. LaMagna.
Mr. Simon?
Mr. Simon. Three or four thoughts, Mr. Chairman. First of
all, this bill is about authentic, legitimate, kosher,
authentication products. It's not about bogus ones or
counterfeit ones. The notion that it should be extended to
digital, we already use authentication features on digital
products. Software is digital.
So maybe what we are thinking about--I think what Mr. Green
was thinking about was downloaded software or downloaded movies
or downloaded music. So it's really a method of distribution
issue rather than whether a product is in digital form or not.
So thinking about it in that online worlds, it's hard for me to
conceive how one would apply a label like that to a downloaded
movie or a downloaded piece of software.
What we do and what a lot of software companies do, a lot
of other companies do as well, is we use digital rights
management technologies, encryption, access keys, a variety of
other things. When those things are hijacked, when those things
are hacked, there's already existing law that covers those
problems. Sections 1201 and 1202 of the Copyright Act cover
those, 1202 in particular. So those are actionable. There is no
loophole with respect to those kinds of things.
Now, finally, somehow the forward leaning notion here,
anticipating that someday something may develop, I fully
recognize that the future is full of hope, but it's unclear. We
do have a concrete problem before us, which is this kind of
loophole in the law. It's worth fixing. We are only working on
the longer-term issues, and I don't think those are issues of
authentication features. Those are questions of technological
protection measures.
Mr. Smith. Okay. Mr. Simon, thank you.
Mr. Buckles?
Mr. Buckles. As my colleagues have said, I think we all
agree that the issues and challenges that we will face in the
world of downloading, whether it's music, software of movies,
is the same, and I think we all share Mr. Green's concerns
about that. I think the disagreement that we might have, or the
questions that we would pose, are really ones of process rather
than substance. This bill was designed to deal with something
very specific that has to do with counterfeiting in the
physical world. It's a real and pressing problem that we are
all facing. Our concern would be in trying to deal with that
real and pressing problem, that it get bogged down in what are
really much more complex issues that would develop in trying to
solve problems about how the future might work with
authentication devices in a digital download world.
Mr. Smith. Thank you, MR. Buckles.
Mr. Green, I'd still like to hear your response if you'd be
brief.
Mr. Green. Certainly. As the Chair knows and everybody
knows, congressional action takes some time, and we are looking
at a world of digital distribution which is not a far-off
fantasy, but a near-term reality. As the distribution takes
off, there are going to be authentication features just like
we've talked about today. Some of them we can imagine, some of
them that we can't, but ways that consumers can use and
copyright owners can use to know that the product is legitimate
and not counterfeit.
As soon as we devise these, there's going to be some pirate
out there who are going to be selling them, just like the
certificates of authentication in the physical world. So rather
than--we have to be able to anticipate that that's going to
happen and make clear that our law is technology neutral, and
would ban the same conduct whether it takes place in the
digital or the physical realm.
Mr. Smith. Fair enough. Thank you, Mr. Green, and
appreciate your answers in regard to that question.
And Mr. Berman is recognized for his questions.
Mr. Berman. How do we know there are only two realms?
[Laughter.]
Mr. Green. There may be others.
Mr. Berman. Maybe we should cover them as well.
After making a statement sort of supporting the bill,
raising the question of why it shouldn't go forward, the devil
in me made me read the bill. Why couldn't someone say, What are
you doing? I bought this product, including its authentication
feature. I've got a right to do anything I want with this
product. I own it now. And if I want to take off the
authentication feature and sell it to a collector of
authentication features or a collage maker, or anybody else?
You're pressing a bill that isn't about my intention to have it
affixed to a counterfeit product or anything else. You're just
restricting my freedom to do something with a component of a
product that I own and I purchased and I paid for, and this is
the Government really getting into interference with sort of
fundamental rights of people to do with their possession what
they want to do.
What's your answer to that argument?
Mr. LaMagna. Mr. Berman, if I may address that?
Mr. Berman. Am I reading the bill wrong? The way I read it,
there is no requirement of proof of--is there something in the
word ``trafficking'' that isn't clear from the bill that
includes an intention that I don't read in this bill now?
Mr. LaMagna. Well, sir, I think the word ``trafficking''
implies large-scale sale and distribution. We are clearly not
interested in people selling one or two or even five copies for
collectors' items or trade, et cetera. What we are seeing,
particularly over the Internet, are people who are offering
100, 500.
Mr. Berman. I have no doubt about what you're going after,
but your bill, on its face, looks like it affects the sale of
one or two for collectors.
Mr. LaMagna. I really don't think that it's going to be
applied in that manner.
Mr. Simon. Mr. Berman, this bill amends existing law which
has embedded in its requirements of knowingly doing these
activities for bad purposes.
Mr. Berman. It does?
Mr. Simon. Yes. It's a criminal statute which----
Mr. Berman. Well, no----
Mr. Simon. You're----
Mr. Berman. That's the conclusion. Just tell me why it does
that.
Mr. Simon. Well, it is amending a provision of existing law
which prohibits the trafficking in unauthentic, counterfeit,
forged authentication devices for illicit purposes. And what
we're adding simply to it is making it illegal to traffic in
legitimate ones as well, again, for the illicit purposes, for
deceiving the public, for selling pirated material. But if
you're not comfortable with it----
Mr. Berman. I'm actually pretty comfortable with it. It was
the devil in me. [Laughter.]
I just wondered if Rick Boucher were here, what would he
say? [Laughter.]
What about the response of Mr. Green to that--I mean I
don't know what fora you're working on this on, but what's
wrong with writing this in a technology-neutral way, even if--
by the way, the argument that no one has yet figured out how to
do something that involves authentication of digital but we're
working on that, also means that there's no one trafficking in
it who will be trying to keep it. So in other words, are you
really adding serious controversy to it by including the
digital transmissions with the one--the least conceivable
exception I could have is the old ISP liability issue, which
can sometimes rear its ugly head, but there are ways to try and
deal with that as well. I don't think Mr. Green is out there
trying to get a sort of a conduit ISP involved criminally in
this statute, I think, who isn't affirmatively marketing or
profiting from the trafficking in what could become a digital
authentication feature.
Mr. Simon. If I may respond, Mr. Berman, I think it is
relevant that nobody is now using these things. Software
companies have examined trying to apply these kinds of features
to software products, and we haven't found any that really work
very well. So we use DRMs, we use technological protection
measures.
The issue why Mr. Green's kind of forward-leaning attitude
in this situation I think would be a little bit of a mistake,
is because it would create, as you say, some overlap with 512,
the ISP liability provisions, some overlap with the anti-
circumvention provisions. Those would be very complicated,
frankly, to figure out, and what we would end up doing is
spending a lot of time spinning our wheels while this problem
persists. So our strong suggestion is: fix this problem. Don't
ignore the other one, but fix this problem and we'll continue
to work on the----
Mr. Berman. What does this have to do with anti-
circumvention? This is not an effort to render criminal--I mean
this is a bill designed to render criminal the trafficking in
authentication documents, not--we already have a DMCA that
deals with the issue of circumvention. How does this raise an
anti-circumvention? Just elaborate on that a little bit.
Mr. Simon. There are two provisions of chapter 12, and I--
with the Chairman's indulgence.
The anti-circumvention provision is used to control access,
and the question is whether an access control feature can also
act as an authentication feature. And the answer is, yes, it
can, and then you get confusion. Section 512 talks about
digital rights management issues, which are a lot of these same
issues that arise here, and again, you have overlap. Is it a
512 covered issue--sorry--a 1202 covered issue, or is it an
issue covered under this criminal provision? So there's overlap
that needs to be worked out, and that's where the complexity
arises.
Mr. Smith. Thank you, Mr. Berman.
The gentlewoman from Pennsylvania, Ms. Hart, whose presence
we appreciate, is recognized for her questions.
Ms. Hart. Thank you, Mr. Chairman.
I want to thank the gentlemen for their testimony today as
well.
I want to direct a question to Mr. LaMagna and Mr. Simon,
concerning about what actually, you know, apart from what we're
discussing today or maybe including what we're discussing
today, what are the biggest challenges that your companies are
dealing with when you're combating actual, direct software
counterfeiting? Would you rank this as the top issue or one of
the top issues? Are there other issues that you would place as
basically the biggest challenges when you're trying to combat
that counterfeiting?
Mr. LaMagna. Ms. Hart, if I may address that.
Counterfeiting is definitely one of our biggest problems at
Microsoft, and the protection of our intellectual property. And
among those, one of the biggest challenges is really public
attitudes toward this type of activity. Many people view this
as a victimless crime. In simplistic ways of thinking, you
know, Microsoft is a very well-known, big, wealthy company,
Bill Gates is very wealthy. People make the connection, well,
you know, I'm not harming anyone. I'm just causing a few
dollars loss to Bill Gates and Microsoft.
The only challenges that we face are worldwide challenges
in terms of getting other countries to adopt the same laws and
the same enforcement and the same political will to protect
intellectual property that we have.
As I think you know, and has been stated, this is an
international problem. It does not stop at the borders, and
it's very, very difficult to go after these large organized
crime enterprises if we do not have worldwide cooperation.
So those are some of the biggest challenges, and certainly
this law would go a long way toward addressing some of those
problems.
Ms. Hart. Thank you.
Mr. Simon, the same?
Mr. Simon. For the software industry generally, on the
counterfeiting problem, this is probably the biggest
counterfeiting problem. So it's the misleading the consumer by
using what are authentic features to really sell stolen
product, pirated product.
Ms. Hart. So that the issues that were cited by Mr.
LaMagna, those also?
Mr. Simon. For the general software industry, that is true,
yes.
Ms. Hart. No other ones that----
Mr. Simon. We have lots of different piracy issues. We're
trying to separate these----
Ms. Hart. Piracy from counterfeiting, sure.
Mr. Simon. Right, where people are simply stealing the
software, downloading it, distributing it, or making more
copies than they're allowed to make or a variety of other
things, we tend to separate these into counterfeiting issues
and piracy issues.
Ms. Hart. Is there something that you are doing yourselves
to try to inform your legitimate customers that they may be
victims of a fake product?
Mr. LaMagna. Oh, absolutely, Ms. Hart. We have websites. We
have a piracy website for Microsoft. We have ``how to tell''
website to actually walk people through the identification of
features to see if they have a genuine product. We have other
public information campaigns. We of course work very closely
with law enforcement to put out information, and to train them
as well in the awareness and enforcement of intellectual
property and piracy. So we do have a number of efforts under
way to better advise people and make them informed consumers,
yes.
Ms. Hart. Thank you. I yield back, Mr. Chairman.
Mr. Smith. Thank you, Ms. Hart. Actually, if you yield to
me, I've got one more question.
Ms. Hart. I will yield to you my remaining time, Mr.
Chairman.
Mr. Smith. Thank you, Ms. Hart.
Let me ask one more question, and again, I'm going to key
off of a suggestion that Mr. Green made in his testimony and
ask the other witnesses to respond, and Mr. Green to respond
after they have given their answer as well.
This goes to the suggestion Mr. Green made that we change
the bill. He says that if the phrase ``licensing document''
comes within the definition of ``counterfeit label'' if it is
used in connection with a computer program but not a phono
record, a copy of a motion picture or other work. We ask that
the definition be extended to all types of works protected
under the statute.
What do you think of that idea, Mr. LaMagna? Was that clear
enough for you or not?
Mr. LaMagna. Yes. It was clear, Mr. Chairman, but again, I
would go back to our theory, which is this is a very narrowly
crafted bill that would address a very specific problem, which
is a huge problem for us as I think we've already emphasized. I
would be concerned that any alteration of that would in some
way make this a less effective bill.
Mr. Smith. Okay. Thank you.
Mr. Simon?
Mr. Simon. I was just looking at the language, Mr.
Chairman, of the bill. It is the practice of the software
industry to do site licensing. So we'll give a copy to the
Committee, and the contract, the license will say that the
Committee can make, 30, 40, 50 copies of it. The issue here is
when somebody tries to take that contract, alter it, and
instead of 30 copies, having 300 copies. So that's a specific
issue that, as I understand it, this provision is trying to
address. I am not aware of any similar current practice in the
motion picture industry, so for me it kind of falls into the
same category as Mr. Green's other suggestion, which is it's a
practice the industry may engage in in the future, but let's
get this thing done now, and if that proves to be a problem,
it's always your prerogative to come back to it.
Mr. Smith. Mr. Simon, thank you.
Mr. Buckles?
Mr. Buckles. On this issue I think I would have a tendency
to agree with Mr. Green. I think this is still dealing with the
physical world. While my colleagues are correct that we do not
normally use site licenses in the same way that the software
industry does today, I don't think we want to preclude that
from being part of the way in which we might be operating in
the future. This is still dealing with physical components. I
don't think using that same terminology for all three of our
businesses in any way would complicate or really expand the
nature and scope of this bill.
Mr. Smith. Thank you, Mr. Buckles.
Mr. Green, you're picking up a little support here.
Mr. Green. I continue to agree with myself on this one.
[Laughter.]
I don't see any reason why this use should be limited to
computer programs. As we get into, again, both a physical and
digital future, we may find ourselves with, ``you may use this
in certain circumstances and not in others.'' And why computer
programs should benefit from that and not our products, I don't
see any justifiable reason for it.
Mr. Smith. We will certainly consider that as we move
toward markup.
Mr. Berman is recognized for a final question.
Mr. Berman. Mr. Chairman, just talking about your question,
the answer--well, forget motion pictures. A photographer, an
artist who authorizes a certain number of prints, why shouldn't
they get the--why should just the software folks get--I mean
they copyright their works. Why shouldn't they be able to deal
with the trafficking and the licensing issue here like that?
Mr. LaMagna. Mr. Berman, before I respond to you, I must
respectfully ask is this the devil I'm responding to or just--
-- [Laughter.]
Mr. Berman. No, no. This is now the real me.
Mr. LaMagna. Well, sir, we're not aware of any other
industry that issues the same type of authentication
certificate. Certainly are willing to consider other scenarios,
but at the present time, as my colleague, Mr. Simon----
Mr. Berman. I guess they are forging----
Mr. Simon. Then it's no longer authentic.
Mr. Berman. Then it's no longer authentic.
Mr. Simon. Then it's covered by the existing law.
Mr. Berman. That's right. That would be one answer. We'll
try and figure out some other hypothetical here. [Laughter.]
Mr. Smith. Thank you, Mr. Berman.
Any other questions? If not, let me thank the witnesses
again for their very helpful testimony, and do appreciate your
support of this legislation. We do expect possibly to mark it
up next month. Thank you all again.
We stand adjourned.
[Whereupon, at 11 a.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress From the State of Virginia
Mr. Chairman, thank you for holding this hearing on this important
legislation to curb counterfeiting.
Counterfeiting and piracy are unfortunately on the rise. The
combination of enormous profits and relatively limited punishments,
especially in foreign countries, makes counterfeiting an attractive
cash cow for organized crime syndicates. Often specializing in audio
and optical disc piracy, as well as business software piracy, these
crime rings are capable of coordinating multi-million dollar efforts
across national borders.
Over the years, legitimate businesses have become more accomplished
in deterring counterfeiting by creating certificates of authenticity
(COA) and other types of authentication documents included within the
packaging of their products that serve as proof of the authenticity of
the product. As these documents have become more complex and harder to
copy, pirates have started to abandon efforts to copy these documents
and have instead begun to either steal, or buy stolen, genuine
authentication documents. These thieves then simply attach the stolen
authentication documents to counterfeited goods and sell them as the
real product.
The need to address this growing problem is clear. First, consumers
lose when they pay for products that are presented as authentic, but
that are actually of poor quality, or simply don't work. Second,
businesses lose both revenue and goodwill when their products are
counterfeited. Microsoft reports that as of 2004, approximately 500,000
genuine Microsoft COAs and COA labels were stolen. These documents are
estimated to be worth $40 million. However, a potentially larger loss
for businesses is the loss of future customers who are disillusioned
with a company due to their experiences with the purchase of a
counterfeited product.
H.R. 3632, the ``Anti-counterfeiting Amendments,'' would address
this growing problem by expanding the current law to expressly include
genuine authentication documents within the definition of ``counterfeit
labels.'' The bill would also provide civil remedies for injured
copyright owners and provide for the forfeiture of any equipment used
to manufacture, reproduce, or assemble authentication documents or
other types of counterfeit labels.
I look forward to hearing the testimony of our expert witnesses
about the scope of this counterfeiting problem and how we can help
better protect intellectual property rights.
__________
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress From the State of Michigan, and Ranking Member, Committee
on the Judiciary
We all know that the piracy of digital content is a serious
problem. After all, the copyright industries are this country's number
one export, providing a positive trade balance of approximately $89
billion. It goes without saying that our content is a valuable
resource.
Unfortunately, the value of copyrighted content makes it highly
vulnerable to theft, and the losses for affected industries are
staggering. The Business Software Alliance estimates that piracy cost
software developers worldwide $13 billion in 2002. The music industry,
including songwriters, artists, and record label employees lost $4.2
billion worldwide the same year. The movie industry loses $3 billion
annually.
While there are laws on the books that deter and punish content
piracy, they do not go far enough. There is a problem of copyright
pirates getting genuine labels for content and then putting those
labels on fake products. This not only harms the real manufacturer of
the products but also the consumers. This conduct is virtually
permissible because current law makes it illegal to sell fake labels
but does not prohibit selling the real labels.
As we consider crafting a new remedy against piracy, though, we
should make sure not to outlaw conduct that is and should remain legal.
For instance, various industries take advantage of the parallel market
to provide goods to consumers at a lower than normal cost. The Supreme
Court has upheld this practice, but the market can continue only as
long as goods are not tracked by their manufacturers to determine the
chain of custody. It is my understanding that this bill would not do
that.
__________
Prepared Statement of the Honorable Howard L. Berman, a Representative
in Congress From the State of California
Thank you Mr. Chairman and I appreciate your holding this hearing
on H.R. 3632, the ``Anti-counterfeiting Amendments OF 2003.'' In the
last Congress, similar bills were introduced in both the House (H.R.
5057) and the Senate (S. 2395), but this subcommittee has never had a
chance to analyze this issue. I am therefore looking forward to hearing
from our witnesses about this bill.
Every day, thieves around the world steal millions of dollars worth
of American intellectual property from the rightful owner. American
innovation is a cornerstone of the American economy. The copyright
industry alone employed over 8 million Americans in 2001. Software
piracy alone has cost the U.S. economy thousands of jobs, and drains
almost 11 billion dollars each year. According to the International
Anti-Counterfeiting Coalition, the US Customs service seized more then
$98 million in counterfeit and pirated goods in 2002--a 58 percent
increase over 2001. To exacerbate the problem, counterfeiters of
software, music CDs and motion pictures are no longer limiting
themselves to pirating the actual goods. Counterfeiters are now
tampering with component parts of the goods, the authentication
features, which are used to ensure the genuineness of the product. This
is what the bill is designed to address.
Just two weeks ago, Microsoft filed a suit in federal court
alleging the sale of counterfeit software and related items. The
complaint alleges that the defendants distributed counterfeit
Certificate of Authenticity labels. Federal law currently provides a
remedy for this type of counterfeiting. However, H.R. 3632 aims to
address a gap in federal law that fails to address the trafficking
genuine labels which are then used with counterfeit or pirated goods.
Last year Richard LaMagna of Microsoft Corporation (and we welcome
him back again) testified before this subcommittee about the global
threat of software counterfeiting. In his written testimony, he
described the cheap, fake software sold on street corners which is
typically marketed as the genuine article to unsuspecting customers who
would never knowingly purchase counterfeit goods. To create the look of
genuine packaged software, counterfeiters use state of the art
technology to create near-perfect copies of CD ROMS, as well as the
packaging, documentation, and other components. For many years,
Microsoft, and I'm sure many other companies, have worked to outpace
counterfeiting technology by developing physical features that help
consumers and law enforcement agencies distinguish legitimate software
from sophisticated counterfeits. However, as software makers have
worked hard to ensure protection of their intellectual property, the
counterfeiters have worked harder and smarter.
For example, Microsoft has included a certificate of authenticity
that incorporates special inks, holograms and microtext with its
software. So far, counterfeiters have found it impossible to replicate
the technology. But as the technology used to protect intellectual
property has gotten more sophisticated, so have the counterfeiters.
Because physical anti-counterfeiting features are increasingly
difficult to reproduce, counterfeiters are now combining pirated CD
ROMs and packaging them with the genuine authentication components
obtained through fraud or theft. Through a gap in the law we have
actually created a separate market for merely the authentication
components.
This bill expands the scope of ``counterfeit labels'' to include
other physical authentication components such as certificates. In
addition, it addresses the situation where genuine certificates are
distributed not in connection with the product of the copyright owner,
or where the label is altered to falsify the number of authorized
copies. The bill also provides for civil remedies for violations of the
Act.
While this bill confronts the concept of trafficking physical
component parts, I would be interested in hearing from our witnesses
about interpretation or expansion of the bill to include digital
components. In an age in which technologies are rapidly developing, I
believe there is a need to address the evolution of digital
authentication features and the potential for copying or counterfeiting
them as well. The legal dichotomy of physical and digital should be a
distinction without a difference. Whether a physical or digital feature
is counterfeited is equally problematic. I do not intend for this to
become another digital rights management debate. I do, however, wish to
address punishing and preventing counterfeiting. Counterfeiters do not
only prey on the copyright owners. Counterfeiters prey on the consumers
who have certain expectation when buying what appears to be a genuine
product.
If the Chairman is so inclined, I look forward to working with him
on these issues before mark-up.
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