[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

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary




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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

                              ----------                              

                           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\
---------------------------------------------------------------------------
    \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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