[Senate Hearing 109-1041]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 109-1041
 
      PROTECTING COPYRIGHT AND INNOVATION IN A POST-GROKSTER WORLD 

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 28, 2005

                               __________

                          Serial No. J-109-40

                               __________

         Printed for the use of the Committee on the Judiciary

                               ----------
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                       COMMITTEE ON THE JUDICIARY

                 ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah                 PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas                   CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas                RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
                       David Brog, Staff Director
                     Michael O'Neill, Chief Counsel
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director

































                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Cornyn, Hon. John, a U.S. Senator from the State of Texas........     4
    prepared statement...........................................    88
Feinstein, Hon. Dianne, a U.S. Senator from the State of 
  California.....................................................    13
    prepared statement...........................................    90
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     2
    prepared statement...........................................    93
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     1

                               WITNESSES

Aydar, Ali, Chief Operating Officer, SNOCAP, Inc., San Francisco, 
  California.....................................................    24
Lemley, Mark A., William H. Neukom Professor of Law, Stanford 
  University Law School, and Director, Stanford Program in Law, 
  Science and Technology, Stanford, California...................    22
Peters, Marybeth, Register of Copyrights, Library of Congress, 
  U.S. Copyright Office, Washington, D.C.........................     5
Roe, Marty, Lead Singer, Diamond Rio, Nashville, Tennessee.......    16
Shapiro, Gary J., President and Chief Executive Officer, Consumer 
  Electronics Association, Arlington, Virginia...................    20
Sherman, Cary, President, Recording Industry Association of 
  America, Washington, D.C.......................................    18
Yagan, Sam, President, MetaMachine, Inc., New York, New York.....    25
Yang, Debra Wong, United States Attorney, Central District of 
  California, and Chair, Attorney General's Advisory Committee on 
  Cyber/Intellectual Property, Los Angeles, California...........     7

                         QUESTIONS AND ANSWERS

Responses of Ali Aydar to questions submitted by Senator Specter.    33
Responses of Mark A. Lemley to questions submitted by Senators 
  Specter, Leahy and Kennedy.....................................    34
Responses of Marybeth Peters to questions submitted by Senators 
  Specter and Leahy..............................................    38
Responses of Gary Shapiro to questions submitted by Senator 
  Specter........................................................    46
Responses of Cary Sherman to questions submitted by Senator 
  Specter and Leahy..............................................    48
Responses of Sam Yagan to questions submitted by Senator Specter 
  and Leahy......................................................    53
Responses of Debra Wong Yang to questions submitted by Senator 
  Specter and Leahy..............................................    64
Questions submitted by Senator Leahy to Gary J. Shapiro (Note: 
  Responses to the questions were not available at the time of 
  printing.).....................................................    77

                       SUBMISSIONS FOR THE RECORD

Aydar, Ali, Chief Operating Officer, SNOCAP, Inc., San Francisco, 
  California, statement..........................................    78
Center for Democracy and Technology, Washington, D.C., statement.    83
Lemley, Mark A., William H. Neukom Professor of Law, Stanford 
  University Law School, and Director, Stanford Program in Law, 
  Science and Technology, Stanford, California, statement........    95
Peters, Marybeth, Register of Copyrights, Library of Congress, 
  U.S. Copyright Office, Washington, D.C., statement.............   101
Roe, Marty, Lead Singer, Diamond Rio, Nashville, Tennessee, 
  statement......................................................   122
Scudieri, Scooter, Artist, Internet's First Rock Star, Shepherds 
  Town, West Virginia, statement.................................   125
Shapiro, Gary J., President and Chief Executive Officer, Consumer 
  Electronics Association, Arlington, Virginia, statement........   127
Sherman, Cary, President, Recording Industry Association of 
  America, Washington, D.C., statement...........................   141
Yagan, Sam, President, MetaMachine, Inc., New York, New York, 
  statement......................................................   147
Yang, Debra Wong, United States Attorney, Central District of 
  California, and Chair, Attorney General's Advisory Committee on 
  Cyber/Intellectual Property, Los Angeles, California, statement   157


      PROTECTING COPYRIGHT AND INNOVATION IN A POST-GROKSTER WORLD

                              ----------                              


                     WEDNESDAY, SEPTEMBER 28, 2005

                              United States Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Arlen 
Specter, Chairman of the Committee, presiding.
    Present: Senators Specter, Cornyn, Leahy and Feinstein.

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S SENATOR FROM THE 
                     STATE OF PENNSYLVANIA

    Chairman Specter. With all this quiet in the Judiciary 
Committee hearing room, without even the pounding of the gavel, 
it must signify that you are ready to begin this hearing. I 
haven't heard such an orderly assemblage in the 25 years I have 
been here before the Chairman signifies the start, but you saw 
it was 9:30 and recognized that, by precedent, this hearing is 
underway.
    Our hearing today focuses on the recent Supreme Court 
decision in the case of MGM v. Grokster, and as articulated by 
the Court, the subject is the, quote, ``tension between the 
competing values of supporting creativity through copyright 
protection and promoting technological innovation by limiting 
infringement liability.''
    The subject of copyright infringement and the promotion of 
creative and artistic endeavors was the focus of the Founding 
Fathers in Article 1, section 8, of the Constitution, where 
Congress was explicitly granted the power to regulate 
copyrights and patents for the promotion of exclusive rights to 
authors' creative activities on literary, dramatic, musical, 
artistic or intellectual works.
    The Congress has not acted on the issue of the Internet and 
copyright infringement and secondary liability, but has really 
left it up to the court, which, candidly, is a major concern of 
mine. Congress has much more capabilities to deal in this field 
than does the court. We have the capacity to hold hearings, to 
make fact-findings, to listen to the competing complex issues 
on all sides, contrasted with the more limited approach of the 
court in the judicial proceedings.
    But so often, as is the case, the Congress abdicates or 
defers to the court. We had the hearings on Guantanamo several 
weeks ago where, notwithstanding the express Congressional 
responsibility, nothing was done and the court came down with a 
series of opinions in June of 2004 and we are really on the 
sidelines, although we ought to be front and center.
    So this is a very important hearing, and in the absence of 
a constitutional issue, which we really don't have, Congress 
really ought to be making the judgment here. It goes without 
saying that we are very, very busy on many, many items. I don't 
have to enumerate them for this erudite group, but that is not 
a sufficient explanation as to why we await the judicial 
decisions.
    I can recall back in the early 1980's on the VCRs, before 
we had the decision in Sony v. Universal, giants of the 
industry on both sides were camping outside of all the 
Judiciary Committee doors. I had a small hideaway on the west 
wing and had the multi-zillionaires seated on the steps outside 
the hideaway.
    I am filibustering, Patrick.
    Senator Leahy. I appreciate that. You know how.
    [Laughter.]
    Chairman Specter. Only in hearings, not in confirmation 
proceedings.
    [Laughter.]
    Chairman Specter. Commenting back about the days of the 
Betamax, and I am sure you will remember how much in demand 
Judiciary Committee members were, with all the moguls of the 
industries competing. I had a small hideaway. Senator Leahy had 
a lot more seniority, so he was in some lofty perch somewhere. 
But they were sitting on the steps and I was a newly elected 
Senator and was sort of luxuriating in the power. All these big 
wheels were seated on the steps waiting to talk to me, and I 
didn't know anything about this subject anyway.
    But we didn't act at that time and the Supreme Court came 
down with the decision, and now we have in the Grokster case 
the finding of secondary liability where there is a 
distribution, quote, ``with the objective for promoting its use 
to infringe copyright, as shown by the clear expression or 
other affirmative steps taken to foster infringement,'' and 
that establishes the liability.
    But, as usual, the concurring opinions throw some doubt as 
to what the standards are. Justice Breyer's definition of, 
quote, ``substantial non-infringing uses,'' close quote, is 
measured by using a prospective analysis of future non-
infringing uses of the product rather than a pure comparison of 
current infringing and non-infringing uses. Justice Ginsburg 
has a narrower view, saying substantial would depend on the 
consideration of the actual relative uses to come to an 
estimate of the infringing and non-infringing uses of the 
product.
    I am hopeful that a new Chief Justice will stop the 
proliferation of concurring opinions so we have a better idea 
as to what the law is, but there is another illustration of the 
important role Congress could play.
    I limit my 5 minutes, Senator Leahy, to the time when you 
arrived. So the red light has been on, unusually, for a minute 
and 14 seconds, and now I yield to you.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Mr. Chairman, you can take all the time you 
want. You know that.
    In talking about Betamax, I do recall that time, and Ms. 
Peters does very well, I am sure. She is our go-to expert up 
here. You know, there was so much of the debate that went on at 
that time. There was also the debate--and the Senator from 
Texas may recall reading about this, too--the movie industry 
was very upset about the ability to tape movies and said you 
have to do something to stop this kind of thing.
    Well, of course, there is not a single movie that is made 
today without planning what they can do--probably not so much 
VHS tapes anymore; it is all DVD--what can they do in after-
sales. In fact, many movies that are kind of clunkers at the 
box office make more in DVDs. I made the mistake of renting one 
the other night. God, it stunk, and I won't mention which one 
it was.
    Peer-to-peer technology, of course, revolutionized the way 
we share all sorts of information. But, like any technology, it 
can be abused, and unfortunately it has been. And as with any 
technology, those who abuse it effectively prevent the 
technology from reaching its highest potential.
    More than 5 years ago, we held our first hearing on peer-
to-peer, beginning an important dialog with many of the people 
in the community about this. I have long been a champion of 
innovation. I have long deplored the fact that a few rogue 
peer-to-peer companies have hijacked the enormous potential of 
this technology.
    I have high hopes as someone who loves music, as someone 
who is fascinated by technology and as someone who represents a 
State full of music and technology fans, that the emerging 
market for legitimate online music sales will prosper. I hope 
it does so quickly.
    If you look in my library, it goes from Puccini to the 
Grateful Dead. It is eclectic in its ability to pick up 
anything I want anywhere. But my concern is that unless the 
problems of piracy and privacy are addressed, peer-to-peer will 
never realize its enormous potential to build online 
communities, to enhance network learning, and to make 
unprecedented amounts of material, both educational and 
entertaining--it is not just entertaining, but it is the 
educational ones--available worldwide.
    I remain concerned about the privacy and security issues. 
Since the Supreme Court's decision in the Grokster case, the 
industry players have certainly had incentive to find ways to 
provide online music without promoting the theft of music 
online.
    Last June, as the Chairman has mentioned, the Supreme Court 
unanimously held that someone who distributes a device for the 
purpose of promoting its use for infringing copyrights will be 
just as liable for the infringement as the third parties who do 
the actual, direct infringing. They emphasized that Grokster's 
unlawful purpose was abundantly obvious.
    We should all remember that it is people using technology 
who infringe copyrights. Technology itself is not the problem, 
and neither is technology alone the solution. Our goal has to 
be the responsible use of technology and the respectful 
treatment of intellectual property rights.
    Our technologies may evolve, but the central principle of 
respect for rights and promotion for innovation has to remain 
constant. The balance between these is critical to maintaining 
our Nation's status as the world leader in intellectual 
property.
    We have all heard a great deal about peer-to-peer networks. 
Now, we are hearing more about Web casting and satellite radio. 
We want consumers to enjoy the great diversity in music 
available. We just have to ensure they do it legally.
    So I thank the witnesses who are here to herald this 
beginning in the world of online music. The potential is 
fascinating. We are not Luddites on this Committee. We want it 
to expand, but we also--and I can't emphasize enough I want to 
protect people's legitimate rights. Those who produce the 
material and have done the work and the innovation, oftentimes 
genius, deserve to have their rights protected.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Thank you, Mr. Chairman.
    Chairman Specter. Thank you very much, Senator Leahy.
    Senator Cornyn, would you care to make an opening comment?

STATEMENT OF HON. JOHN CORNYN, A U.S. SENATOR FROM THE STATE OF 
                             TEXAS

    Senator Cornyn. Thank you, Mr. Chairman. I will be brief. I 
want to express my gratitude to you for scheduling this 
important hearing. Like the hearing that you held last week 
regarding the decision of the Supreme Court in Kelo v. City of 
New London, this hearing focuses on the important issue of 
property rights, only this time the property right doesn't 
involve a home, but rather the property interests of artists 
and those who invested so much money to produce their artistic 
works so that we can all enjoy them.
    One of the good things about this hearing is I learned that 
Senator Leahy, our distinguished Ranking Member, listens to the 
Grateful Dead. We learn more everyday about each other in this 
body.
    Senator Leahy. I might say I think I know the lyrics of 
almost all of the songs, and I have got to tell you at some of 
the concerts the lyrics tended to change, depending upon the 
mood of the Dead.
    Senator Cornyn. I see the Ranking Member in a different 
light now than I did before.
    [Laughter.]
    Senator Cornyn. I appreciate him even more.
    Unfortunately, as you know, Mr. Chairman and Senator Leahy, 
everyday literally millions of dollars in copyrighted materials 
are stolen online. This theft is no less wrong because it 
happens in cyberspace. Rather, it is putting thousands of 
Americans out of work and damaging one of the most important 
and vibrant sectors of the United States economy.
    As the Court said in the Grokster case, because well over 
100 million copies of the software in question are known to 
have been downloaded and billions of files are shared across 
networks each month, the probable scope of copyright 
infringement is staggering. Grokster and StreamCast are not, 
however, merely passive recipients of information about 
infringing use.
    This is an issue that really we have addressed before, 
similar issues, on a bipartisan basis, and I am sure we will 
continue to do that in this difficult area to try to strike the 
right balance. Senator Feinstein and I were proud to cosponsor 
the Artists Rights and Theft Prevention Act, which we passed in 
the 108th Congress, which had to do with piracy of films, 
movies and other copyrighted materials even before copyright 
owners have had the opportunity to market their products. With 
the help of Senators Hatch and Leahy, that bill became law 
earlier this year as part of the Family Entertainment and 
Copyright Act. I am also pleased to be working with Senator 
Leahy, our Ranking Member, and other colleagues on additional 
legislation that will protect against rampant counterfeiting.
    In closing, Mr. Chairman, let me just say that as we 
consider additional legislative measures and as we observe the 
implications of the Court's ruling in MGM v. Grokster, we must 
ensure that the advent of the Internet and the expansion of 
innovative technologies do not set aside the basic principles 
that theft is wrong and that facilitation of theft is equally 
wrong.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Cornyn appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Senator Cornyn.
    We now turn to the United States Register of Copyrights, 
Marybeth Peters, who has held that position since 1994, and for 
11 years prior was the policy planning adviser to the Register. 
So that is quite a distinguished tenure in that office.
    She has been a lecturer at Catholic University and an 
adjunct professor of copyright law at the University of Miami 
School of Law and Georgetown Law. He has her undergraduate 
degree from Rhode Island College and a law degree with honors 
from G.W.
    Thank you for joining us, Ms. Peters, and the floor is 
yours.

 STATEMENT OF MARYBETH PETERS, REGISTER OF COPYRIGHTS, LIBRARY 
      OF CONGRESS, U.S. COPYRIGHT OFFICE, WASHINGTON, D.C.

    Ms. Peters. Chairman Specter, Senator Leahy, members of the 
Committee, thank you for the opportunity to testify on 
protecting copyright and innovation in a post-Grokster world.
    The recent ruling in the Grokster case, one of the most 
significant developments in copyright law in the past 20 years, 
clarified that those who offer products and services in a way 
that induces others to engage in copyright infringement can be 
held secondarily liable for that infringement. That 
clarification appears to have encouraged productive 
negotiations and agreements within the music industry and 
ultimately should make it easier to legitimately obtain music 
online.
    The Grokster ruling has also raised the public 
consciousness as to the legal status of unauthorized peer-to-
peer file-sharing of copyrighted works. In Grokster, the Court 
made clear that regardless of whether a product is capable of 
substantial, non-infringing use, one who offers such as product 
with an intent to induce to use it to infringe copyrights will 
be liable for the resulting infringement.
    As the Court put it, one who distributes a device with the 
objective of promoting its use to infringe copyright, as shown 
by clear expression or other affirmative steps taken to foster 
infringement, is liable for resulting acts of infringement by 
third parties. The Court made this ruling in a specific factual 
and legal context that is worth noting.
    Ever since the rise of Napster in the late 1990s, creators 
and performers of music, motion pictures and other creative 
works have faced an unprecedented threat to their livelihoods 
as a series of so-called file-sharing services have risen to 
create and serve a market from massive copyright infringement. 
Millions and millions of people flocked to these peer-to-peer 
services to get free music, free movies and free other creative 
works, apparently without giving a thought to the fact that not 
only were they engaging in copyright infringement, but they 
were also undermining the very incentive for authors and 
artists to create the works that they were so eager to obtain.
    Grokster and StreamCast clearly knew what their services 
were being used for, and as the litigation revealed, they 
consciously set out to exploit the market for infringement and 
to promote the use of their software for that purpose. But they 
were able to assert a plausible legal defense by relying on the 
Sony case involving the sale of VCRs, which was decided long 
before the Internet made it possible to engage in massive, 
instantaneous and virtually cost-free infringement.
    In Sony, the Court held that there could be no liability 
for contributory infringement based solely on the distribution 
of a product that is capable of commercially significant non-
infringing uses. The peer-to-peer services, supported by others 
in the consumer electronics and technology industries, asserted 
all the way to the Supreme Court that because peer-to-peer 
software is capable of substantial non-infringing uses, and 
because even those particular peer-to-peer services could be 
used for the reproduction and distribution of works in the 
public domain or of copyrighted works with the permission of 
the copyright owner, they were shielded from liability under 
the Sony doctrine.
    If their arguments had prevailed, the continued existence 
of our creative industries, as well as our copyright law, would 
have faced a potentially mortal threat. Fortunately, the Court 
rejected such a drastic reading of Sony and made clear that 
whether or not a product has substantial non-infringing uses, 
one who distributes it with the intent that it be used to 
infringe and who takes steps to promote its use to infringe 
will be liable when infringement takes place.
    Last year, Senators Hatch and Leahy introduced the Induce 
Act which would have made it unlawful to intentionally induce 
an act of copyright infringement. The Supreme Court's ruling 
comes close to accomplishing the intent of that Act.
    It may be that in a few years either copyright owners or 
technology providers, or both, will conclude that Grokster did 
not achieve the right balance or that further clarification of 
the Sony rule is necessary. But we need to give lower courts 
some time to digest this ruling and give the affected parties 
time to see how clearly it offers guidance for both copyright 
owners and technology providers, and how good that guidance 
turns out to be. At this time, it is premature to consider the 
need for any legislation on secondary liability.
    You should, however, now reform Section 115 of the 
Copyright Act, the compulsory license for reproducing and 
distributing phonorecords of musical works. Grokster gives 
copyright owners and legitimate music services a useful tool in 
the fight against peer-to-peer piracy, but that battle will not 
be won unless consumers are able to find the music they want 
online from legitimate services that offer convenience, 
security and reasonable prices. Section 115 is out of date and 
little headway has been made during the past 2 years of 
discussions about reform. Legislative action is needed now.
    To conclude, first, I am hopeful that Grokster represents 
the turning point where legitimate online delivery services can 
supplant the illegal services that have dominated the online 
music scene. Second, I urge you to make reform of Section 115 
of the copyright law a legislative priority for the 109th 
Congress, and I look forward to working with you to help that 
come about.
    Thank you.
    [The prepared statement of Ms. Peters appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Ms. Peters.
    Our next witness is the United States Attorney for the 
Central District of California, Debra Wong Yang, the first 
Asian-American woman to serve as a United States Attorney, and 
has the largest office outside of Washington, D.C. She was 
appointed by the Attorney General to Chair the Attorney 
General's Advisory Committee on Cyber/Intellectual Property and 
the Intellectual Property Task Force. She had been a California 
State judge and an adjunct professor at USC. Her law degree is 
from Boston College.
    Thank you very much for coming in today, Ms. Yang, and we 
look forward to your testimony.

  STATEMENT OF HON. DEBRA WONG YANG, UNITED STATES ATTORNEY, 
 CENTRAL DISTRICT OF CALIFORNIA, AND CHAIR, ATTORNEY GENERAL'S 
ADVISORY COMMITTEE ON CYBER/INTELLECTUAL PROPERTY, LOS ANGELES, 
                           CALIFORNIA

    Ms. Yang. Thank you, Chairman Specter, Ranking Member 
Leahy, Senator Feinstein, Senator Cornyn, Good morning. Thank 
you for the opportunity to discuss the Supreme Court's recent 
decision in Grokster, and more broadly to talk about the 
Justice Department's efforts in protecting intellectual 
property.
    Until relatively recently, protection of intellectual 
property has largely been a civil matter. Congress has made 
civil remedies available and left it to private parties to sue 
one another for damages or equitable relief. Grokster involves 
the reach of civil liability for copyright. There, the Court 
held that a person could be secondarily liable for a third 
person's copyright infringement, but only if he acted with the 
intent to promote the unlawful infringement. What I would like 
to discuss, however, is what the Justice Department is doing to 
enforce the criminal laws protecting intellectual property.
    Congress has created criminal penalties only recently. 
Copyright and trademark infringement did not become felonies 
until the 1980s, and theft of trade secrets was not criminal 
until 1996. Patent infringement to this day is protected only 
by civil liability. The resort to criminal sanctions has 
paralleled the growing importance of intellectual property to 
our economy.
    In our mission to protect intellectual property, the 
Justice Department has focused on three goals. First, we have 
been using the tools that Congress has provided to halt the 
supply of illegally obtained intellectual property. Second, we 
have attempted to diminish the demand for pirated and stolen 
intellectual property through educational and outreach 
programs. And, lastly, we have trained and rely upon a group of 
prosecutors who specialize in cyber and intellectual property 
crimes.
    In stemming the supply, we have investigated and prosecuted 
the initial theft of intellectual property assets, as well as 
their subsequent distribution. For example, we have identified 
three ways in which movies not yet available in DVD format are 
obtained. They are stolen from post-production facilities, they 
are handed off by persons who screen movies for the Academy 
Awards, or they are taped by camcorders. We have aggressively 
prosecuted criminals who engage in all of these acts.
    Just this year, Congress substantially aided our ability to 
stop the supply of so-called pre-release movies by elevating 
the acts of uploading and of camcording from misdemeanors to 
felonies. U.S. Attorneys' offices across the Nation have 
already started to use these new statutes.
    We have also attacked the distribution networks used by 
those who steal and pirate intellectual property. For those who 
distribute using the Internet, we use the Digital Millennium 
Copyright Act to prosecute individuals who dismantle the 
copyright protection attached to intellectual property assets.
    We have also conducted several long-term investigations 
aimed at infiltrating and taking down groups that share pirated 
software and movies over the Internet. For example, earlier 
this year we had Operation Site Down. The Department of Justice 
took aim at a so-called warez group that operated a centralized 
data base containing more than $50 million in illegally copied 
intellectual property assets.
    We have also started to investigate and prosecute more 
decentralized pirating organizations that use the peer-to-peer 
networks to store and distribute illegally obtained 
intellectual property. I have outlined several of these 
examples in my written submission to this Committee.
    We have also targeted groups that distribute intellectual 
property in the real world by making hard copies of DVDs, CDs 
and software, and selling those items at swap meets and on 
street corners across the United States. Last year, for 
instance, U.S. Attorneys' offices in California and the State 
of Washington completed Operation Marauder and charged 12 
people with copyright and trademark violations based on their 
mass production and distribution of illegal software in several 
different States in one of the largest seizures of counterfeit 
software in United States history.
    In addition to these prosecutions, the Department has 
contributed to the administration's STOP program, which stands 
for Strategy Targeting Organized Piracy. Working with the White 
House, the Department of State and other departments within the 
Government, the Justice Department has met with representatives 
from other countries to halt the influx of pirated items into 
the United States.
    In addition to working to halt the supply, we have also 
devoted substantial time and effort to diminishing the demand 
for pirated intellectual property. Over the past year, we have 
hosted several different outreach programs aimed at high school 
students to educate them about why they should not download 
illegally obtained music, games and movies. We will continue to 
work on changing the attitudes about piracy through our 
extensive educational efforts.
    The Department's efforts in halting the supply and demand 
for illegally pirated goods have been aided in large part by 
the Department's commitment to developing specialized 
prosecutors. The Department is now home to a 35-person attorney 
unit called the Computer Crime and Intellectual Property 
Section, known as CCIPS here at Main Justice, and have 
specialized units known as CHIP units, which stand for Computer 
Hacking and Intellectual Property units, that prosecute cyber 
and intellectual property crimes in 18 United States Attorneys' 
offices, as well as one CHIP prosecutor in each of the 
remaining U.S. Attorneys' offices.
    Last year, then-Attorney General Ashcroft commissioned an 
Intellectual Property Task Force to conduct a comprehensive 6-
month review of the Department's efforts to protect 
intellectual property. In October of last year, the task force 
published its report, with several concrete proposals to 
increase the Department's effectiveness in prosecuting these 
types of crimes.
    Attorney General Alberto Gonzales has reaffirmed the 
Department's commitment to these issues when he recommissioned 
the task force to implement the recommendations. The Department 
has already put several of these recommendations into practice, 
which are set forth also in my written testimony.
    Finally, Attorney General Gonzales recently created a 
subcommittee of United States Attorneys to examine what the 
Department can do to improve its prosecutorial efforts in 
protecting intellectual property. I have been asked to chair 
this subcommittee. Our subcommittee is just beginning its work.
    I am grateful for the opportunity to address this 
cCommittee and I am hopeful that today marks the beginning of a 
fruitful dialog between our new Committee and Congress as to 
how to best combat the misuse of our Nation's intellectual 
capital.
    Thank you, and I would welcome any questions.
    [The prepared statement of Ms. Yang appears as a submission 
for the record.]
    Chairman Specter. Thank you very much, Ms. Yang.
    Without objection, Senator Cornyn's statement will be made 
a part of the record, as will all other statements submitted, 
including Senator Feinstein's, Senator Leahy's, mine, and all 
of the witnesses'. Their statements will be made a part of the 
record.
    Ms. Peters, you have been in the Register's office now for 
some 22 years. We would be interested in your views as to 
whether the definition of secondary liability and 
interpretation of the copyright laws generally might better be 
the function of Congressional hearings and legislation than 
Supreme Court decisions. What do you think?
    Ms. Peters. Having had a good Supreme Court decision 
recently--
    Chairman Specter. How do you tell whether it is good or 
not?
    Ms. Peters. I know, I know. In this case, basically finding 
that there was liability was a good decision, and finding that 
those who consciously induce those others to infringe should be 
liable is a good result.
    Chairman Specter. OK, so it was a good decision. Could 
Congress give you a better one? You know, we don't have 
concurring opinions when we legislate.
    Ms. Peters. I know, and we actually favor one of the 
concurring opinions over the other. But as I mentioned, 
Senators Leahy and Hatch last year did introduce the Induce 
Act, and if you look at the provisions in their Act and you 
look at what the Supreme Court did, they are remarkably 
similar.
    Chairman Specter. So the Court just copied Justice Leahy 
and Justice Hatch?
    [Laughter.]
    Ms. Peters. Well, in many ways it is--I will use the words 
``remarkably similar.''
    Chairman Specter. You know, they haven't even been 
confirmed.
    [Laughter.]
    Senator Leahy. And probably never could be.
    Ms. Peters. I still believe that the common law system of 
secondary liability, in general, has served copyright rather 
well. And it may be that legislation should be enacted, but my 
own preference would be to see how courts deal with this at 
this point in time, and that could better inform any 
legislative fix because ultimately what you are looking at is 
the exact same thing that the Supreme Court did.
    Chairman Specter. Well, I can understand your saying we 
have a Supreme Court decision and let's see how it works out 
now. But institutionally, isn't it really more of a 
Congressional function than a judicial function?
    Ms. Peters. I actually believe it is both. Because the 
Copyright Office is totally governed by--
    Chairman Specter. It is both, exactly the same, tied, not 
more one than the other?
    Ms. Peters. Certainly, if there is legislation that is a 
clear intent of what the Constitution intended with regard to 
the Constitution gives the power to Congress to determine the 
scope of copyright protection. But that is not totally 
exclusive, and even when Congress acts, the courts in a common 
law system interpret that legislation. So it always is kind of 
back and forth between the Congress and the courts, each one 
basically supplementing the other in various situations.
    Chairman Specter. Ms. Yang, in terms of the volume of the 
piracy and the losses, how would you compare the copying of 
cassette tapes and movie tapes, which had been the principal 
lines of infringement in the past, with the infringement 
available now with the technological advances and specifically 
the Internet? Is it a great deal more now than before?
    Ms. Yang. I would say so, Senator. With respect to the 
volume, because of the availability and the access of sharing 
on an Internet site, a warez site or on a peer-to-peer level, 
it is astronomical as far as how much can get out there and how 
quickly it can be done.
    There is one small distinction, though. With respect to the 
hard goods, the one difference is you actually exchange cash. 
So there is somebody who is out there who is taking monies in 
when it comes to hard goods. It is much more difficult for us 
to quantify what that loss would be in sort of the peer-to-peer 
or the Internet situation.
    Chairman Specter. Ms. Yang, we have the concurring opinions 
which are present in the Grokster case. Would it be important 
for Congress to pick up at least the issues raised in those two 
concurring opinions and consider them and to legislate in that 
area so the district courts know what the law is and won't go 
back and forth like a tennis ball between the concurring 
opinions?
    Ms. Yang. First, Senator, I would like to make the 
distinction that Grokster relates solely to civil liabilities 
and civil issues, and I am here to sort of address the criminal 
aspects. But anytime you have an opinion where there are, I 
guess, questions left for litigants and parties to have to 
muddle through, it is always helpful to have legislation in 
that regard, and especially in this particular area as we 
course through rapidly changing times.
    Chairman Specter. My red light went on in the middle of 
your answer, so I yield now to my distinguished colleague, 
Senator Leahy.
    Senator Leahy. Thank you, Mr. Chairman.
    Ms. Wong Yang, I am glad to have you here. Ms. Peters, of 
course, probably has the record of having appeared before this 
Committee more than virtually anybody else and, of course, has 
testified on this subject before.
    Could I ask you--I understand the various parties in the 
music industry have been negotiating among themselves. Have you 
taken part in those discussions?
    Ms. Peters. We took part in the summer of 2004 and reported 
to the House subcommittee on the results of those meetings. We 
certainly have been aware of the discussions between the 
private parties, and I did actually testify before the House 
and people commented on my remarks.
    At the moment, we have met with most of the players and 
they seem to be at an impasse, but the bottom line is, yes, we 
have been very actively involved. We don't have a stake 
necessarily in a particular outcome. The goal is to make sure 
that there is sufficient licensing so that legitimate services 
can blossom and flourish.
    Senator Leahy. What happens if we don't legislate a change 
in Section 115?
    Ms. Peters. Then you have the status quo. So to the extent 
that there are people who are complaining that it is impossible 
to use the compulsory license or that it is impossible to 
license in the current environment, then that will continue.
    Senator Leahy. What about those millions of people who have 
still got that old software? There are millions of people out 
there with the old software. They are still exchanging stuff. 
What do you do about that?
    Ms. Peters. I think that the Supreme Court--
    Senator Leahy. Is that horse out of the barn?
    Ms. Peters. There will always be people who disobey the 
law. I do believe that because of the Supreme Court decision, 
more people know that there is no question about the legality 
of the various actions. So I do think those people who may have 
been tricked into thinking that what they were doing was legal 
know better. So I think ultimately it will be reduced, but it 
will never go away.
    Senator Leahy. Thank you.
    Ms. Wong Yang, Senator Hatch and I introduced the Pirate 
Act last year. That is sort of the civil side of the Justice 
Department's criminal enforcement authority in the copyright 
realm. Now, as I understand it, the Department did not support 
the effort of Senator Hatch and myself. You have also suggested 
very strongly that you believe the enforcement of intellectual 
property rights in a civil context has to be left to private 
parties. I am somewhat puzzled by this because the Federal 
Government, especially this Justice Department, has no 
hesitation in bringing civil cases in a lot of other areas 
where they assume the public interest requires it.
    Is there any reason why we should limit the Federal law 
enforcement of copyright laws just to the most egregious 
criminal cases? Couldn't civil litigation accomplish sometimes 
quicker and better what you might want to do?
    Ms. Yang. Certainly, Senator Leahy, I think that where you 
have parties who can seek civil liabilities against each other, 
that provides a certain amount of compensation for the loss. 
What we try to do with our limited resources is try to attack 
those who actually distribute or supply to a greater magnitude 
and try to use our efforts to focus on, much as we do in drug 
cases, those that are sort of in the chain and distributing it. 
We can't necessarily get at all aspects of it and try to sort 
of focus our efforts in that regard.
    Senator Leahy. I can never fully understand just why the 
Justice Department does some things they do. I know right after 
9/11, a lot of us were concerned about ships coming into the 
New Orleans port and the Department of Justice spent a lot of 
money on a huge investigation down in New Orleans, and guess 
what they found. Two houses of prostitution. I mean, who knew 
in New Orleans, of all places?
    [Laughter.]
    Senator Leahy. I would think they could have gone to the 
Yellow Pages and found them a lot faster.
    [Laughter.]
    Senator Leahy. How does the Department combat physical 
piracy? How is it handling the problem overseas? What resources 
are allocated to peer-to-peer prosecutions and how successful 
have those prosecutions been?
    Ms. Yang. Aside from the STOP program that I referred to 
earlier, the Department actually in the Intellectual Property 
Task Force report identified a number of things that we could 
do in the future with respect to dealing with some of the 
foreign problems.
    One of them is to put a prosecutor located in Eastern 
Europe and another one in Asia to help facilitate the 
processing of more of those crimes, and we continue to do 
outreach through various organizations into those countries.
    Senator Leahy. Thank you. I think I will have some follow-
up questions. I will submit them in writing, though, on that. 
Thank you very much, Ms. Wong Yang. Thank you, Ms. Peters.
    Mr. Yang. Thank you, Senator.
    Chairman Specter. Thank you, Senator Leahy.
    Senator Feinstein.

  STATEMENT OF HON. DIANNE FEINSTEIN, A U.S. SENATOR FROM THE 
                      STATE OF CALIFORNIA

    Senator Feinstein. Thank you very much, Mr. Chairman. As 
you probably know, this is a major issue for my State. We have 
all seven of the big movie companies, hundreds of independents, 
a whole chain of companies that function legally.
    I have watched for over half a decade now, beginning with 
Jack Valenti coming before this Committee and urging us to do 
something. We then asked Jack to go out and negotiate and there 
was an attempt at negotiation, and then there was another 
attempt at negotiation. Some companies, I believe, have 
changed.
    We now have a unanimous Supreme Court decision, and yet the 
peer-to-peer networks are apparently increasing rather than 
decreasing. To me, that is a signal, and the signal is that we 
should enact a strong law to protect our copyright industries. 
If these negotiations can't produce, then I think it is up to 
the Congress to act.
    I know that the United States Attorney here, Ms. Yang, 
operates the largest U.S. Attorney office in the Nation in the 
center of much of the intellectual property industries of 
California.
    If we were to legislate, Ms. Yang, what would you advise us 
to do?
    Ms. Yang. Senator, I can't answer that specifically today. 
I will tell you that the legislation that you have provided to 
us in the past with the Family Entertainment and Copyright Act 
we have been using in the U.S. Attorneys' offices. One case was 
filed--actually, all of them have been filed in your 
jurisdiction. One was filed in San Jose, and just yesterday 
down in Los Angeles we filed a case charging eight individuals 
using that violation where they uploaded onto the Internet.
    On the subcommittee that I just got named to chair, what we 
hope to do is identify various holes and places where we see 
things in our prosecutions that we could identify as being 
areas where we could use the assistance from this Committee and 
from the Senate.
    Senator Feinstein. Well, you see, I would think in view of 
a unanimous U.S. Supreme Court decision, which is actually 
being followed in other countries--and we are constantly told 
stop to piracy in China. Well, how can you stop piracy in China 
when we can't stop it in our own country? We have got that 
Supreme Court decision and still the illegality exists. I think 
what is necessary is really forceful enforcement tools. If you 
don't have them, I think we ought to give them to you.
    Ms. Yang. Right. I mean, for example, when you increased 
the penalties in camcording from misdemeanors and allowed us to 
charge it as a felony, I think that sent a strong deterrent 
message through the entertainment--
    Senator Feinstein. Then why are these illegal networks 
still out there if the message is so strong?
    Ms. Yang. I think the message needs to come out even 
stronger. We need to get out there with a unified voice. From 
the Department's perspective, that is what we tried to identify 
through the Intellectual Property Task Force and identify areas 
that we could hit on. We have been charging cases in the peer-
to-peer area, but quite frankly there is only so much that we 
can do in a limited amount of time.
    Senator Feinstein. My point is, Mr. Chairman, whatever it 
is, it is not enough. How can you have a U.S. Supreme Court 
opinion which is unanimous which carries the full force of the 
legal system in this country and yet it still goes on, and it 
goes on to the extent of considerable loss to legitimate 
companies with copyright rights? So my view is that whatever 
the message that is going out there is, it isn't strong enough 
and that this Congress needs to take some action.
    I remember when Valenti first came before us and they 
started the negotiations, and it has gone on and on and on 
probably for close to a decade now. Yet, still the illegal 
market is increasing, and there seems to be no sanction and no 
deterrent that slows it down sufficiently.
    Chairman Specter. Well, we have the United States Attorney 
here from the Central District of California.
    Senator Feinstein. Who is saying she does what she can when 
she can do it. That is the way I interpret what you are saying, 
and what I am saying back is it isn't enough. So what do we 
need to do to give you the tools? That is what I want to know, 
if you don't have the tools.
    Ms. Yang. Senator, I would actually like to--I don't want 
to speak off the cuff here. I would like to sort of caucus with 
people back at Main Justice and see if there are things that we 
can identify or make specific suggestions to you, because I 
know that is what you are asking for.
    I will tell you that the education that we have been doing 
is a large component, and it is very dismaying for me to go 
into the public among high school students, college students, 
some of the places where I lecture to students, and ask them 
how many of you download music or movies. I give them a 10-
second immunity to answer the question and almost always it is 
a hundred percent of the people in the room. So I mean that is 
part of the reason why we also have to educate our youth as to 
why this is actually a theft.
    Senator Feinstein. Just bottom line, we either have 
copyright that we enforce, or because you have got this broad 
young public that sees nothing wrong with illegal downloading, 
you destroy every copyright industry, it seems to me. Every 
industry that depends on copyright can't function in a country 
as the high-tech services become such that you can't protect 
copyright. And that is what I see happening now, and it will 
spread to other areas, as well. So somehow we either get a 
handle on it and stop it--and I think the only way to stop it 
is through the peer-to-peer network by really sanctioning it in 
a way that either it is going to be legal or it isn't going to 
exist.
    That is the difficult part. How do we give you the tools to 
do that, because the market is going to remain, just as the 
market for illegal products in China and all over the world is 
going to remain? And it seems to me if we can't stop it on our 
own shores, we can't tell other countries what to do or not do.
    Ms. Yang. I agree.
    Chairman Specter. Well, Ms. Yang, aren't there existing 
criminal penalties available to go after those who are 
secondarily liable?
    Ms. Yang. There are. I mean, post-Grokster, we did one case 
where we took down some peer-to-peer individuals and we 
continue to do that. It is just that for us--
    Chairman Specter. One case?
    Ms. Yang. Yes, we have done one case.
    Chairman Specter. How about more than one case?
    Ms. Yang. Well, part of that, sir, has to do with the fact 
that our mind set really is--and it is not to say that we 
ignore that. That is not it at all, but our mind set is trying 
to get at the people who directly distribute and supply the 
goods. So we are still going at sort of, as you call it, the 
first level. So for us to drop down to those who are, as we 
call it, secondarily liable--you know, it falls within the 
focus if it is of great magnitude, but quite frankly we are 
still operating at the first level.
    Senator Feinstein. I think--
    Chairman Specter. Well, wait a minute. Why not operate at 
both levels? How much consultation is necessary with Main 
Justice? You have criminal liability under the statute. You 
have a definition now by the Supreme Court as to secondary 
liability. Why not get tough? That is what Senator Feinstein 
wants you to do and I think she has got a pretty good idea.
    Ms. Yang. I could do that if I could take, for example, 
many more prosecutors and put them toward doing that.
    Chairman Specter. So you need many more prosecutors? Tell 
us what you need. That is the pending question by Senator 
Feinstein.
    Ms. Yang. Quite frankly, you know, the things where there 
are resources involved, that would definitely help because, you 
know, we are trying to manage, quite frankly, a lot of 
different things right now. Terrorism is our Number one 
priority, as well it should be, and unfortunately we have those 
kinds of cases that actively go on in my district.
    Chairman Specter. Is there any room for private prosecution 
of the injured parties to go into criminal court?
    Ms. Yang. Certainly, there could be cross-overs. I mean, we 
would never want to be sort of, I guess, the hammer in a civil 
lawsuit, so to speak. So where civil remedies are available and 
they are adequate, that is fine.
    Chairman Specter. I am not thinking about civil liability. 
There are some provisions in the criminal law for private 
prosecution. There was a very good analysis of that in the Yale 
Law Review some years ago that I wrote.
    [Laughter.]
    Chairman Specter. Senator Feinstein.
    Senator Feinstein. If I might just say something, the thing 
that worries me is if we go out and arrest some high school 
that is downloading--and I don't think any of us are supportive 
of that, but you have got very smart, very sophisticated people 
running these networks. They know what the liability is and 
they take the chance, and I think, candidly speaking, it has 
got to be either made legal or shut down.
    What bothers me is the information I have received that it 
is increasing, despite the Supreme Court decision, which 
indicates to me that we have got a real problem on our hands 
and that if we don't stop it, it is going to destroy these 
intellectual property industries.
    Chairman Specter. Well, you have your assignment, Ms. Yang: 
off to Main Justice and report back this afternoon.
    [Laughter.]
    Chairman Specter. Ms. Peters, we could use some help from 
you, too. With your 22 years' experience, you must have some 
ideas. Consider the question to be submitted in writing within 
a week: what active steps can Congress take to help law 
enforcement with additional resources and what additional 
legislation is necessary, if any, to enforce the laws.
    Now, on to panel two. Our second panel consists of Mr. 
Marty Roe, Mr. Cary Sherman, Mr. Gary Shapiro, Mr. Mark Lemley, 
Mr. Ali Aydar and Mr. Sam Yagan.
    Marty Roe is our first witness on panel two. He is the lead 
singer and guitarist for the country music group Diamond Rio. 
No. 1 hits include ``Meet in the Middle,'' ``Beautiful Mess,'' 
``One More Day,'' and ``How Your Love Makes Me Feel.'' The band 
has won four country music awards and was inducted into the 
Grand Ole Opry in 1998.
    Thank you for joining us, Mr. Roe, and the floor is yours.

 STATEMENT OF MARTY ROE, LEAD SINGER, DIAMOND RIO, NASHVILLE, 
                           TENNESSEE

    Mr. Roe. Thank you, Mr. Chairman, Senator Leahy and Members 
of the Committee. Good morning. I am Marty Roe, with the group 
Diamond Rio. I would like to introduce my band mates who are 
here somewhere: Gene Johnson, who is from Pennsylvania; Dan 
Truman, from Utah; and Dana Williams, who is from Tennessee. 
Somehow or another, they elected me for this honor. We do 
appreciate the opportunity to speak today to give you an 
artist's perspective on the Supreme Court's recent Grokster 
decision.
    We have been signed to Arista Records since 1991 and are 
blessed to have a career that has spanned well over a decade. I 
am proud to say that we made history this year with our 15th 
consecutive Country Music Association Vocal Group of the Year 
nomination, and I am proud and honored to be here this morning 
representing the music community.
    Imagine going to your job 8 hours a day, 5 days a week, 50 
weeks a year, working hard to produce a product that you are 
proud of that adds value to society. Now, imagine that at the 
end of that year, you receive no paycheck and no compensation 
from the millions of people who use everyday that product that 
you worked so hard to create. You would have walked off that 
job long ago.
    Unfortunately, that is exactly what has happened in the 
music industry, not because of any lack of love for music, but 
for the simple truth that artists and songwriters, like 
everyone, need to make a living. Many peer-to-peer services 
like Grokster have been the main culprit in preventing those 
artists from making a living. By operating file-sharing 
networks, encouraging and facilitating the free exchange of 
millions of copyrighted works, these businesses have devalued 
our music and created an entire generation of listeners who 
believe that we don't deserve to be paid for our hard work and 
creativity.
    The result can be seen from Music Row to Hollywood as 
artists, musicians and songwriters have closed up shop. Some 
have estimated that the Nashville community has lost nearly 
half of its songwriters, a huge number of whom have been forced 
to go into other professions in this terrain.
    The Supreme Court's decision in Grokster offered a unique 
high note in this otherwise downbeat time. The highest court in 
the land, in a unanimous decision, saw what we saw, what nearly 
everyone who seriously considered this issue saw: this was 
outright theft, and Grokster and other services like it were 
making it happen. The decision gives new hope to a suffering 
industry by making those services responsible for promoting the 
theft of our creative work. It shines a spotlight on shady 
businesses that have perfected the art of operating in the 
shadows and blaming others for the resulting illegal activity.
    Certainly, some bands have used peer-to-peer networks to 
market themselves and reach a wider audience. If this has 
worked for them, that is great, but this promotional device 
should be a choice for each and every artist. No one should 
decide for me or any other band that a song should be offered 
for free.
    Of course, Diamond Rio is excited to be a part of the 
digital revolution. We embrace it. For instance, our music is 
offered on the current Napster, iTunes, Music Match and many 
more, but these services present a major distinction from 
Grokster and its siblings. They value our music and encourage 
others to value it as well. For a reasonable fee, the public 
can get quality downloads without the threat of viruses and 
spyware. Appropriate payment goes to us and the many people who 
help us bring our music to you. The Grokster decision is 
important in helping to continue to usher in legitimate online 
music businesses and a vibrant, legitimate marketplace.
    We are part of a large family, an interconnected network of 
artists, songwriters, musicians, recording engineers and many 
others who bring music to life. We have been proud to work in 
Nashville, the heart of music-making in the country, and indeed 
in the world. We want to see this family survive and grow, and 
the Grokster decision has played a major part in that. The 
Grokster decision was helpful because a unanimous Supreme Court 
set the tone of intolerance for using piracy as a business tool 
to make profits at the expense of artists.
    Regardless of the medium, whether it be peer-to-peer, 
radio, downloads, satellite, Internet or any other platform, we 
hope that Congress will work vigilantly to maintain and assure 
this tone of intolerance against businesses facilitating theft, 
because by doing so you will be helping those of us who devote 
our whole lives to making the music.
    Thank you.
    [The prepared statement of Mr. Roe appears as a submission 
for the record.]
    Chairman Specter. Thank you very much, Mr. Roe.
    Our next witness is Mr. Cary Sherman, President of the 
Recording Industry Association of America, 350 members. It 
purportedly represents the interests of a $14 billion U.S. 
sound recording industry. Prior to his current position, he was 
a partner in Arnold and Porter, and a graduate of Cornell and 
the Harvard Law School.
    Thank you for coming in today, Mr. Sherman, and we look 
forward to your testimony.

   STATEMENT OF CARY SHERMAN, PRESIDENT, RECORDING INDUSTRY 
            ASSOCIATION OF AMERICA, WASHINGTON, D.C.

    Mr. Sherman. Thank you, Mr. Chairman and Senator Leahy and 
Senator Feinstein. I appreciate the opportunity to testify 
today. I think that that must be an old bio because a $14 
billion is now a $12 billion industry partly because of the 
subject matter of today's hearing.
    Clearly, the decision in Grokster was a defining moment for 
the distribution of music and other creative content in the 
digital age. In a rare unanimous decision, the Court recognized 
that those who actively induce or encourage others to steal 
copyrighted works may be held liable themselves for the 
resulting infringement. And I would like to recognize this 
Committee's leadership in helping forge the path taken by the 
Supreme Court in the Grokster case. The language of the opinion 
may be legalese to many, but the message was simple: theft in 
any medium is unacceptable and those who facilitate it may be 
held responsible.
    The music industry has been hit particularly hard by the 
massive theft occurring on illicit P2P file-sharing networks 
like Grokster. Record companies are essentially venture 
capitalists, with the revenue we earn from the sale of recorded 
music plowed back into new music and new artists. 
Unfortunately, there is a lot less money to invest these days. 
SoundScan recently reported that through the week of September 
of this year, album sales are down 8 1/2 percent versus the 
same period for 2004, and this is on top of a 5-year decline of 
some 30 percent on units shipped between 1999 and 2004. The 
result is less money to invest in new artists and new music.
    Thousands of individuals engaged in the music, film and 
other entertainment industries have seen their jobs disappear, 
and music stores across the country have had to close their 
doors. Left unchecked, the networks that promoted this illicit 
activity threaten to instill in an entire generation a culture 
of lawlessness and a complete lack of respect for copyright and 
the valuable works it protects.
    The decision in Grokster helps to change all that, 
clarifying that inducing and encouraging infringement are just 
as much a part of copyright law as the doctrines of 
contributory infringement and vicarious liability. This result 
is completely consistent with and does nothing to change the 
holding of the landmark Sony Betamax case, which the Court 
noted was never meant to foreclose rules of fault-based 
liability derived from the common law.
    Simply, courts are not required to ignore evidence of 
intent if there is such evidence, and there was plenty of 
evidence of what Grokster intended. As the Court noted, the 
unlawful objective is unmistakable. The Supreme Court injected 
into copyright law some common sense based on centuries of 
common law.
    The Court was also careful to balance the interests of 
content innovators and technology innovators. By focusing on 
the behavior of Grokster and similar companies and not the 
technology they used, the Court separated the good actors from 
the bad and left intact the Sony Betamax standard that has 
served creators, technology developers and consumers so well.
    The clarity provided by the Court, rather than stifle 
innovation, will increase it. Companies like iMesh, SNOCAP, 
Mashboxx, Pier Impact and P2P Revolution, as well as new 
technologies that operate within the law, will have a chance to 
gain traction, attract investors and appeal to fans.
    Within days of the decision, venture capital firms were 
calling companies offering licensed P2P services, looking for 
opportunities to invest. The Grokster decision ensures the 
healthy growth of a legitimate market eagerly seeking support. 
Apple's iTunes, Real Networks' Rhapsody, Napster, Ruckus, 
Cdigix. Walmart, Yahoo and many others have worked hard to 
build successful destinations for legitimate online music.
    The growing interest in these services can be clearly seen 
on the campuses of colleges and universities across the 
country. Nearly 70 schools now have deals with a legitimate 
service--a more than threefold increase from just last year. 
The decision in Grokster has played a major role in this 
growing trend, focusing attention on the issue of illegal file-
sharing and providing school administrators with undeniable 
moral and legal clarity.
    In fact, it has provided everyone with clarity. Those who 
make the movies, music, software and other creative content we 
love now know that their hard work will be protected. Consumers 
can now look forward to more of these great works and know that 
they can get them in a safe, secure, respectful and legal way. 
Those who seek to bring us content in fresh and innovative ways 
on new and old distribution platforms now know that they don't 
have to compete with illicit free-riders offering the same 
content for free.
    Those who seek to support these exciting, new legitimate 
products and services can now have renewed faith in their 
investment. And those who have promoted the absurd notion that 
somehow it is OK to take someone else's property just because 
you can have been shown to be clearly wrong. And those who 
choose to continue their businesses with a model based on theft 
now know that there is no excuse. The time to go legit is now.
    Thank you.
    [The prepared statement of Mr. Sherman appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Sherman.
    Our next witness is Mr. Gary Shapiro, President and CEO of 
the Consumer Electronics Association and Chairman of the Home 
Recording Rights Coalition. He led the manufacturers' legal and 
legislative battle to preserve the legality of the recording 
technology and consumer battle to protect fair use rights. He 
had been associated with the Squires Sanders law firm, a Phi 
Beta Kappa from the State University of New York and a law 
degree from Georgetown.
    The floor is yours, Mr. Shapiro.

  STATEMENT OF GARY J. SHAPIRO, PRESIDENT AND CHIEF EXECUTIVE 
 OFFICER, CONSUMER ELECTRONICS ASSOCIATION, ARLINGTON, VIRGINIA

    Mr. Shapiro. Thank you very much, Mr. Chairman, Senator 
Leahy, Senator Feinstein. The Consumer Electronics Association 
actually started in 1924 as the Radio Manufacturers 
Association, and now we have grown to some 2,000 companies, 
technology companies which employ hundreds of thousands of 
Americans, over $120 billion in sales, and are actually leading 
the economy and pulling it along through new technologies, many 
of which are giving different ways for the content community to 
reach their consumers.
    I am also here as Chairman of the Home Recording Rights 
Coalition, which as formed in 1981, the day after the Ninth 
Circuit Court of Appeals ruled that motion picture companies 
had the right to keep VCRs off the marketplace, which you were 
referring to earlier.
    While the Supreme Court in the Betamax case sparked a 
phenomenal technological renaissance of creativity and 
innovation that empowered consumers and created vast new 
markets for content providers, today in the post-Grokster world 
we are concerned that technological creativity and innovation 
may be stifled by the fear of future litigation and over-
regulation.
    The Grokster Supreme Court did not overturn Betamax, but 
created a new template, an inducement doctrine based on 
subjective intent. We are concerned about the future 
interpretation of this doctrine in the lower courts, especially 
in an environment where the media companies have expanding 
legal tools to limit the lawful activities of consumers, 
manufacturers and retailers.
    Now, on any typical day the wired family sends news to 
friends over the Internet, rips songs from CDs to portable 
players, downloads information from the Web to be used in 
school and business reports, and copies information from home 
repair, cooking or shopping websites. Teenagers take images and 
sounds and text and weave them together in unpredictably 
creative and very innovative ways.
    This use of technology to shift content in time, place, 
form and structure is redefining our culture and it is spurring 
new forms of creativity. Yet, all of these increasingly 
commonplace activities involve conduct that an overly broad 
interpretation of the Grokster case could prohibit.
    We are at a crossroads today as we shift to a digital 
society. With new technologies allowing every citizen to be a 
creator, our national creativity can no longer be measured by 
CD sales. With photo, video and music studios shifting to the 
American home, with the Internet providing worldwide outlets 
for distribution, with new technologies leaping forward, now is 
not the time to chill American ingenuity. And yet Grokster has 
certainly created that chill.
    Before developing a product in the post-Grokster 
environment, an innovator or entrepreneur will have to persuade 
everyone, from its outsider bankers to its inside counsel, that 
the product can be sold without risk of a lawsuit. Venture 
capital migrates away from risky, litigation-prone areas. So 
the chilling effect of content industry lawsuits against 
entrepreneurs is not even an academic exercise at this point.
    Consider the company Replay. That was a competitor to Tivo 
in the personal video recording market. It was driven to 
bankruptcy by litigation brought by MPAA members. Among the 
claims in the complaint they filed was that Replay, which is 
almost just like Tivo, induced the reproduction of copyright 
material.
    Well, one of today's hottest new products brought by a tiny 
company is the sling box. It is an ingenious new product that 
lets you watch a television signal from your home, cable or 
satellite TV service on a laptop computer, no matter where you 
are. There is no infringement here. No copies are being made 
and you can only connect to one device at a time. Yet, 
according to published reports, the MPAA has already threatened 
the company with a lawsuit to stop the sale of the product.
    Now, driving our concern as a technology industry is the 
fact that over the last decade, copyright law that this 
Congress and previous Congresses have passed has repeatedly 
been changed to strengthen the rights of copyright owners, 
while narrowing the rights of consumers and technology 
entrepreneurs. Terms of copyright are much longer. Penalties 
for infringement are much harsher. The DMCA made it illegal to 
create, or arguably even to discuss technologies which 
circumvent a copyright protection scheme.
    Now, individually, each of these Acts passed by Congress 
seems justifiable. But, cumulatively, they have totally tilted 
the balance toward copyright owners and away from users and 
technology companies. These new powers, fortified by the 
Grokster decision, make it easier for content owners to 
bottleneck innovation to the narrow paths approved by copyright 
owners.
    Indeed, just last week the motion picture industry 
announced that it is forming an exclusive consortium called 
MovieLabs to examine and license approved copy protection 
technologies. Centralizing licensing in a body owned and 
controlled solely by the movie industry is a powerful weapon in 
the wake of Grokster. Sheer market power of these six studios 
should be of interest to this Committee and to the Department 
of Justice.
    Despite winning the Grokster case, the content community is 
seeking even more legislative tools. Right now, the recording 
industry is approaching another Senate Committee with a 
proposal to give the FCC broad power to impose design 
requirements on new digital radios. And unlike the TV broadcast 
flag, the RIAA is not aimed at mass, indiscriminate, anonymous 
distribution of content over the Internet. The RIAA digital 
radio proposal is aimed squarely at limiting non-commercial 
recording entirely by a consumer in a private home. It would 
work an enormous change to copyright law and fair use. Yet, 
this proposal has never even been put to this Committee or to 
Congress.
    We do not believe that this is the time to hand new weapons 
to copyright proprietors to use against new technologies and 
inventors and entrepreneurs. But if the content community 
insists that they need further protections under the law, then 
we ask at a minimum that a clear statement of manufacturer and 
consumer protections be part of the equation. That is why in 
the House we support H.R. 1201, which would provide a clear 
statement by codifying the Betamax doctrine.
    Thank you.
    [The prepared statement of Mr. Shapiro appears as a 
submission for the record.]
    Chairman Specter. Thank you, Mr. Shapiro. We now turn to 
Professor Mark Lemley, Neukom Professor of Law at Stanford, and 
director of the Program at Stanford in Law, Science and 
Technology. He is the author of 6 books and 65 articles, has a 
law degree from Boalt Hall and a bachelor's degree from 
Stanford University. He is one of the top intellectual property 
lawyers in California.
    Thank you for coming in today, Professor Lemley, and the 
floor is yours.

  STATEMENT OF MARK A. LEMLEY, WILLIAM H. NEUKOM PROFESSOR OF 
  LAW, STANFORD UNIVERSITY LAW SCHOOL, AND DIRECTOR, STANFORD 
  PROGRAM IN LAW, SCIENCE AND TECHNOLOGY, STANFORD, CALIFORNIA

    Mr. Lemley. Thank you, Mr. Chairman. I want to start by 
saying that I am encouraged at the title of this hearing, which 
is ``Protecting Copyright and Innovation in a Post-Grokster 
World,'' because the message I want to bring to you is that 
both protecting copyright and protecting innovation are 
extraordinarily important. Copyright is good because it 
encourages creativity. Innovation is good because it encourages 
a variety of other activities, and indeed facilitates the use 
and distribution of copyrighted works. The important thing is 
not to promote one at the expense of the other, but instead to 
try to find a balance.
    Now, the problem is that there are abuses. There are, as 
has been mentioned in this Committee already, undoubtedly 
abuses of copyright by high school and college students, as 
Senator Feinstein mentioned, who are downloading or uploading 
without authorization. That is illegal and it should be 
illegal. There are abuses by technology companies in rare cases 
such as Napster, designed solely to facilitate those acts of 
infringement.
    But I want to make it clear that there are also abuses of 
copyright law by copyright owners who are asserting rights 
designed to go after the people who are infringing instead of 
against legitimate technology companies. This isn't a ``may 
happen''; this is an ``is happening.'' We have seen lawsuits 
filed by copyright owners against the makers of consumer 
electronics devices that play music, against the makers of 
consumer electronics devices that allow you to record off of 
the television, against Internet auction sites like eBay, 
against Internet service providers, against search engines like 
Google, against bookstores like Amazon.com, against the 
telephone companies who own the wires over which data is 
transmitted, against venture capitalists who fund companies 
which in turn support infringement, and even against the law 
firms who advise companies.
    Now, this is a problem for the same reason that violation 
of copyright law is a problem. We have got to have a balance 
between copyright law and innovation. Grokster tries to 
distinguish good from bad, tries to strike that balance by 
saying we are going to create a legal tool that goes only after 
the bad and not a legal tool that goes after the good.
    Whether it succeeds or not, I think, remains to be seen. In 
my written testimony, I talk about some uncertainties relating 
to how the Court opinion will be interpreted. But because of 
those uncertainties, I think it may be premature to legislate 
to modify the opinion. Maybe Mr. Sherman is right and 
everything will be fine there.
    That doesn't mean, however, that the problem is going to go 
away, either the problem of copyright infringement--as Senator 
Feinstein acknowledged, it is still with us in the digital 
environment--or the problem of threats to innovation. So what I 
want to suggest outside of Grokster are some things we might 
do, and also that we might not do, to address this problem.
    What might we do? The first thing we ought to do, I think, 
is make it easier to target the people who are actually 
infringing, not perhaps in a criminal environment, although 
that is possible. We don't necessarily want to put college 
students in jail, though we have the legal tools now that would 
allow us to do that, and it would send a signal.
    I have proposed, along with Professor Tony Reese, a way of 
using the Copyright Office and the copyright royalty judges 
that this body created last year to try to create a cheap, easy 
mechanism for findings of infringement against direct 
infringers in ways that would impose a civil sanction that 
would hopefully make it clear to those people that they are 
infringing and deter them from doing so, and I have attached 
that proposal to my testimony.
    Second, I want to endorse Marybeth Peters's statement that 
we have got to make it easier to clear digital rights. The 
problem with legal music services is not just that you can't 
compete with free; it is that they have been so far unable to 
compete with ubiquity. People can get any song they want on an 
illegal service. They have not been so far able to get any song 
they want on a legal service, and that is because of the morass 
of rights that have to be cleared from multiple different 
owners in order to get rights in a digital environment. We have 
got to cut through that morass.
    Third, and finally, what I want to suggest is some things 
that we ought not to do, and in particular that we ought not 
try to impose technology mandates on innovative companies. 
Technology is good. It can be used for bad purposes, but if we 
give control over the design of a technology to one individual, 
history has shown us time and time again we will get bad 
innovation.
    Remember the pre-AT&T breakup phones. We got a lot of 
innovation in phone manufacturing once we let a whole bunch of 
people innovate in the phone industry. We didn't have 
innovation before that time. Innovation by committee, 
innovation only at the sufferance of all copyright owners 
collectively, would be even worse.
    So what I want to suggest is that while this Committee 
should target acts of direct infringement, while the Grokster 
opinion does correctly target people who are engaged in acts of 
inducement, this Committee ought to be very careful to avoid 
targeting or giving copyright owners the tools to target 
legitimate technology companies, because those legitimate 
technology companies, as Mr. Shapiro suggested, are existing 
right now in a state of fear. They have been sued. They 
recognize that they will be sued again and we shouldn't make 
the problem worse for them.
    [The prepared statement of Mr. Lemley appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Professor Lemley.
    Our next witness is Mr. Ali Aydar, Chief Operating Officer 
for SNOCAP. Prior to joining SNOCAP, he was the Senior Director 
of Technology at the original Napster. He has a mathematics/
computer degree with special concentration in technology-based 
entrepreneurship from Carnegie Mellon.
    We appreciate your being here and look forward to your 
testimony.

STATEMENT OF ALI AYDAR, CHIEF OPERATING OFFICER, SNOCAP, INC., 
                   SAN FRANCISCO, CALIFORNIA

    Mr. Aydar. Thank you, Mr. Chairman, Senator Feinstein, for 
the opportunity to be here this morning. My name is Ali Aydar 
and I am Chief Operating Officer of SNOCAP, a San Francisco-
based company working to create a digital music marketplace 
that meets the needs of copyright owners, online retailers and 
consumers.
    SNOCAP's founder, Shawn Fanning, is very sorry that illness 
prevents him from being here this morning. Six years ago, I 
joined Shawn as the first employee of an unknown music file-
sharing service called Napster. Napster unleashed an appetite 
for digital music that no one knew existed. When I joined 
Napster, there were 40,000 registered users. When it shut down, 
there were 85 million. At its peak, Napster users were 
launching hundreds of thousands of searches every second.
    The day after the company shut down, Napster's founders got 
together. We understood the problems facing digital music and 
felt compelled to fix them. We envisioned a technology-based 
solution built upon what we learned from our experience. We had 
learned that consumers want to listen to everything, not just 
the record companies' active catalogs, but every song or 
symphony ever recorded.
    We had learned that it was not just about free; it was 
about access, having whatever music you want whenever and 
wherever you want it. Fans want music and they are willing to 
pay for it. Artists and rights-holders want and deserve to be 
compensated. There has been progress in meeting these 
challenges. Roughly two million tracks are available for sale 
and rights-holders are being compensated.
    Yet, still, consumers aren't getting the music they want. 
Authorized sellers offer far less than the over 25 million 
tracks that can be found on P2Ps. Because there are literally 
hundreds of thousands of copyright owners, in order to match 
the number of tracks that existing P2Ps provide, each online 
retailer would have to strike tens of thousands of deals--a 
legal, economic and practical impossibility.
    Consequently, retailers focus on what is considered most 
popular, making it unlikely for consumers to find everything 
they want on existing authorized services, whether it is an up-
and-coming local band or a classic radio hit from their youth. 
But where some saw only a legal and practical mess, we saw a 
technological opportunity and a market-based solution. SNOCAP 
is our effort to provide that solution, a business-to-business 
service that benefits rights-holders, online retailers, 
including legitimate P2Ps that respect copyright, and 
consumers.
    SNOCAP acts as a one-stop registry and clearinghouse. 
Copyright owners register their content with SNOCAP and set the 
price in terms of distribution. SNOCAP also helps content 
owners identify less well-known tracks that are being shared on 
P2Ps and allows them to register and set terms on which these 
tracks can be shared or block sharing altogether.
    Retailers can access content through SNOCAP rather than 
negotiating hundreds or thousands of separate deals. It allows 
entrepreneurs to develop new business models and it gives 
thousands of online communities, whether they are maintained by 
non-profit organizations or giant corporations, the ability to 
form their own P2P networks and share content, while ensuring 
that rights-holders get paid. With SNOCAP, consumers legally 
get access to much more music and the benefits of file-sharing 
in an environment that works for everyone without the adware, 
spyware viruses and spoof files that plague the P2Ps today.
    This vision has been embraced by the industry. Major labels 
and many independents are currently registering their content 
with SNOCAP and progress continues. We expect that consumers 
will be able to buy music online from a SNOCAP-enabled retailer 
by early next year. It will be a dramatic step forward and it 
is just the beginning.
    SNOCAP has the potential to bring creators, retailers and 
consumers together as a registering and clearinghouse for every 
type of digital content, including film, television and books. 
As media and technology continue to mature, SNOCAP will enable 
rights-holders to efficiently move beyond the PC to new 
channels, allowing the Internet to finally realize its most 
fundamental promise--a medium where the world's information, 
knowledge, art and science can be shared universally, 
immediately and legally.
    Thank you.
    [The prepared statement of Mr. Aydar appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Aydar.
    Our final witness is Mr. Sam Yagan, President of 
MetaMachine, and developer of the file-share application 
commonly known as e-Donkey. Prior to working there, he co-
founded the educational publishing company SparkNotes, now 
known as Barnes and Noble. He has an applied math degree from 
Harvard and an MBA from Stanford.
    The floor is yours, Mr. Yagan.

STATEMENT OF SAM YAGAN, PRESIDENT, METAMACHINE, INC., NEW YORK, 
                            NEW YORK

    Mr. Yagan. Thank you, Chairman Specter, Senator Feinstein. 
Thank you for inviting me to testify on this issue that will 
undoubtedly have broad and lasting ramifications for both the 
content and technology industries.
    For the last 3 years, I have served as President of 
MetaMachine, the developer and distributor of the peer-to-peer 
file-sharing application e-Donkey. From my vantage point, I 
have witnessed and participated on the front lines of the 
confrontation between content and technology. I hope my 
experience on this cutting edge will be valuable to your 
Committee.
    You might be curious to know what kind of person might run 
a peer-to-peer company, so I would like to tell you a little 
bit about myself. Prior to joining MetaMachine, I was co-
founder and CEO of an educational publishing company called 
SparkNotes, which is now owned by Barnes and Noble. In that 
role, I was a rights-owner and my job was to sell books, not so 
different from the record label's job of selling CDs. I share 
this background with you to give you comfort that I am not an 
anarchist and I have no axe to grind with the owners of 
intellectual property.
    Before I get to the core of my opening statement, I would 
like to make it clear to the Committee that we have replied to 
the RIAA cease and desist letter and I have personally 
committed to Mr. Sherman, which I reiterate today, that we are 
in the process of complying with their request.
    Therefore, I am not here as an active participant in the 
future of P2P, but rather as one who has thrown in his towel, 
and I hope not to replay past issues today. I hope that as a 
result of my pending retirement from the P2P business, I can 
speak with more candor and that you will accept my testimony 
not as pushing any self-serving agenda, but merely as sharing 
with you my views on the post-Grokster world.
    I would like to comment on three elements of the Grokster 
case. First, because the Grokster standards require divining a 
company's intent, the Court's decision was essentially a call 
to litigate. This is critical because most start-up companies 
just don't have very much money. Whereas I could have managed 
to pay for a summary judgment under Betamax, I simply couldn't 
afford the protracted litigation I needed to prove my case in 
court under Grokster. Without that financial ability, exiting 
the business was our only option, despite my confidence that we 
never induced infringement and that we would have prevailed 
under the Grokster standard.
    Second, the Court specifically cites that Grokster's 
marketing to former Napster users indicated a principal, if not 
exclusive intent to bring about infringement. Is this really 
proof of intent to induce? Does that mean that every advertiser 
that is advertised in the e-Donkey software also have a similar 
intent to induce? I should hope not because last summer the 
campaigns of both President Bush and Senator Kerry ran 
advertisements on e-Donkey. Were they really both courting the 
swing infringement vote, or could they have had some other 
intent?
     My final point on Grokster is that its inducement standard 
is not sustainable as a long-term equilibrium. Imagine if since 
e-Donkey's inception not only had we not made any statements 
inducing infringement, but that we had made no statements at 
all other than putting up a website that read ``e-Donkey is a 
peer-to-peer file-sharing application.'' Those words alone seem 
that they would not qualify as affirmatively and actively 
inducing infringement.
    If we had never made any other statements, would we be in 
the clear right now? If so, new peer-to-peer applications will 
inevitably spring up and easily satisfy Grokster in this way. 
If we would not be in the clear, then the effect of Grokster 
will go far beyond merely chilling innovation; it will almost 
certainly freeze it in its tracks.
    I would like to wrap up by humbly stepping well beyond my 
area of expertise and making four observations that may be 
beneficial as you continue your oversight on this issue.
    First, I hope you will encourage a market solution. I don't 
think anyone can predict how this will shake out, but I have 
limitless trust in our free market system to generate numerous 
new business models to take advantage of the tens of millions 
of Americans who use P2P. Imagine if we could monetize just 1 
percent of the estimated tens of billions of shared files. 
There is a market solution to be found and it may well be one 
that fits into the business model of the incumbent 
entertainment industry, but it is not for us to decide. That is 
best left to the market.
    Second, on this issue I hope you will be especially aware 
of unintended consequences. With many P2P applications offshore 
or simply open-sourced, the entities that will end up being 
most devastated by Grokster will be those like us that set up 
shop in the U.S., abided by American laws, paid taxes, and at 
least in our case tried to license content from the 
entertainment industry. I fear that the winners in Grokster 
will not be the labels and the studios, but rather the 
offshore, underground rogue P2P developers who will have just 
lost half a dozen of their most legitimate competitors.
    Third, I hope you will consider the global context. As you 
know, e-Bay recently acquired the P2P company Skype for more 
than $2 billion. Skype was founded offshore, despite having 
American investors. It would be a real tragedy and a blow to 
our economy if our future technologists follow suit.
    Finally, I have started a few companies in my career and if 
I have one overriding passion, it is for entrepreneurship, the 
driving force of our economy. I urge you to try to empathize 
with entrepreneurs trying to innovate in nascent industries. I 
hope you will do all that you can to nurture and encourage 
entrepreneurs, and provide them with a legal environment in 
which they can face the myriad challenges that startups do 
without the additional burden of having to wonder how a judge 
many years in the future will construe their every e-mail, 
every phone call, and indeed every thought.
    I am happy to take any questions.
    [The prepared statement of Mr. Yagan appears as a 
submission for the record.]
    Chairman Specter. Thank you very much, Mr. Yagan.
    Mr. Roe, Mr. Sherman, what remedies do you think can be 
implemented to protect property rights short of criminal 
prosecutions? I will start with you, Mr. Sherman.
    Mr. Sherman. At this point, we are not seeking any 
particular legislation with respect to the Grokster decision 
itself.
    Chairman Specter. I am not talking about legislation. I am 
talking about enforcement. How do we implement enforcement to 
protect property rights?
    Mr. Sherman. Well, there was some legislation pending in 
the last Congress that would have made it easier for the 
Department of Justice to enforce rights dealing with issues 
such as the number of files and the valuation of these kinds of 
files. That was not enacted, but that is the sort of thing that 
could be done that would make the job of the Department of 
Justice easier.
    The idea of giving the Justice Department an opportunity to 
bring civil actions I always thought was a very good idea 
because it meant that the punishment could be commensurate with 
the violation, so that it wasn't a question of criminal 
prosecutions. Half or more of the lawyers in the Justice 
Department are on the civil side rather than on the criminal 
side, so it would mean that a lot more attorneys would be 
available to do something helpful on economic crimes.
    Chairman Specter. There is limited time, so let me move to 
Professor Lemley. Professor, you say that we ought not to 
stifle legitimate technology. And, Mr. Shapiro, you are 
worrying about chilling innovation.
    I will start with you, Professor. How do you identify the 
legitimate technologies and see to it that they are not 
harassed, while still protecting property interests?
    Mr. Lemley. Thank you, Mr. Chairman. Well, as Mr. Yagan 
indicated, the intent standard is a difficult one to meet. So I 
think the answer is a difficult one to understand; it is a 
difficult one to know whether you comply with it. So I think 
the answer has to have two parts. One is I would like to see 
both private and governmental enforcement focus its attention 
more closely on the people who are actually doing the 
infringing rather than companies that provide software or 
services that can be used to facilitate infringement. Targeting 
direct infringers, I think, is helpful because there we are not 
concerned about the impact on technology.
    The second thing that I think you can do is to have legal 
standards that are as clear as they can be and are as narrowly 
circumscribed as they can possibly be to target only people in 
the secondary liability space that really are bad actors. That 
is hard to do, and I worry a little bit about how the Grokster 
opinion will be interpreted in the lower courts, but for now it 
might prove to be a workable standard.
    Chairman Specter. Mr. Shapiro, you articulate very 
important principles not to stifle technology or chill 
innovation. How do you accomplish that and still protect the 
property interests that Mr. Roe and Mr. Sherman are so 
concerned about?
    Mr. Shapiro. Mr. Chairman, I think you make it clear that 
there is a balance. Right now, I think I am with most of the 
other panelists and the prior ones that I would not encourage 
Congress to do much of anything. I think this case has to be 
sorted out a little bit. It set a very high bar. We are very 
concerned about the intent standard because--
    Chairman Specter. Congress should not do much of anything?
    Mr. Shapiro. On this specific issue right now.
    Chairman Specter. We are good at that.
    [Laughter.]
    Chairman Specter. Go ahead.
    Mr. Shapiro. But if Congress is to act in the copyright 
arena, I would have to say it has to also focus on what rights 
consumers have, not just the copyright owners. I would also 
redefine the Copyright Office, frankly, so it is just not 
protecting copyright owners.
    I am concerned about making the U.S. Government the law 
firm for the RIAA and the MPAA. I don't think that is 
appropriate, which some of the proposals have done. I think the 
term of copyright should be reduced. Actually, Congress did 
make a decision which helped the Supreme Court. Congress acted 
to make it clear that downloading in the home is an illegal 
activity, and because of that, the Supreme Court say that that 
is an illegal activity. Therefore, it is inducing this illegal 
activity. Also, the RIAA has sued some 10,000 Americans, some 
10,000 teenagers, collected about $30 million to finance the 
RIAA, according to published reports. So what you have is--
    Chairman Specter. My time is almost up, but I want to--
    Mr. Shapiro. I am sorry. You have done a lot already is 
what I am saying.
    Chairman Specter. I want to move to Mr. Yagan. You heard 
Mr. Aydar's suggestion to bring all of these competing forces 
together. Do you think it is a good idea?
    Mr. Yagan. Mr. Chairman, I think my primary interest is in 
promoting as many different marketplace solutions as possible. 
So I am very excited about what SNOCAP is trying to do. I have 
been meeting with Mr. Aydar for well over a year on this topic. 
So I think it is a good idea, but I think we have to be very 
concerned not only about what we are doing internally, but how 
is the technology going to develop in an offshore environment.
    I believe that the result of the Grokster case will be that 
all of the existing peer-to-peer applications will be converted 
or in some other way will cease operations, but that does not 
mean that the file-sharing itself will necessarily stop. So I 
think as we think about what the market solution is or what the 
legislative solution is, we have to keep in mind the practical 
consequence that just because companies like mine may no longer 
exist, the technology still will.
    Chairman Specter. Thank you, Mr. Yagan. The red light went 
on during your answer, so I yield now to the new Ranking 
Member, Senator Feinstein.
    Mr. Sherman. Mr. Chairman, if I may just interject one 
thing, I just want to correct the record. There is no truth to 
the notion that the RIAA has collected anywhere near the amount 
of money Mr. Shapiro thinks. I just want to make that clear.
    Chairman Specter. Senator Feinstein.
    Senator Feinstein. I have listened to this with great 
interest and the position I am having the hardest time 
understanding is yours, Mr. Shapiro.
    Mr. Shapiro. I suspected that.
    Senator Feinstein. Yes, because you represent patent 
industries that want to protect their patents. In my book, 
there is no difference between the patent and the copyright. 
They are both protective mechanisms for people who have created 
to be able to recover based on the creation. So in my view, 
what is sauce for the goose is sauce for the gander. So should 
we reduce patent?
    Mr. Shapiro. I would be very comfortable reducing copyright 
to the term of a patent, but now it is about five times the 
term of a patent. It used to be very close together, and 
Congress repeatedly expanded it at the request of copyright 
owners. It now is so ridiculously long that there is very 
little in the public domain that can be used in these new 
systems.
    Senator Feinstein. But you certainly don't want less 
patentability for the companies you represent.
    Mr. Shapiro. Well, we do represent most of the patent 
owners in the non-medical area, and there is no question about 
that. The patent law does have some challenges as well, but the 
difference in a patented product, a physical product, and a 
copyrighted product is that if I take your patented product 
from you, you no longer have that product. If I use your 
copyrighted product, you have not actually lost something 
physical. In fact, you may have gained something and I may want 
to buy more of your product.
    Senator Feinstein. You lose your income.
    Mr. Shapiro. You lose a potential source of a sale. Every 
one of these estimates of lost sales actually may be an 
estimate of what was taken, but not paid for. A lot of these 
people would never pay for that, but there is some gain. They 
do get exposed to artists, they learn about artists. It is not 
all bad. It is arguable whether it is bad or good.
    It clearly is wrong. I would agree that P2P--I do not 
represent P2P companies. P2P is wrong. I am concerned about the 
broader context of that ruling in how all new technology is 
introduced because so much of new technology is shifting 
content around in time and space and managing it.
    Senator Feinstein. Thank you. I was very interested in what 
Mr. Aydar said about SNOCAP. Now, that seems to me to be a very 
good model.
    Do you agree, Mr. Sherman?
    Mr. Sherman. Absolutely. The record companies and the rest 
of the music community are very excited about the offering. It 
is an entire system that can make P2P legal. It would allow 
non-infringing uses of it to continue, but it would enable you 
to identify infringing transmissions and turn them into 
legitimate sales with a back office function that provides 
royalty payments to everybody. That is a beautiful model.
    Senator Feinstein. Well, then, Mr. Yagan, why wouldn't we 
want to see the SNOCAP model become the state-of-the-art for 
the entire industry? It seems to me to be a fair outcome 
whereby everybody gets basically what they need to survive.
    Mr. Yagan. I support that fully and I wish SNOCAP the best 
of luck, and we are in the process from an e-Donkey perspective 
of determining what our technological solution will be as we 
strive to convert the existing traffic we have into traffic 
that will be in one of these closed environments.
    At the end of the day, as much as I think it is a good idea 
and everyone else on this panel may think it is a good idea, it 
is at the end of the day up to the consumers, the 60, 70, 80 
million consumers in America who are downplaying music on these 
P2P applications, whether they are going to leave the existing 
open environments and move over to a closed SNOCAP-type 
environment. I have no idea if that is going to take place in 
the market.
    Senator Feinstein. I would just note that the solution 
comes from San Francisco.
    [Laughter.]
    Senator Feinstein. Let me ask all of you, assuming that 
models like SNOCAP are the solution, what do we do to promote 
that solution? What is clear to me after so many years is just 
staying out of it and letting the two sides go at each other 
isn't going to solve it, and the only thing that is going to 
happen is there is going to be a lot of litigation. So how 
would you suggest that the Congress or someone would proceed 
if, in fact, the SNOCAP model is a good solution?
    Mr. Lemley. Well, let me start off, Senator Feinstein, by 
suggesting that part of the difficulty that all of the peer-to-
peer file-sharing services have had in negotiating for rights--
and I think they have all tried to do so--is there are so many 
different rights-holders, not only because there are lots of 
different songwriters and there are lots of different recording 
companies and movie companies and they have each got rights, 
but because the rights have been divided according to a pre-
digital world, so that one group of companies ends up with the 
rights to own publishing music and another group owns the 
rights to public performances of music And, of course, a 
digital broadcast is both.
    So we need some way, whether it is in Section 115 or some 
other way, to consolidate those interests so that there are a 
relatively small number of people who can sit down at the table 
and negotiate.
    Mr. Sherman. I would echo Professor Lemley's remarks. 
Licensing reform in Section 115 would help especially the new 
business models where there are uncertainties about how the law 
applies. We don't have dispute resolution mechanisms in place 
to solve those problems and get new, innovative ideas to market 
quickly.
    Senator Feinstein. So let me ask this question. Is 
everybody agreed, then, that a solution lies within 115?
    Mr. Sherman. I certainly feel that way.
    Senator Feinstein. Any dissenters? Oh, I knew it.
    Mr. Shapiro. Well, I just can't say I agree with that, but 
what I would say is that part of the problem is the difficulty 
locating copyright owners. That is the biggest part of the 
problem, and part of it is because the copyright term is so 
gosh-darn long now. It is just impossible to use old stuff 
anymore.
    If there was a way of identifying copyright owners--and 
there have been proposals where you have to register with a 
dollar every 20 years or whatever it is just to say you are 
still alive. There are some proposals out there which are very 
reasonable and would allow a more central way of finding out 
who owns what. But a DVD shouldn't cost the same price as a CD. 
The motion picture industry has done it right. The music 
industry has done it wrong, plus they have been saddled by all 
these different rights and who owns what.
    Mr. Sherman. The Section 115 reform that is being talked 
about would create a blanket license system so that a filing of 
a single paper would cover all of the copyright owners 
identified or unidentified, which would address Mr. Shapiro's 
problem.
    Mr. Roe. If I could say one thing, just in the past 2 years 
just the education of informing people of what they were doing 
was illegal has actually deterred illegal downloading almost by 
50 percent. So it has had some effect, the education, but I do 
have a little bit of issue with the fact that Congress 
shouldn't do anything at this moment.
    I think in the early stages of any technology, whether it 
be the automobile or the recording business in general, there 
are times where we have to set the boundaries of how is this 
new technology going to be handled. And I hope that the 
information you have gathered here today will help you all do 
what you are supposed to do here.
    Chairman Specter. Thank you, Mr. Roe.
    Senator Feinstein. Thank you. My time is expired.
    Chairman Specter. Mr. Aydar, you haven't had a chance to 
comment. We would be pleased to hear from you, although SNOCAP 
has received lofty praise here.
    Mr. Aydar. Well, in terms of legislation and whether 
Congress should do anything, SNOCAP is out there promoting a 
technology and a market-based solution. We believe that it 
would be helpful to see where that market-based solution leads 
us. We feel that we have built a solution that works within the 
copyright law and will make the number of works that are 
available on a legitimate service comparable to what is 
available on a peer-to-peer network, thereby making those 
services able to compete, thereby making those services 
compelling and capturing the users that are using these P2Ps 
today.
    Chairman Specter. Well, thank you all very much for coming 
in. I regret we do not have more members. You have come on a 
very, very busy day. We are on the floor with the Roberts 
nomination, which is occupying a great deal of attention. We 
had scheduled at the same time a conference on what to do about 
hurricane costs and offsets. So it is a very busy season.
    But there is a great deal of concern for both sides of this 
issue to promote artistic accomplishment and innovation on 
technology. The Internet has been magnificent, the artistic 
works have been magnificent, and these are issues of great 
importance on both sides to America and to the world. So we 
will continue to study them, and at least in the short term I 
think we will carry out the wishes of those who would like to 
see us do nothing, at which we are very good, until Senator 
Feinstein tells us precisely what to do.
    [Laughter.]
    Chairman Specter. Thank you all very much.
    [Whereupon, at 11:14 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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