- MGM v. GROKSTER

[Senate Hearing 109-1115]
[From the U.S. Government Publishing Office]

S. Hrg. 109-1115

MGM v. GROKSTER

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

HEARING

before the

COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

__________

JULY 28, 2005

__________

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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
David Russell, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director

C O N T E N T S

----------
Page
Hearing held on July 28, 2005.................................... 1
Statement of Senator Boxer....................................... 48
Statement of Senator Ensign...................................... 43
Statement of Senator Inouye...................................... 1
Statement of Senator Pryor....................................... 41
Statement of Senator Stevens..................................... 1
Editorial, dated July 16, 2005, from Billboard Magazine,
entitled ``After Grokster, Can Music Business Save
Itself?''.................................................. 2

Witnesses

Attaway, Fritz E., Executive Vice President and Washington
General Counsel, Motion Picture Association of America......... 32
Prepared statement........................................... 33
Bainwol, Mitch, Chairman and CEO, Recording Industry Association
of America..................................................... 28
Prepared statement........................................... 29
Baker, David N., Vice President, Law and Public Policy,
EarthLink, Inc................................................. 24
Prepared statement........................................... 26
Eisgrau, Adam M., Executive Director, P2P United, Inc., on behalf
of the Electronic Frontier Foundation (EFF).................... 4
Joint prepared statement of Adam M. Eisgrau, Executive
Director, P2P United, Inc.; and Fred von Lohmann, Senior IP
Attorney, Electronic Frontier Foundation (EFF)............. 5
Heesen, Mark G., President, National Venture Capital Association. 18
Prepared statement........................................... 19
Kerber, Gregory G., Chairman and CEO, Wurld Media, Inc........... 14
Prepared statement........................................... 16

Appendix

Lafferty, Marty, CEO, Distributed Computing Industry Association
(DCIA), prepared statement..................................... 55

MGM v. GROKSTER

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THURSDAY, JULY 28, 2005

U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:34 p.m. in room
SR-253, Russell Senate Office Building, Hon. Ted Stevens,
Chairman of the Committee, presiding.

OPENING STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA

The Chairman. This afternoon, we want to examine the issues
related to the MGM-Grokster decision and the appropriate
balance between copyright protection and communication
innovation.
The Supreme Court decision cleared the way for peer-to-peer
and other communication technologies to be liable for
contributory or vicarious copyright infringement. Going
forward, we'll all have to balance the competing interests of
encouraging innovative services like peer-to-peer that spur new
services, jobs, and economic growth against protecting content
providers from piracy to ensure return on investment and
continued innovation in the content space.
Now, I know it's a very controversial subject we're dealing
with this afternoon, and we have a series of witnesses here.
First let me turn to our Co-Chairman, Senator Inouye.

STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII

Senator Inouye. I thank you very much, Mr. Chairman, for
holding this hearing on the Supreme Court's recent decision. As
we all know, it was unanimous. It's unusual in Washington these
days to get a unanimous decision on anything, especially an
issue as important as copyright.
In my view, the Supreme Court has struck the proper balance
between protecting the rights of copyright holders and creating
an environment for technological innovation, and, in doing so,
has made the American consumer the ultimate winner. With its
ruling, the Supreme Court has sent an important message that
the law does not allow companies to induce others to steal.
Given that millions of Americans have downloaded or swapped
files using peer-to-peer technology, the Department of Justice
observed that it appears many people have come to view piracy
over peer-to-peer networks as different and less objectionable
compared to stealing a physical copy of a CD or DVD from the
store. By holding companies that promote copyright infringement
by clear expression or other affirmative steps taken to foster
infringement, the Supreme Court has made it very clear that
stealing is unacceptable.
The recording industry, motion picture, and computer
software industries are key components of our Nation's economy.
According to a recent study by the International Intellectual
Property Alliance, the copyright industries are strong and
growing. In 2002, these industries accounted for 6 percent of
the gross domestic product and employed 4 percent of the
workers of the United States. In addition, these industries
recorded more than $89 billion in foreign sales and exports in
2002, which is well ahead of other major industry segments.
Given the importance of these industries by our economy, I
applaud the Supreme Court's decision to hold persons
accountable for actions that encourage unlawful behavior.
And so, I thank you, Mr. Chairman, for holding this
hearing.
The Chairman. Thank you very much.
Senator Pryor, do you have a statement? Do you have a
statement, Senator?
Senator Pryor. I don't, thank you.
The Chairman. Thank you very much.
Just so the record will disclose the extent of this
conflict, I'm going to put into the record the Billboard
editorial of July 16 by Fred Goldring.
[The information previously referred to follows:]

Billboard Magazine--July 16, 2005

After Grokster, Can Music Business Save Itself?

By Fred Goldring

Last week, the Supreme Court handed down a decision in the MGM vs.
Grokster case that the news wires immediately heralded as a ``sweeping
victory'' for our industry. Then, of all people, former Recording
Industry Assn. of America head Hilary Rosen spoiled the party, pointing
out that while the ruling ``maybe [sic] important psychologically, it
just won't really matter in the marketplace.'' She clarified that
``knowing we were right legally really still isn't the same thing as
being right in the real world.''
Then The New York Times piled on, insisting that ``[h]owever valid
the industry's desire to protect its products, trying to stop file
sharing has become a Sisyphean exercise.'' Rosen got the last word in
that story, too, calling the Grokster decision ``meaningless.''
Next, a Los Angeles Times piece suggested that the recording
industry might try making MP3 music legitimately available rather than
trying to sell files ``that restrict copying, deter sharing and limit
portability.'' People in our industry found this last suggestion
``outrageous.'' It reminded me that I made a similarly outrageous
suggestion--nearly 2 years ago--in a piece I wrote for these pages,
``Abandon the `Shock and Awe' Tactics: An Eight-Step Recovery Program
for a Healthier Music Industry.''
At the time, the recording industry had initiated the first few
hundred of what would become a monthly round of John Doe lawsuits filed
against accused music uploaders. I posited that the strategy of suing
customers (thieves) and building ever-better locks for CDs and digital
singles simply was not working, and that everything we had done thus
far had in fact made the problem much worse.
Sales were down. File swapping was up. Alarmed by our strategic
direction, I wrote as someone who earns his living working with
musicians, record companies and publishing companies (and as a musician
myself) that an industry intervention was needed, to offer ``tough
love'' as one would to ``a good friend or family member who is not
thinking clearly, hell-bent on a collision course of self-
destruction.''
In 2003, I suggested a few immediate steps that would put us on the
path to recovery, specifically:

Admit you're powerless. File sharing is not going away.
Downloading is already more popular than the CD.

Give up on anti-piracy technologies--they don't work.

Stop attacking your own customers. (Bad PR, worse business.)

Focus less on finger-pointing and more on immediate,
practical, fair solutions.

Give the people what they want, even if it requires that
laws be changed.

Support initiatives that will allow unlimited access to
every piece of music in the MP3 format whenever and wherever
someone wants it, with no conditions or restrictions, in an
easy-to-use interface. People will pay for this.

Glancing over my tough-love recommendations of 2 years ago, I have
to point out the obvious: 2005 sure looks a helluva lot like 2003. The
cynic in me would almost think that the industry had read my
suggestions and decided to do the exact opposite.
So now, we are far worse off, even perhaps to the point of no
return. And we are busy celebrating the ``mother of all Pyrrhic
victories'' when file sharing is at an all-time high.
This is not just the latest in a long history of missed
opportunities for our business. It is truly a defining moment.
It is no accident that The New York Times, Los Angeles Times,
Newsweek and Reuters are reporting that the music industry emperor is
not wearing any clothes. Business is down another 8 percent this year,
and we have pinned our hopes again on the deus ex machina. The industry
has received its long-awaited vindication on paper by the U.S. Supreme
Court, and yet the pundits--even Rosen (who ironically originally led
this charge)--insist we are tilting at windmills. We are finally out of
practical options, because there is no higher authority to appeal to.
Two years ago, I ended with this simple recommendation: ``Stop your
futile efforts to change the behavior of millions of music fans. Spend
all your efforts on designing a system that gets everyone paid around
the overwhelming behavior that exists.''
Today, I'm asking the hard questions: Will the recording industry
save itself? Or are we too far gone? Is there a realistic scenario for
withdrawal, a retreat from the ``lawsuits and locksmiths'' mentality
and a swift about-face? Can we swallow our pride and prevail over
hubris long enough to embrace the real world and the real market
opportunity? Or is The Motley Fool correct in predicting a not-so-
distant future when ``the major labels won't be the same batch of old-
school vinyl-pushers . . . the real power brokers in the music industry
will be Google, Yahoo! and Microsoft?''
Wall Street analysts and the mainstream press do not like our
prospects, and so more than ever I fear we are living in a bubble and
kidding ourselves about this war and the definition of winning.
Two years ago I advocated change, and 2 years later I see status
quo. So now I can only envision a frustratingly bleak future where we
publicly celebrate shutting down a few peer-to-peer businesses like
Grokster, though like shuttering Napster, doing so will be a useless
exercise. I envision us marking 500 million songs sold in the course of
a couple of years at Apple Computer's iTunes Music Store, remaining
blind to the reality that (even the RIAA admits) nearly 3 billion free
MP3s are swapped every month. I envision us continuing to hold out hope
for a turning of the tide, an improvement in our position and a
validation of our strategy that, like a desert oasis shimmering on the
horizon, is always just 2 years away.
It turns out I was right in 2003. Going forward, I hope I am wrong.
Because we don't have another 2 years.
Fred Goldring is a founding partner of Goldring, Hertz &
Lichtenstein, a Beverly Hills, California-based entertainment law firm.

The Chairman. We have, as witnesses this afternoon, a
series of people that we've selected to try and bring a balance
in terms of the comments on this issue. First is Adam Eisgrau,
Executive Director of P2P United.
May I call on you, please, sir?

STATEMENT OF ADAM M. EISGRAU, EXECUTIVE DIRECTOR, P2P UNITED,
INC.; ON BEHALF OF THE ELECTRONIC
FRONTIER FOUNDATION (EFF)

Mr. Eisgrau. You certainly may. Thank you, Mr. Chairman.
Good afternoon, Mr. Chairman, Co-Chairman Inouye, Senator
Pryor. I thank you for the opportunity to appear here today on
behalf of P2P United and the Electronic Frontier Foundation.
For the record, I am not, and do not, appear here today as
counsel for any individual or company.
We appreciate the Committee's prospective focus, Mr.
Chairman, on the larger policy implications of the Supreme
Court's decision in MGM v. Grokster; most particularly, how to
continue to promote technology, including peer-to-peer
technology and technological innovation. I'm pleased to
underscore that the value and legality of P2P technology,
itself, was expressly recognized by the court in its opinion.
Clearly, however, the misuse of this powerful and neutral
communications technology continues to pose significant
challenges. Notwithstanding a massive and ongoing campaign of
lawsuits against consumers--11,000, and counting--the
unvarnished facts are that new open peer-to-peer software
programs will, and should continue to be, lawfully produced
every day around the globe. And, as reported last month in
Rolling Stone, ``The lawsuits have failed to stop, or even
slow, illegal file sharing.'' As a practical matter, the high
court's recent decision will not alter this landscape at all.
Ms. Hillary Rosen, Mr. Bainwol's predecessor at the RIAA
wrote, the day before the Court's recent ruling, and I quote
her, ``It is said that the Supreme Court's decision will be one
of the most important copyright cases ever on the books. I
think it has all the makings of being famous,'' she said, ``for
another reason. It just won't really matter in the marketplace.
So, here is the crux of the problem,'' as Rosen explained,
``P2P services have traffic at a rate 40 to 50 times the
traffic of legitimate sites. This volume needs to be embraced
and managed because it cannot be vanquished. And a tone,'' Ms.
Rosen continued, ``must be set that allows future innovation to
stimulate negotiation and not just confrontation.''
Editorializing in Billboard Magazine on July 16--and I
thank you for placing that in the record, Mr. Chairman--
prominent music industry attorney Fred Goldring felt compelled
to reiterate advice he had given his industry in 2003, ``Stop
your futile efforts to change the behavior of millions of music
fans. Spend all your efforts on designing a system that gets
everyone paid around the overwhelming behavior that exists.''
We fully agree, Mr. Chairman, with both Ms. Rosen's and Mr.
Goldring's bottom lines and urge the Committee, therefore, to
take a proactively pragmatic view of how to help the market
move forward.
We have two requests. First, bring all relevant
stakeholders together in a series of meetings or hearings to
intelligently and civilly discuss the possibility that a system
of voluntary--and I do emphasize ``voluntary''--collective
licensing may be a useful mechanism, among others, to help meet
consumer demand for online music while also encouraging
innovation and maximizing the compensation of music copyright
owners, both big and small.
A similar system has, in fact, already worked well for
decades, Mr. Chairman. Songwriters originally viewed radio
exactly the way the music industry today views many P2P users,
as pirates. Ultimately, however, they formed ASCAP, and, later,
BMI and SESAC. Under this voluntary licensing system, radio
stations pay a fee and, in return, get to play whatever music
they like, using whatever equipment they feel works best.
Today, the performing rights societies, like ASCAP, BMI,
and SESAC, pay out literally hundreds of millions of dollars
annually to their artists, and virtually all eligible rights-
holders opt to participate. Some difficulties over time
notwithstanding, there is no question that the system that has
evolved for radio is far preferable to the songwriter's
original strategy of trying to sue radio into extinction.
But there is a catch, Mr. Chairman. The entertainment
industries, I'm sorry to say, have unilaterally declared any
kind of collective licensing for P2P, even voluntary systems,
to be an absolute nonstarter, and have refused multiple
invitations to discuss the concept systematically in any forum.
Without passing or changing any laws, therefore, this committee
has the power to do consumers, and potentially the economy, a
great service by simply convening such talks under its auspices
and making clear that it expects invitees to participate in
good faith.
Second, for reasons detailed in our written testimony, we
also ask that this committee initiate an inter-committee
process meant to produce targeted statutory reform that will
insulate technology innovators from potentially astronomical
and crippling statutory damages under secondary liability
doctrines made murkier by the court's recent ruling in
Grokster. Originally designed to deter large-scale direct
copyright infringers and other true commercial pirates,
statutory damages of up to $150,000 per work infringed can now
be imposed on individual inventors, technology companies, or
even venture investors without proof of economic harm. This
can, and we believe should, be changed without depriving
copyright owners of powerful injunctive remedies and,
potentially, very large actual damages awards in secondary
liability cases, or, for that matter, of continued access to
statutory damages in cases of real commercial piracy.
We appreciate the opportunity to be here, Mr. Chairman. We
thank you for placing the material in the record. And I look
forward both to the Committee's questions and its ongoing
direct involvement in these issues.
Thank you.
[The prepared statement of Mr. Eisgrau follows:]

Joint Prepared Statement of Adam M. Eisgrau, Executive Director, P2P
United, Inc.; and Fred von Lohmann, Senior IP Attorney, Electronic
Frontier Foundation (EFF)

Good afternoon, Chairman Stevens, Co-Chairman Inouye and members of
the Committee. Thank you, and your staffs, for the opportunity to
participate in these proceedings.
My name is Adam Eisgrau. I am a Vice President of Flanagan
Consulting (established by former Congressman Michael Flanagan), and I
appear before you today both as Executive Director of P2P United and on
behalf of the Electronic Frontier Foundation (EFF), which co-authored
this testimony.
P2P United was founded 2 years ago this month as a resource for
legislators, other policymakers and the media in need of accurate
information regarding peer-to-peer software (P2P) and its tremendous
potential. Our members include the developers of the Grokster and
Morpheus software programs at issue in the Supreme Court's recent
decision which has brought us together today. Much more about our group
and its work is available online at www.p2punited.org. The Electronic
Frontier Foundation, as detailed online at www.eff.org, was established
15 years ago this month to defend the public's right to think, speak,
and share ideas using all manner of new technologies, particularly the
Internet and World Wide Web.
In the four weeks since the Supreme Court's ruling in MGM v.
Grokster, many pundits, analysts and advocates have concluded that the
Court's unanimous opinion obviated any necessity for Congressional
action to address the issues before the Court. P2P United and the
Electronic Frontier Foundation respectfully disagree for reasons
articulated by the Court itself. As a unanimous Court observed at the
very outset of its legal analysis in MGM v. Grokster: ``[t]he more
artistic expression is favored, the more technological innovation may
be discouraged; the administration of copyright law is an exercise in
managing the tradeoff.'' MGM v. Grokster, 545 U.S. 125 S. Ct. 2764,
2770 (2005).
The task of striking the right balance, however, is
constitutionally delegated to Congress. Congress now has an important
opportunity--indeed an ongoing responsibility--to examine the balance
between copyright law and innovation with an eye toward affirmatively
protecting and promoting the kind of technological innovation in
communications that has been responsible for advancing our society and
our economy so dramatically in the Internet Age.
Accordingly, as this committee monitors the import and impact of
the Court's ruling--which we applaud it for doing today and hope that
it will continue to do regularly for some time to come--our
organizations urge the Committee's members to adopt a de facto policy
of ``proactive pragmatism'' in the public interest. Specifically, P2P
United and EFF urge the Committee to affirmatively embrace two
overarching public policy goals:

1) proactively protect communications technology innovators
from the likely chilling effects of potentially crippling
liability in the uncertain legal environment created by the
Supreme Court's holding; and

2) pragmatically promote new marketplace solutions that move us
toward a world where Internet users can obtain licenses that
give them lawful access to the broadest variety of copyrighted
material using the most efficient and convenient technologies
available.

In particular, we propose that the Committee convene and task all
relevant stakeholders with exploring--merely publicly discussing in
good faith--the potential of a voluntary ``collective licensing''
system for music to fairly compensate all rightsholders for currently
unlawful and unpaid downloads. Significantly, such a system would
profit not only the four (soon to be three) megalithic overseas
corporations that control much of the world's commercial music, but
also for the first time would empower and compensate the thousands and
thousands of individual musical performers and writers now
unaffiliated--and statistically unlikely at any point to become
affiliated--with what Joni Mitchell aptly called the ``star maker
machinery of the popular song.'' \1\

I. Given the Uncertainties Left by the Supreme Court's Decision in MGM
v. Grokster, Disproportionate Statutory Liability for Secondary

(A) Clarity about Confusion: The Consequence of the Court's Ruling
In MGM v. Grokster, the question asked by the parties and dozens of
amici was direct and critically important: ``When will a technology
vendor be held secondarily liable for the direct copyright
infringements committed by third parties using its products?'' Asked
specifically to clarify the reach of copyright law's existing secondary
liability doctrines of ``contributory'' and ``vicarious'' liability,\2\
the Court instead announced a new doctrine called ``inducement,''
holding that ``one who distributes a device with the object of
promoting its use to infringe copyright, as shown by clear expression
or other affirmative steps taken to foster infringement, is liable for
the resulting acts of infringement by third parties.'' MGM v. Grokster,
545 U.S. 125 S. Ct. 2764, 2771 (2005).
While the new doctrine of inducement presents its own uncertainties
for prospective litigants and lower courts to grapple with in the years
to come,\3\ P2P United and EFF believe that the more significant
prospective difficulty for technology innovators and investors now lies
in the continued uncertainty surrounding the traditional copyright
doctrines of contributory infringement, on which the Court was deeply
split,\4\ and vicarious liability, on which it was essentially
silent.\5\
For many years, technologists and their financial backers relied on
what seemed to be a relatively ``bright line'' test for secondary
copyright liability announced in the Supreme Court's landmark
``Betamax'' ruling in 1984.\6\ Unfortunately, the spate of litigation
launched against P2P companies since 1999 has muddied the waters, with
the rulings in the Napster, Aimster, and initial Grokster cases
charting different courses though each of three branches of secondary
liability.
The Supreme Court's opinion now leaves technology companies, their
attorneys and their backers to pick their way through a dangerous
minefield of legal uncertainties profoundly antagonistic to economic
progress and deeply hostile to continued innovation. Even if they
assiduously avoid so much as the appearance of ``inducing'' copyright
infringement, America's innovators must still guess as to whether or
when they might be held liable for distributing a multipurpose
electronic device or software program.
Moreover, not only can they still be sued under either or both of
the doctrines of contributory infringement and vicarious liability, but
history tells us that they probably will be sued. That's exactly what
happened as the first VCR and the first digital audio tape recorder
came to market. More recently, ReplayTV was sued in 2001 for their
improved digital video recorder because, according to the then-CEO of
the Turner Broadcasting System, commercial skipping by consumers
constituted ``theft.'' \7\
Even as the Committee meets today, entertainment industry
executives are making threatening statements about the latest
electronic marvel. Called the Slingbox, the device and its associated
software will enable you to watch your TV programming from wherever you
are by turning virtually any Internet-connected computer into your
personal TV.\8\

(B) Remedy Remediation: A Measured and Targeted Solution
P2P United and EFF do not propose that the Commerce Committee
undertake to rewrite the doctrines of secondary copyright liability. We
do believe, however, that there is one sphere in particular in which
Congress can and should act in a targeted fashion to reduce the
chilling effect on innovators of ongoing uncertainty in this area of
the law.
Almost uniquely in American jurisprudence, our copyright laws
permit a plaintiff in an action for infringement to opt out of actually
proving the extent to which they were harmed by copyright infringement
in favor of receiving so-called ``statutory damages.'' Under Section
504(c) of U.S. Code Title 17, anytime up to the moment that judgment is
handed down, the plaintiff may invoke its rights to collect (in the
court's discretion) between $750 and $150,000 for every individual
copyrighted work infringed. This legal regime makes good sense when
brought to bear against a commercial pirate making and selling millions
of counterfeit music CDs, for example. It may well be dangerously
counterproductive, however, if applied in secondary liability cases to
a technology company that makes electronic products used by millions of
consumers over whom the companies have no control.
This danger is especially sobering when made concrete. Apple
initially promoted its phenomenal iPod with an extensive ad campaign
exhorting the public to ``Rip, Mix & Burn'' and 1,000,000 iPods were
sold in its first 20 months on the market even though it worked only
with Apple's own Macintosh computers! As of the beginning of this
month, Apple had reportedly sold over 21 million iPods since the first
calendar quarter of 2002.\9\ Even the earliest version of the device
could store well over 1,000 songs and the largest, with a 60gB drive,
now holds upwards of 15,000 songs.
At even the minimum $750 per infringing song, and a now paltry
1,000 songs per device sold to date, it is thus a mathematical fact
that--under contributory infringement, vicarious liability, or
``inducement'' theories--Apple still could be sued for statutory
damages in excess of $15 trillion for its users' allegedly unlawful
copying of music! We do not suggest that this result is likely, but the
fact that it is even legally possible should be profoundly troubling,
to say the least.
Faced with potentially crippling statutory liability, what will the
next generation of garage inventors, like Apple's own founders, or
their possible investors choose to do with their as-yet-uninvented
breakthrough devices? What price will our economy pay for highly
rational risk-aversion on the part of young geniuses, their expert
counsel, and savvy investors?
Most critically, is the somewhat extraordinary status quo with
respect to available statutory damages really where the balance between
protecting intellectual property and encouraging innovation and
economic growth should be struck?
EFF and P2P United believe that the answer to this last inquiry
should and can be a resounding ``no.'' We respectfully urge you and Co-
Chairman Inouye to lead a collaborative committee (and inter-committee)
process designed to produce a meaningful copyright statutory damages
clause in the current Congress. Specifically, we request and recommend
that statutory damages be limited by law to cases of direct copyright
infringement as perpetrated by commercial pirates, and thus made
expressly unavailable in cases involving secondary liability (including
those brought under the Court's new inducement test). We respectfully
submit, that such reform would strike the appropriate balance that
today's hearing was expressly designed to illuminate.
On the one hand, it would still permit copyright owners to obtain
both injunctive relief and actual damages, thus putting them in the
same position as litigants under most other areas of common law. On the
other, corporate and individual technology innovators and investors
once again would be able to make reasonable business decisions about
manageable levels of legal risk, rather than face the all-too-real
specter of corporate capital punishment in an unpredictable legal
environment. The real beneficiaries of such a balance, of course, will
be American consumers, the Nation's economy and, ultimately, copyright
owners whose fortunes also depend on new technologies (their many
attempts to kill them in the cradle notwithstanding) to create new and
market-making business opportunities.

II. The Supreme Court's Ruling in MGM v. Grokster Will Have Virtually
No Practical Effect on the Digital Downloading of Music, but
Congress Can and Should Take Rational, Non-Statutory Steps Now
to Maximize the Potential of Peer to Peer Technology for all
Music Rightsholders

(A) Lawsuits and Traditional Licensing are Poor Instruments of Public
Policy
In the past 2 years, the digital music marketplace has seen
significant activity and change. However, it simply cannot be credibly
argued that the music industry has not experienced--and continues to
face--an enormous failure of both imagination and the market for
licensed digital downloading.
To be sure, the four companies that control 90 percent of the
current music ``catalog'' have licensed a relative few new services to
distribute what mostly amounts to presently popular music online.
Apple's iTunes, for example, recently celebrated the 500,000th a la
carte download of a $0.99 song. Moreover, in that same period, the
Recording Industry Association of America has brought over 11,000
lawsuits against individuals accused of illegal downloading and, if
present trends continue, will collect more than $36 million in
settlement of those claims.\10\
The music and movie industries have spent millions more to
otherwise educate the public that such downloading is wrong and has
serious consequences, both for downloaders, and for artists and
copyright holders, not compensated for their works. Not incidentally,
P2P United--as an organization and through its individual members'
websites--also has done its best to get out that message while our
members also affirmatively promote the work of independent artists who
have embraced P2P distribution of their music. Certainly not least of
course, the entertainment industries have now obtained a unanimous
ruling from the Supreme Court which after further litigation, they
hope, will shutter the doors of P2P United's members and dissuade other
software developers from inventing even more efficient peer-to-peer
programs.
As the June issue of Rolling Stone magazine put it, however, ``One
thing is clear: The lawsuits have failed to stop, or even slow, illegal
file-sharing.'' \11\ Indeed, the unvarnished fact is that peer-to-peer
usage is much more widespread than it was a year ago and well more than
double what it was this time in 2003. According to the most recent
independent analysis by Big Champagne (essentially the Nielsen or
Arbitron ratings of the Internet)--and notwithstanding massively
publicized litigation against individuals and companies--P2P usage last
month reached nearly 9 million simultaneous users with access to over a
billion song files. In August of 2003, a month prior to the first round
of RIAA consumer lawsuits, there were 3.85 million P2P users.
By contrast, it has recently been estimated that the total number
of songs now available for download through the iTunes and Rhapsody
subscription services total fewer than 2.75 million tracks. Even if
only a far-too-conservative one in five music files available through
peer-to-peer software each day are taken to be unique songs, at least
60 times more music files are available each day through P2P technology
than are presently available to consumers through the two primary
licensed channels.
More lawsuits are not going to change that reality. Writing the day
before the Supreme Court's ruling in MGM v. Grokster, Ms. Hillary
Rosen, former head of the RIAA, made a forceful case for new thinking
and a new view of P2P software developers by her former colleagues in
the music industry:

``It is said that the Supreme Court's decision will be one of
the most important copyright cases ever on the books. I think
it has all the makings of being famous for another reason.
Because while the victory of whoever wins maybe important
psychologically, it just won't really matter in the
marketplace. . . .

``So why won't this case matter now in the marketplace? Because
by now SEVERAL HUNDRED MILLION copies of this software that the
entertainment industry would like to vanquish have been
downloaded to individual computers around the world. . . . And
now, a majority of them are hosted outside the United States.
There is no court ruling whose enforcement can keep up with
this. Sure, it might affect some venture capitalist deciding
where to put money for a product. But none of these services
since Napster have required venture money. They grow
organically, because they are serving a still unserved desire.
Do people like free content, sure, but they also like content.
All the stuff--when they want it--to feel like free even if it
might not be free. . . . And the entertainment industry is
still far too often spending time comparing the profit margins
and risk of new ideas to an earlier time when the world was
less digital. . . .

``So here is the crux of the problem. [P2P] services have
traffic at a rate 40 to 50 times the traffic of legitimate
sites. Yet, the amount of time and money wasted on besting the
game by the entertainment and technology industries is huge.
This volume needs to be embraced and managed because it cannot
be vanquished. And a tone must be set that allows future
innovation to stimulate negotiation and not just confrontation
(emphasis added).'' \12\

Ms. Rosen was equally emphatic in her appeal for a pragmatic view
of the marketplace after the Court's opinion was handed down the
following day:

`` . . . knowing we were right legally really still isn't the
same thing as being right in the real world. We had that
euphoria with the first Napster decision. I hope my former
colleagues remember that. The result was lots of back and forth
and leverage hunting on both sides and continued litigation and
then a great service shut down to make room for less great
services. And more legal victories didn't bring more market
control no matter how many times it was hoped it would.

``The euphoria of this decision does not and should not change
the need for the entertainment industry to push forward and
embrace these new distribution systems. . . .\13\ For today, I
hope all sides will take a deep breath and realize that this
Supreme Court decision doesn't change one bit their
responsibility to move forward together on behalf of their
consumer.'' \14\

P2P United and EFF share Ms. Rosen's clear (and clear-eyed) view
that P2P technology will only become more available with time, that
demand for its convenience and content will continue to increase, and
that the current battles surrounding P2P file sharing thus are a losing
proposition for all parties concerned, including consumers. We believe
that the path forward lies in aligning the incentives of the
entertainment industry with those of new Internet technologies in
pursuit of a marketplace in which all musical artists and copyright
holders are fairly compensated and such compensation is maximized
because consumer demand in all its present and future forms is truly
met.
With this goal and these realities in mind, P2P United and EFF urge
the Committee to begin considering ways in which Congress might clear
the path for solutions based on voluntary collective licensing.

(B) Voluntary Collective Licensing for Downloaded Music Merits Serious,
Congressionally-Convened Discussion by All Relevant
Stakeholders
What we propose is not unusual, unknown in the marketplace or
conceptually complex. Indeed, the concept is familiar and simple.
First, the music industry (labels and music publishers) with
representatives of artists and songwriters would form one or more
voluntary collecting societies. These societies then would offer music
consumers the opportunity to download music lawfully in exchange for a
modest regular payment, perhaps $5-$10 per month.\15\
So long as they pay into the collective, consumers would be free to
keep doing what they now do by the millions every day . . . and are
clearly going to do anyway: download and share the music they love
using whatever software they like on whatever computer platform they
prefer. Under this system, however, they would be able to do so without
fear of litigation. Moreover, the money collected would be divided
among all rightsholders--whether signed to a major record label or
not--based upon the professionally measured popularity of their music.
The more people who share, the more money will be available to
rightsholders. The more competition in competing file-sharing products,
the more rapid technological innovation and improvement will be. The
more freedom for music aficionados to share what they care about, the
deeper the available catalog to the benefit of all parties' in the
system.
If this system of voluntary collective licensing seems familiar,
that's because it has been in use to excellent effect for decades. In
the face of a seemingly intractable impasse between a then-new
technology and copyright owners, ASCAP, BMI and SESAC were brought into
existence by songwriters to bring broadcast radio in from the copyright
cold in the first half of the twentieth century. Songwriters originally
viewed radio exactly the way the music industry today views P2P users--
as ``pirates.'' After trying to sue radio out of existence, songwriters
ultimately formed ASCAP (and later BMI and SESAC). Radio stations
interested in broadcasting music stepped up, paid a fee, and in return
got to play whatever music they liked, using whatever equipment worked
best.
Today, the performing rights societies pay out hundreds of millions
of dollars annually to their artists. Although these societies also
have received some criticism, there can be no question that the system
that has evolved for radio is preferable to one based on fruitlessly
trying to sue radio into extinction one broadcaster at a time.
Beginning in this respected committee, P2P United and EFF believe
that Congress can and should encourage detailed and serious evaluation
of the potential of voluntary collective licensing in at least two
important ways:
First, the Register of Copyrights, Marybeth Peters, recently
proposed reforms to copyright law that would make it easier for
existing collecting rights societies like ASCAP, BMI and SESAC to grant
blanket licenses for digital downloads.\16\ We believe that her
proposal is sound and, if adopted, would have the added benefit of
establishing marketplace prerequisites for testing the full-range of
collective licensing possibilities.
For example, as we read the Register's proposal, it would create
``music rights organizations'' legally empowered to grant blanket
licenses directly to music consumers on behalf of songwriters. Because
this proposal requires adjustments to both copyright and antitrust law
within the purview of the Federal Trade Commission, it would appear to
present a productive opportunity for inter-committee collaboration on
these matters.
While adoption of the Register's proposal would be an important
first step, it only addresses the music publishing side of the music
industry. Any comprehensive solution must also involve major and
independent record labels. Presently, no collecting society represents
the major labels or can grant a blanket license directly to music
consumers. Under current law, the highly concentrated nature of the
industry, with just four companies controlling more than 90 percent of
the market, such coordination presents antitrust challenges. Here, too,
we see an opportunity for this committee to begin collaboratively
exploring options that might remove this obstacle to an otherwise
viable and desirable market-oriented licensing solution for the
burgeoning digital music sector of the economy.
The advantages of such a collective licensing approach are
potentially legion and mutually reinforcing:

Artists and rightsholders will get paid for what are now
literally billions of non-compensable music downloads not
likely to cease or slow;

Government intervention in the market will be minimal
(limited to encouragement and oversight), and collecting
societies will set their own prices in response to market
forces; \17\

Broadband deployment will get a real boost as the so-called
``killer app''--music file sharing--is legitimized and actively
encouraged; \18\

Investment dollars will pour into the newly legitimized
market for digital music file-sharing software and services,
prompting an explosion of different service offerings and
devices; \19\

Music fans finally will have completely legal access to the
essentially unlimited selection of music that only a network
built from the collections of other fans can provide. With the
threat of litigation and defensive file ``spoofing''
eliminated, these networks will rapidly improve and grow,
affording millions more consumers access to rare recordings
long unavailable in the marketplace;

The distribution bottleneck that has limited the
opportunities of independent artists and placed them at the
economic mercy of the major record labels for decades will be
eliminated. Artists will be able to choose any road to online
popularity--including, but no longer limited to, a major label
contract. So long as their songs are being shared among fans,
they will be paid; \20\ and

Payment will come only from those who are interested in
downloading music, and only so long as they are interested in
downloading.

Conclusion
As sensible as we hope the idea of voluntary collective licensing
now seems, the RIAA and the major corporations that it represents have
dismissed the idea and have refused to engage in any discussion of the
subject with appropriate stakeholders. Accordingly, we respectfully
request that this committee either hold hearings on this issue, or--at
minimum--formally invite all relevant parties (public and private
sector alike) to a series of roundtable discussions of collective
licensing's potential to unleash the true market power and potential of
peer-to-peer technology and, with it, the genius of American
technological innovation.
P2P United and the Electronic Frontier Foundation thank you again
for the opportunity to participate in these proceedings, Mr. Chairman.
As proposed, we hope for similar opportunities in the near future.

ENDNOTES
\1\ J. Mitchell, ``Free Man in Paris'' released on ``Court &
Spark'' ( 1973; Crazy Crow Music).
\2\ Each theory of liability is independent of the other and
requires proof of two elements. Contributory infringement may arise
when a defendant knows about infringing activity and materially
contributes to it, while vicarious liability requires proof that a
defendant profits directly from the infringement and has a right and
ability to supervise the direct infringer.
\3\ EFF and P2P United believe that the attached Consumer
Electronics Association ``one-pager'' on the MGM v. Grokster decision
(recently solicited by the Congressional Internet Caucus Advisory
Committee) states these concerns very well. We here submit it for the
record and wish to underscore CEA's conclusion that: ``This new legal
ambiguity [as to what constitutes culpable inducement] will not enhance
America's competitiveness. Foreign firms will continue to receive
funding and ship products free from concern about overreaching IP
litigation, while their American counterparts will need to demonstrate
compliance with Grokster's ambiguous legal test.''
We also concur with the recently reported remarks of Mr. James
Burger, outside counsel to Intel, who warned against the potential that
the discovery-intensive litigation required by the Court's new
inducement standard could give rise to a form of ``greenmail'' directed
at small companies by large plaintiffs who might demand significant
settlement fees in exchange for dropping baseless, but potentially
ruinous, litigation. N. Graham & A. Mazumdar, ``Parsing Grokster . . .
,'' BNA Patent,Trademark & Copyright Journal, Vol. 7 No. 1728 at 327
(July 15, 2005).
\4\ Concerning contributory liability standards, Justice Breyer,
joined by Justices O'Connor and Stevens, adopted and endorsed the views
expressed by EFF and many of the other technology sector amici,
declaring that ``Sony's rule is strongly technology protecting . . . .
Sony thereby recognizes that the copyright laws are not intended to
discourage or to control the emergence of new technologies, including
(perhaps especially) those that help disseminate information and ideas
more broadly or more efficiently.'' MGM v. Grokster, 125 S. Ct. at
2791. Justice Ginsburg, joined by Chief Justice Rehnquist and Justice
Kennedy, rejected the bright-line interpretation. Unmoved by the
argument that Sony bars a finding of contributory infringement unless a
technology is almost exclusively used for infringement, Justice
Ginsburg declared, ``Sony, as I read it, contains no clear, near-
exclusivity test.'' Id at 2784 n.1.
\5\ Having disposed of the case on inducement grounds, the Court
did not reach the vicarious liability theories briefed by the parties,
merely restating that the doctrine ``allows imposition of liability
when the defendant profits directly from the infringement and has a
right and ability to supervise the direct infringer.'' MGM v. Grokster,
125 S. Ct. at 2776 & n.9. By contrast, the lower courts in MGM v.
Grokster responded in some detail to the diametrically opposing views
of the parties regarding vicarious liability. The entertainment
industry had argued that the ability to redesign a product to reduce
infringing uses ought to be deemed equivalent to a ``right and ability
to supervise'' the customers who use the technology. The P2P defendants
replied that such a ``could have designed it differently'' test would
effectively force technology companies to redesign their products to
suit the demands of copyright owners. On this point, the Solicitor
General's amicus brief before the Supreme Court sided with the
defendant/respondents: ``The `right and ability to supervise' element
of vicarious liability . . . has never, to our knowledge, been held to
be satisfied by the mere fact that the defendant could restructure its
relations or its product to obtain such an ability.'' Brief for the
United States as Amicus Curiae Supporting Petitioners at 20 n.3,
available at: www.eff.org/IP/P2P/MGM_
v_Grokster/050124_US_Amicus_Br_04-480.pdf.
\6\ When two motion picture studios sued Sony in 1976 for selling
the first Betamax VCR, they did so under a contributory liability
theory. In that case, Sony v. Universal City Studios, 464 U.S. 417
(1984), the Supreme Court announced the ``Betamax doctrine,'' holding
that a technology vendor could not be held liable for distributing a
technology ``capable of substantial noninfringing uses.'' Because the
Betamax VCR was plainly capable of noninfringing uses, the Supreme
Court did not hold Sony liable. Since the Court's Sony ruling, the
technology and entertainment industries characterized the scope of the
``Betamax defense'' very differently. Technologists saw a bright-line
rule: so long as a technology is merely capable of noninfringing uses
in commerce, it is legal to distribute, regardless of how some (or even
most) customers might actually use it. Hollywood movie studios and the
music industry, in contrast, read the case much more narrowly,
reasoning that Sony was only excused from liability because a principal
use of the Betamax device (as they have interpreted the decision) was
noninfringing.
\7\ See extended interview with Mr. Jamie Kellner entitled
``Content's King,'' Cableworld (April 29, 2002) [``JK: It's theft. Your
contract with the network when you get the show is you're going to
watch the spots. Otherwise you couldn't get the show on an ad-supported
basis. Any time you skip a commercial or [press] the [30-second
advance] button you're actually stealing the programming.'' The full
text of this sobering interview is available online at: www.2600.com/
news/050102-files/jamie-kellner.txt.
\8\ The ``crime'' Slingbox's developers may have committed is
permitting a consumer who has paid for programming at home to ``sling''
that same programming to a single remote location or portable device so
that it may be enjoyed while the consumer is away from home. See A.
Wallenstein, ``Slingbox Could Spark New Lawsuit,'' Hollywood Reporter
(July 6, 2005), also at: www.hollywoodreporter.com/thr/article
_display.jsp?vnu_content_id=1000973572.
\9\ See generally Apple's online archive of such data at
www.apple.com/pr/library.
\10\ As of early last month, the RIAA reportedly had brought 11,456
lawsuits and collected an average of $3,600 from each of almost 2,500
defendants. See S. Knopper, ``RIAA Will Keep On Suing,'' Rolling Stone
(June 9, 2005) at: www.roll
ingstone.com/news/story/_/id/7380412/
?pageid=rs.Home&pageregion=single1&rn
d=1122320285908&has-player=true&version=6.0.12.872.
\11\ See S. Knopper, ``RIAA Will Keep On Suing,'' Rolling Stone
(June 9, 2005), cited above at n.10.
\12\ See H. Rosen, ``The Supreme Wisdom of Not Relying on the
Court,'' The Huffington Post (June 26, 2005) at:
www.huffingtonpost.com/theblog/archive/hilary-rosen/the-supreme-wisdom-
of-not_3221.html.
\13\ The absence in the current market of P2P software providers
licensed to promote the labels' own online music downloading services,
or to make licensed music available directly to the public, is not due
to a lack of effort by P2P developers to obtain such contracts. As
early as 2001, the original Napster pleaded with the major labels for
such a license, reportedly offering a billion dollars in royalties.
More recently, as Chairman Smith's Competition Subcommittee heard in
direct testimony in June of last year, P2P United member Streamcast
(the makers of the Morpheus software also at issue in the Supreme
Court's opinion) was poised to finalize a contract with RealNetworks to
promote the major labels' own ``Rhapsody'' subscription service to
millions of Morpheus' P2P software users. With only a signature between
Streamcast and such a license, the Streamcast business development
executive who sought the deal was told twice in a voice mail recording
previously provided to the Commerce Committee that Streamcast had been
``blacklisted'' by ``the labels'' and that RealNetworks thus could not
consummate the otherwise fully negotiated deal. A transcript of that
voice mail recording is again submitted for the record and the full
Committee's consideration.
\14\ See H. Rosen, ``The Wisdom of the Court, Part II,'' The
Huffington Post (June 27, 2005) online at: www.huffingtonpost.com/
theblog/archive/hilary-rosen/the-wisdom-of-the-court-_3259.html.
\15\ This hypothetical price is based upon Yahoo's Y! Music
Unlimited, which offers consumers unlimited access to more than 1
million songs for as little as $4.99 per month. See http://
music.yahoo.com/unlimited/.
\16\ Statement of Marybeth Peters, Register of Copyrights, hearing
on ``Music Licensing Reform'' before the Subcommittee on Courts, the
Internet, and Intellectual Property, Committee on the Judiciary, U.S.
House of Representatives, 109th Congress, 1st Session, June 21, 2005.
See www.copyright.gov/docs/regstat062105.html.
\17\ The $5 per month figure noted above is a suggestion, not a
proposed mandate. Because collecting societies will make more money
with a palatable price and a larger base of subscribers than with a
higher price and expensive enforcement efforts, the market may be
relied upon to keep consumer pricing reasonable.
\18\ Moreover, such a system will further drive demand for
broadband communications services and, with greater broadband delivery
of musical content, the more revenue major corporate copyright
industries will get paid. Under such circumstances, the entertainment
industries' powerful lobby may be expected to begin affirmatively
working for an expansive and innovation-driven Internet, instead of
against it.
\19\ Rather than being limited to a handful of ``authorized
services'' like Apple's iTunes and Napster 2.0, the market is likely to
give rise to competing file-sharing applications and ancillary
services. Moreover, so long as individual consumers are licensed,
technology companies need not worry about negotiating the nearly
impossible maze of current music licensing requirements and may focus
instead on providing the public with the most attractive products and
services in a competitive marketplace.
\20\ Indeed, the ability of independent artists to negotiate as
they may choose with one or more record labels will only be enhanced by
their ability to document and quantify their revenue-generating
potential and overall popularity with certified download royalty data.
For the fist time in history, under a voluntary collective licensing
regime, independent artists may well be able to truly bargain at arm's
length with major music industry conglomerates.

Impact of the Supreme Court Grokster Decision by the Consumer
Electronics Association

About CEA: The Consumer Electronics Association (CEA) is the
preeminent trade association promoting growth in the consumer
technology industry through technology policy, events, research,
promotion and the fostering of business and strategic relationships.
CEA represents more than 2,000 corporate members involved in the
design, development, manufacturing, distribution and integration of
audio, video, mobile electronics, wireless and landline communications,
information technology, home networking, multimedia and accessory
products, as well as related services that are sold through consumer
channels. Combined, CEA's members account for more than $121 billion in
annual sales.
CEA Position: We are pleased that the Supreme Court preserved the
core principle of the ``Betamax'' decision, where as the mere
distribution of a product that has substantial non-infringing uses does
not expose a distributor to contributory infringement. In other words,
the Court said that infringing business models, rather than the
technology itself, should determine liability.
However, we are concerned with the Court's establishment of an
inducement standard and how it will be interpreted by the lower courts.
The ambiguity created by this standard will generate an uncertain legal
environment for innovators and investors, since the Court provided
minimal guidance as to what acts qualify as ``bad behavior.''
For example, does the marketing phrase ``Rip, Mix, Burn'' qualify
as inducement to infringe? What if you are developing a product with
knowledge that you could make your technology more ``infringement proof
'' merely by tripling the cost of development? If you don't do so, are
you inducing?
We expect that corporate counsels and investors will now err on the
side of caution when deciding whether to introduce innovative new
products and services. This is especially true now that litigation will
go to the issue of intent, making it very difficult to have an
infringement suit dismissed quickly on summary judgment. Instead,
entrepreneurs will face expansive discovery rules examining the notes
of engineering meetings, marketing plans and e-mails of executives.
This new legal ambiguity will not enhance America's
competitiveness. Foreign firms will continue to receive funding and
ship products free from concern about overreaching IP litigation, while
their American counterparts will need to demonstrate compliance with
Grokster's ambiguous legal test.
We will not realize the overall impact of this decision until it is
tested in the lower courts. We hope that the 9th Circuit interprets
this decision narrowly, implicating only the specific marketing
statements at issue in this case.
CEA will continue to work for a pro innovation environment, while
cooperating with the content industry on developing legitimate business
models.

Transcript of Voicemail Message Forwarded to Michael Weiss, CEO of
Streamcast by Streamcast Vice President of Business Development,
Elizabeth Cowley Left by Real Networks' General Manager of Consumer
Products, Ryc Brownrigg (September 8, 2003)

``Hey, Elizabeth. It's Ryc [Rick] Brownrigg. Rhapsody and Listen
are one in the same. Rhapsody is the service that's offered by the
Listen team, which is now our San Francisco team.
Unfortunately, the licenses for the ability to stream to Rhapsody
come from the labels, as you are aware. And the labels have blacklisted
you guys. So that is the problem we've got. Basically, what they're
saying is you've got to denounce P2P and/or resolve the lawsuit--is
what you have to do.
And so, until they resolve the lawsuit they're going to keep you on
the blacklist, which means I'm probably not going to get much latitude
to do anything as far as Rhapsody goes. So, I mean, I'm still willing
to give you the client and work with you on the client, but
unfortunately, I'm not going to be able to do anything as far as
helping you with the service in any short order.
So if you want to give me a call [NUMBER OMITTED], we can chat
about it more, but I don't know if this is still of interest to you to
work with us being as you have this limitation. Talk to you later.
Bye.''

The Chairman. Thank you very much.
Our next witness is Gregory Kerber, Chairman and CEO of
Wurld Media, Incorporated, which is the creator of a peer-to-
peer platform currently in its test phase and has signed
partnerships with Sony, BMG, Music Entertainment, Universal
Music Group, Warner Music Group, and EMI.
We're interested in your comments, Mr. Kerber.

STATEMENT OF GREGORY G. KERBER, CHAIRMAN AND CEO, WURLD MEDIA,
INC.

Mr. Kerber. On behalf of Wurld Media, I'd like to thank the
Chairman and Co-Chairman and every member of the Committee of
Commerce, Science, and Transportation for conducting this
hearing and the effects of the U.S. Supreme Court decision in
MGM v. Grokster, as delivered by the Justice Souter on June 27,
2005.
My name is Greg Kerber. I'm Chairman and CEO of Wurld
Media, an advanced technology company located in Saratoga
Springs, New York, and that's Upstate New York.
Wurld began in 1999 as a small technology company and was
funded and capitalized by family, friends, and founders who
believed in the future of the industry and believed in the
future of this new economy, called ``digital media.'' Wurld has
developed a platform for the secure sale and scalable
distribution of copyrighted protected digital media. The
company's platform is called Peer Impact, which he will be
launching to the public on August 5th, next week--features an
architecture and enables music copyright holders, computer
gaming companies, video producers, movie studios, book
publishers, and other digital media owners to securely
propagate their content across a peer impact network for
legitimate sale to, and download from, any Peer Impact-
connected computer on our network.
The advancement in peer-to-peer technology creates an
endless capability to provide every kind of digital media to
consumers in a safe environment free from viruses, unauthorized
content, child pornography, spyware, and identity gatherers,
while at the same time providing the ability to have parental
controls and ensuring that all the rights-holders in the value
chain receive payment for their creative works. This is just
the tip of the iceberg, as far as we are concerned. These
advanced technologies are now beginning to enable the
virtualization and creation of the supply chain through new and
emerging businesses.
This hearing is important, because it is exploring the
effects of the decision in the Grokster case. Without going
into any kind of legal analysis of the case, because I'm not an
attorney, I can say that, as a business person running a
legitimate peer-to-peer business, this decision clearly
illustrates that our system of government is working to achieve
the correct balance between protecting the consumer, the
creators of intellectual property, and that of advancing
technology.
Prior to the decision, the primary motivating elements in
any evolution of peer-to-peer technology was the avoidance of
culpability, not for the sake of innovation or enhancing the
consumer experience. It was acceptable and lawful to allow
illegal activity to exist and to thrive within a network if the
system was simply designed to appear uncontrollable, something
we called the Frankenstein Monster Scheme.
One of the many negative outcomes of this lawlessness is
the rampant content of child pornography that proliferates on
illegal peer-to-peer networks. The United States General
Accounting Office, in conjunction with many others, the Customs
CyberSmuggling Center detailed study of peer-to-peer networks
and discovered that when using innocuous searches, with search
terms routinely used by children, 56 percent of the results
returned were pornographic in nature. This decision now forces
these bad actors to be accountable. There are no longer--they
can no longer ignore laws that have been put in place to
protect the economy, the development of intellectual property,
and, most importantly, the future: our children.
This decision allows companies like ours to be able to grow
and prosper and compete fairly in the marketplace based upon
meeting consumers' needs, providing a safe environment and not
having to compete with business models that are based upon
stealing content.
The benefits from this decision include what--that we will
be able to provide employment opportunities to citizens of
Upstate New York, Southern California, and right here in
Washington, D.C., as we rapidly expand our staffing to keep up
with new content partners and to continue the evolution of our
network.
Innovation is not gone, but, rather, it's just beginning.
In addition to providing jobs for U.S. citizens, we will be
able to contribute to the Nation's gross national product, pay
taxes, and, as we launch our services in other areas of the
globe, contribute to the reversal of the balance of payments.
The benefits from this decision include that of the
consumer. The consumer wins as we will be able to provide a
product to consumers that creates convenience, choice, and
family safety.
Our peer-to-peer partnership include not only the
copyright-holder and the creator of the original works, but the
consumer, as well, who can now be involved in the economic
distribution of digital media. The consumer will find a
limitless choice in a world connected by a network that
contains all the content they want, but not having to be
concerned about their personal information at risk, that their
children are going to be viewing inappropriate material, or
that they're downloading viruses or Trojan horses that will, at
some point in the future, take over their operating system, or
that they are doing something online that they would never
dream of doing at a store, which is stealing works that others
have created, without paying for them.
The benefits from this decision include that venture
capital can once again feel safe in investing in advanced
technologies in legitimate peer-to-peer services without the
fear of impending litigation. Anecdotally, I should note that
the interest in our company from top-tier venture capital
community immediately following this decision has been pretty
overwhelming. The decision finally provides firm basis upon
which the pirates and bad actors can be distinguished from the
legitimate businesses, permitting capital flow once again into
those advanced Technology companies that we can be proud of on
the world stage; businesses that will provide employment for
U.S. citizens instead of those businesses that hide themselves
in the dark corners of other countries to avoid the laws of the
U.S.; companies that will now be able to convert their nascent
industry into one that the country can be proud of and can
exist without relying on illegal, immoral activities.
The benefits from this decision include that legitimate
industry can solidly emerge and prosper. The industry is an
advanced technology industry that respects the intellectual
property of the content creator by properly remunerating those
who make contributions throughout the value chain. It's
unlimited and global in nature, and now provides a level
playing field in which innovation can flourish and a business
can compete fairly.
Let me summarize by saying this. The decision will
positively affect the future development of advanced technology
for media distribution and the associated hardware and software
industries. This decision puts to rest that they serve to hold
the consumer-friendly new advances in stasis. Venture capital
can now invest in legitimate businesses, knowing with certainty
they will be able to compete fairly on the quality of their
offerings.
We look forward to continuing to provide a safe place for
intellectual property, so that the creation of original works
can be inspired and retain its valued place in our society.
Thank you.
[The prepared statement of Mr. Kerber follows:]

Prepared Statement of Gregory G. Kerber, Chairman and CEO,
Wurld Media, Inc.

On behalf of Wurld Media, Inc., I thank Chairman Stevens and Co-
Chairman Inouye--and every Member of the Committee on Commerce,
Science, and Transportation--for conducting this hearing on the effects
of the U.S. Supreme Court decision in MGM v. Grokster as delivered by
Justice Souter on June 27, 2005.
I am Greg Kerber, Chairman and CEO of Wurld Media, an advanced
technology company located in Saratoga Springs, New York. Wurld began
in 1999 as a small technology company, capitalized by family and
friends, who believe in the future of this industry. Wurld Media has
developed a platform for the secure sale and scalable distribution of
copyright-protected digital media. The company's platform, Peer
Impact^TM, features an architecture that enables music
copyright holders, computer gaming companies, audio book publishers and
other digital media owners to securely propagate their content across
the Peer Impact network for legitimate sale to, and download from, any
Peer Impact connected computer. This advancement in peer-to-peer
technology creates endless capabilities to provide every kind of
digital media to consumers, in a safe environment, free from: viruses,
unauthorized content, child pornography, spyware, and identity
gatherers, while at the same time providing the ability to have
parental controls and ensuring that all rightsholders in the value
chain receive payment for their creative works. This is just the tip of
the iceberg as far as we are concerned. These advanced technologies are
now beginning to enable the virtualization of the supply chain through
new and emerging businesses.
This hearing is important because it is exploring the effects of
the decision in the Grokster case. Without going into any kind of legal
analysis of the case, as I am not a lawyer, I can say that as a
businessman, running a legitimate peer-to-peer business, this decision
clearly illustrates that our system of government is working to achieve
the correct balance between protecting the creators of intellectual
property and that of advanced technology. Prior to this decision, the
primary motivating elements in any evolution of peer-to-peer technology
was the avoidance of culpability, not for the sake of innovation or
enhancing consumer experience. It was acceptable and lawful to allow
illegal activity to exist and to thrive within a network if the system
was simply designed to appear to be uncontrollable. One of the many
negative outcomes of this lawlessness is the rampant child pornography
that proliferates on the illegal peer-to-peer networks. The United
States General Accounting Office, in conjunction with, among others,
the Customs CyberSmuggling Center, conducted a detailed study of peer-
to-peer networks and discovered that when using innocuous searches,
with search terms routinely used by children, 56 percent of the results
returned were pornographic in nature. \1\ This decision now forces
these bad actors to be accountable. They can no longer ignore laws that
have been put into place to protect the economy, the development of
intellectual property, and, most importantly, our children. This
decision allows companies like ours to be able to grow and prosper and
compete fairly in the marketplace based upon meeting consumer needs,
providing a safe environment and not having to compete with business
models that are based upon stealing content.
---------------------------------------------------------------------------
\1\ ``File-Sharing Programs, Peer-to-Peer Networks Provide Ready
Access to Child Pornography,'' United States General Accounting Office,
February 2003.
---------------------------------------------------------------------------
The benefits from this decision include that we will be able to
provide employment opportunities for the citizens of upstate New York
and beyond as we rapidly expand our staffing to keep up with new
content partners and to continue the evolution of our network.
Innovation is not gone, but rather, just beginning. In addition to
providing jobs for U.S. citizens, we will be able to contribute to this
Nation's gross national product, pay taxes, and as we launch our
services in other areas of the globe, contribute to the reversal of the
balance of payments.
The benefits from this decision include that the consumer wins as
we will be able to provide a product to consumers that creates
convenience, choice and family safety. Our peer-to-peer partnerships
include not only the copyright holder and the creator of original
works, but the consumer as well, who can now be involved in the
economics of distribution. The consumer will find a limitless choice in
a world connected by a network that contains all the content they want
but not having to be concerned that their personal information is at
risk, that their children are going to be viewing inappropriate
material or that they are downloading viruses or Trojan horses that
will, at some time in the future, take over their operating system, or
that they are doing something online that they would never dream of
doing in a store; stealing works that others have created without
paying for them.
The benefits from this decision include that venture capital can
once again feel safe in investing in advanced technologies, in
legitimate peer-to-peer services, without the fear of impending
litigation. Anecdotally, I should note that the interest in our company
from the venture capital community immediately following the decision
has been overwhelming. This decision finally provides a firm basis upon
which the pirates and bad actors can be distinguished from legitimate
businesses, permitting capital to flow once again into those advanced
technology companies that we can be proud of on the world stage;
businesses that will provide employment of U.S. citizens instead of
those businesses hiding themselves in the dark corners of other
countries to avoid the laws of the U.S.; companies that will now be
able to convert this nascent industry into one that this country can be
proud of and that can exist without relying on illegal and immoral
activities.
The benefits from this decision include that a legitimate industry
can solidly emerge and prosper. That industry is an advanced technology
industry that respects the intellectual property of content creators by
properly remunerating those who make contributions throughout the value
chain, is unlimited and global in nature, and now provides a level
playing field upon which innovation can flourish and businesses can
compete fairly.
Let me summarize by saying that this decision will positively
affect the future development of advanced technology for media
distribution and the associated hardware and software industries. This
decision puts to rest questions that had served to hold many consumer-
friendly new advances in stasis. Venture capital can now invest in
legitimate businesses, knowing with certainty that they will be able to
compete fairly and on the quality of their offerings. We look forward
to continuing to provide a safe place for intellectual property so that
the creation of original works can be inspired and retain its valued
place in our society.

The Chairman. Thank you very much.
Our next witness is Mark Heesen, President of the National
Venture Capital Association, representing 450 venture capital
and private equity firms, accounting for more than 85 percent
of U.S. venture funding.
Mr. Heesen?

STATEMENT OF MARK G. HEESEN, PRESIDENT,
NATIONAL VENTURE CAPITAL ASSOCIATION

Mr. Heesen. Thank you very much, Mr. Chairman.
The venture-capital sector has grown, since its inception
just 50 years ago, to become a major force in the U.S. economy.
In fact, in 2003, venture-capital-funded companies were
directly responsible for 9.4 percent of all U.S. private-sector
employment, as well as 9.6 percent of all companies' sales in
the United States.
To be able to make this type of impact on the U.S. economy,
as well as on the lives of every American, VCs invest with a
particular emphasis on emerging companies in the information
technology, communications, and life-science industries. These
areas, in particular, have been where we have found that
destructive technologies, those which upset the status quo, but
in the long run produce exponential societal, financial, and
technological advances, reside.
Disruptive technologies, by their very nature, often put on
notice entrenched older interests that their primacy in a
particular area is at risk. If they wish to continue to
succeed, they have a decision to make, whether they move
forward in helping to usher in the new model or to stay wedded
to a business model no longer accepted in the marketplace.
Such a dynamic makes the venture-capital community the
financial lynchpin to technology and medical advances, and,
thus, a hero to many, while simultaneously making us a black
hat as the destructors of the status quo on the other. The MGM
v. Grokster decision is emblematic of this.
Prior to the Supreme Court's decision in Grokster, the
venture community was deeply concerned that any erosion of the
bright-line protection provided in Sony v. Universal for
disruptive products that are capable of substantial non-
infringing uses would have a chilling effect on innovation and
product design by developers of multi-use technologies and
services. We believe that the Supreme Court's decision in
Grokster is favorable to the venture-capital industry, insofar
as the court rejected the studio's strong efforts to cut back
on the protections for innovative technologies that have the
potential for substantial non-infringing uses.
With the Sony bright-line rule intact, hopefully only those
players who willfully promote copyright infringement will be
subject to, and should be subject to, potential liability for
secondary infringement of copyrights.
Unfortunately, the entertainment industry has never been
satisfied with attacking direct instances of infringement. For
more than a century, the industry has attacked, in turn, each
new development, each destructive technology that facilitates
copying and distribution, from phonographs to mimeographs, from
audiotape players to VCRs, from compact discs to mp3 players.
As each new technology has developed the industry has sought to
destroy or control it, sometimes extending their attacks to the
inventors who created, and the investors who funded, that
product or service.
The Grokster decision reaffirmed the principle that new
products and services will be protected, provided they are
capable of substantial non-infringing uses. Entrepreneurs and
their investors should be able to move forward in developing
novel products without constant concern that some unforeseen
future use could impose ruinous liability.
Venture capitalists believe in the power of the market. The
market, rather than the Federal courts, should drive investment
decisions. Unfortunately for everyone involved, the Supreme
Court left many liability questions outside of the Sony bright-
line protection unanswered in Grokster. For venture capital
firms, this additional legal uncertainty will continue to make
us less inclined to invest in this critical information
technology at a time when the rest of the world is quickly
catching up to our expertise in this area.
As lower Federal courts begin to study and apply the
Grokster decision, NVCA believes that we all have an
opportunity here for some breathing space, one in which
technologies can continue to emerge. There should be no rush to
judgment from any sector, be it from the entertainment or
technology communities or investors or Congress. However, if
the entertainment industry decides to initiate even greater
volumes of litigation against inventors, investors, and their
destructive technologies, Congress may need to return its focus
to this issue.
Thank you very much.
[The prepared statement of Mr. Heesen follows:]

Prepared Statement of Mark G. Heesen, President,
National Venture Capital Association

Thank you for the opportunity to share the views of the National
Venture Capital Association (NVCA). NVCA represents the interests of
more than 470 venture capital firms in the United States, which
together account for more than 85 percent of venture funding. As the
only national trade group for the venture community, the NVCA's mission
is to foster public awareness of the vital role that venture funding
plays in driving the United States economy and to advocate public
policies that stimulate entrepreneurship and innovation.
While the importance of venture capital firms and the companies
they fund to the United States economy is difficult to quantify, recent
studies estimate that, in 2003, venture-backed businesses were
responsible for more than 10.1 million American jobs and accounted for
more than $1.8 trillion of the United States Gross Domestic Product
(GDP).\1\ Such economic mainstays as Intel, Federal Express, Home
Depot, Genentech, Google, and Starbucks were incubated with venture
funding. Each year, venture firms invest more than $18 billion in
start-up companies across the country, which accounts for an estimated
72 percent of all venture investment worldwide. A decidedly American
phenomenon, venture capital funds and the companies they back provide a
key differentiator animating American economic growth.
---------------------------------------------------------------------------
\1\ See Global Insight, Venture Impact 2004: Venture Capital
Benefits to the U.S. Economy 1 (2004).
---------------------------------------------------------------------------
The NVCA's members invest with a particular emphasis on emerging
companies in the information technology, communications, and life
sciences industries. In addition to providing early funding to young
businesses unable to secure capital from more traditional sources,
NVCA's member firms take an active role in guiding nascent businesses
through their start-up and middle phases. They work with the
entrepreneurs and management, lending their experience and expertise
while developing long-term partnerships.
NVCA's member firms accordingly have a unique perspective on the
hurdles that emerging businesses confront and the background conditions
that promote or stifle growth and innovation. Prior to the Supreme
Court's decision in MGM v. Grokster, NVCA's member firms were deeply
concerned that any erosion of the bright-line protection provided in
Sony Corporation of America v. Universal City Studios, Inc. for
products that are ``capable of substantial noninfringing uses'' would
have a chilling effect on innovation and product design by developers
of multiple-use technologies and services.
We believe that the Supreme Court's decision is favorable to the
venture capital industry in so far as the Supreme Court rejected the
studios' strong efforts to cut back on the protections for innovative
technologies that have the potential for substantial non-infringing
uses. With this bright-line rule intact, hopefully only those players
who willfully promote copyright infringement will be subject to--and
should be subject to--potential liability for secondary infringement of
copyrights. A company or a venture capital firm that brings to market
technologies that have the potential for legitimate, non-infringing
uses, and that markets the technologies based on those non-infringing
uses, should remain protected from secondary liability, even though
other third parties might discover ways with the technologies to
infringe on copyrights.
NVCA's members are pleased that a new standard for contributory
infringement as proposed by the petitioners in Grokster was not
created. Such a standard would have been virtually impossible for
venture capital firms to accommodate in making their initial investment
decisions, when the potential commercial applications of a promising
concept are still far in the future. Having said this, NVCA is
concerned that Grokster's long-term impact could still be very
problematic for technology advancement in general and the VC community
specifically. Such malleable standards--vague in their formulation and
unpredictable in their application--could invite courts to second-guess
design decisions and expose venture firms to potentially ruinous
litigation.

Attacking Innovation
Any technology or service that makes it possible to copy or
distribute information can be used for copyright infringement. The list
of such technologies--which today includes computers, the Internet, and
e-mail, as well as CD burners, iPods, and peer-to-peer file sharing--is
extensive, as is the range of their legitimate uses. Modern life would
be impossible to envision without such ``dual use'' technologies.
Indeed, these ``technologies of freedom''--which allow the rapid spread
of information free of decentralized control--are critical to our
modern democracy, as well as to our productivity and economic well-
being.
Freedom, however, is sometimes abused. There are, and always have
been, those who would abuse the power afforded them by new technologies
to copy and distribute works that belong to others. Existing copyright
laws provide severe penalties for such direct infringement, recognizing
that the few who are caught must provide an example and deterrent for
others.
But the entertainment industry has never been satisfied with
attacking direct instances of infringement. For more than a century,
when it first claimed that the player piano spelled the death of
American music, the industry has attacked in turn each new development
that facilitates copying and distribution, from phonographs to
mimeographs, from audiotape players to VCRs, from compact disks to mp3
players. As each new technology has developed, the industry has sought
to destroy or control it, often extending their attacks to the
inventors who created and the investors who funded the product or
service.
Fortunately, these attacks have been largely unsuccessful. (And
their failure, ironically, has been good for the entertainment industry
itself, which has in the long run benefited hugely from the new methods
of distribution.) Under the bright-line rule established by the Court
in Sony, technologies and services that are ``capable of substantial
noninfringing uses'' are protected from secondary copyright liability,
regardless of whether (or how many) others use those technologies and
services for direct infringement of copyrights. Responsibility for
copyright infringement rests where it belongs: on the shoulders of
those who abuse products to infringe copyrights, not on those who
create or invest in products capable of substantial non-infringing
uses.
This bright-line protection has been critical to technological
progress. Entrepreneurs have been able to develop novel products
without worrying that illegitimate uses could impose ruinous liability.
Because markets take time to develop, and because the future uses to
which a product may one day be put (both legitimate and illegitimate)
are not necessarily evident in its early phases, Sony allows an
innovation to incubate without fear that third-party infringement
(present or future) will invite litigation.
Sony Bright-Line Rule Critical To Capital Investment
``[E]very invention is born into an uncongenial society, has few
friends and many enemies.'' \2\ In Sony, the Supreme Court fashioned a
margin of protection for such nascent technologies. The Court
articulated a bright-line rule for determining liability under the
doctrine of contributory infringement that armed inventors and product
developers--and those who fund them--with the knowledge that a
technology or service with legitimate uses would not be driven out of
the market because some or even most customers may use the product to
infringe copyrights.
---------------------------------------------------------------------------
\2\ Joel Mokyr, The Lever of Riches: Technological Creativity and
Economic Progress 183 (1990) (internal quotation marks omitted).
---------------------------------------------------------------------------
The Court's bright-line rule in Sony has been the midwife for the
technological revolution of the past two decades. It is not by chance
that the Sony decision coincided with a period of unprecedented
innovation and technological progress. By establishing a bright-line
rule that protects new products and services--and the investors--
provided they are ``capable of substantial noninfringing uses,'' Sony
has provided critical assurance to entrepreneurs that they could
develop novel ideas and products without worrying that some unforeseen
future use could impose ruinous liability.
Entrepreneurs frequently invent new products without any clear
picture of their potential uses, secure in the belief that a good idea
will eventually find a market. That others could use the invention for
copyright infringement is and should be irrelevant to the question
whether the product or process can be placed in service of alternative,
legitimate ends. One cannot even begin to count the staples of modern
life--radios, typewriters, tape recorders, cameras, photocopiers,
computers, fax machines, cassette players, cell phones, CD burners, DVD
players, e-mail, cable modems and DSL for high-speed Internet access,
Internet search engines such as Google and Yahoo, TiVos, and mp3
players such as the iPod--that can be used to infringe copyrights and
yet have perfectly legitimate uses that we increasingly could not do
without. Peer-to-peer networks are another such innovation, whether
used to share photos among family and friends, to promote the music of
a new band, or to share research among scholars.
The Sony case itself provides the best illustration of the fact
that products often arrive before their primary markets emerge. At the
time that case was decided, the Betamax was used primarily for copying
shows from over-the-air broadcasts, either to build a library of such
shows or simply to engage in time-shifting.\3\ The primary dispute
between the majority and the dissent concerned whether time-shifting
was itself a fair use of the copyrighted material.\4\ But the Betamax
and its ultimately more successful competitor, the VHS VCR, quickly
evolved into something quite different: a means of viewing lawfully
rented movies. A whole industry grew up to provide legitimate materials
for a product that the entertainment industry sought to crush in its
infancy. That was possible only because the Court in Sony provided a
protected space in which these legitimate uses could grow. In that
case, as in many others, the product created its own legitimate market.
---------------------------------------------------------------------------
\3\ See 464 U.S. at 423 (surveys by both respondents and Sony
``showed that the primary use of the machine for most owners was `time-
shifting,' '' although surveys also showed ``that a substantial number
of interviewees had accumulated libraries of tapes'').
\4\ Id. At 442, 447-56; id. At 477-86 (Blackmun, J., dissenting).
---------------------------------------------------------------------------
The entertainment industry in its Supreme Court brief on Grokster
suggested that the Sony test encourages bad behavior by inventors and
product designers who hide behind its protections in order to make
money off infringement.\5\ That is certainly possible but, as we argued
in our Amicus Curiae brief, that it is not a reason to change the Sony
bright-line test established by the Supreme Court. The Justices agreed
with our line of thinking in Grokster. As long as a product is capable
of substantial, non-infringing uses, it is a socially useful product,
whose development should be encouraged. Abuse of the product should be
attacked, not the product itself, nor the inventor behind it, nor the
venture capitalist who funded the venture. If a company materially
assists or encourages specific acts of infringement--whether through
customer support mechanisms or other communications--secondary
liability might well be appropriate.\6\ But the mere acts of
developing, advertising, marketing, upgrading, and supporting a multi-
use product that is capable of substantial non-infringing uses should
be protected, without necessitating a fact-specific, inherently
amorphous inquiry into the motivations and incentives of the
inventor.\7\
---------------------------------------------------------------------------
\5\ See Motion Picture Studio Pet. Br. 9-11, 27-29; U.S. Br. 17;
Am. Tax Reform Br. 13-15.
\6\ See, e.g., Cable/Home Communication, 902 F.2d at 837-39 (active
promotion of television signal de-scrambling chips); Sega Enters. Ltd.
v. MAPHIA, 948 F. Supp. 923, 933 (N.D. Cal. 1996) (Internet bulletin
board operator actively encouraged users to upload copyrighted games).
\7\ NVCA takes no position on whether, on the record here, the
defendants in Grokster materially assisted or encouraged specific acts
of infringement.
---------------------------------------------------------------------------
It is critical to understand that the threat of secondary liability
from copyright suits is qualitatively different from most other sorts
of business risk that investors can insure against or build into their
risk calculations. The mandatory mechanism of statutory damages--
designed to discourage direct infringement--has crushing implications
for vendors of multi-purpose technologies, where damages from
unforeseen users can quickly mount in the millions and even billions of
dollars. And the indeterminate reach of such secondary liability means
that not merely start-up capital is at risk, but also the personal
wealth of start-up's officers, directors, and investors.\8\ The
litigation risk in such circumstances is wholly one-sided: minimal
attorneys' fees for the plaintiffs versus financial annihilation for
the defendants. It would be impossible to create a more chilling
environment for creativity and product development.\9\
---------------------------------------------------------------------------
\8\ The prospect of such litigation is far from theoretical. In
addition to suing Napster, for example, the recording industry has
brought suit against venture capital firms and other investors that
provided early funding. See In re Napster, Inc. Copyright Litig., Nos.
C-MDL-00-1369-MHP & C-04-1166-MHP, 2005 WL 273178, at *1 (N.D. Cal.
Feb. 03, 2005) (discussing suit versus venture capital firm Hummer
Winblad Venture Partners); UMG Recordings, Inc. v. Bertelsmann AG, 222
F.R.D. 408, 413-14 (N.D. Cal. 2004) (discussing suit against investor
Bertelsmann). Indeed, after driving mp3.com into bankruptcy and
acquiring its assets, the studios have even brought suit against the
lawyers that performed corporate work for mp3.com in its start-up
phase. Jon Healey, MP3.com Sues Former Copyright Counsel, L.A. Times,
Jan. 19, 2002, at C2. These scorched-earth litigation tactics are
expressly designed to discourage the development of any product that is
capable of infringing uses--a complete inversion of the Sony rule.
\9\ See Mark A. Lemley & R. Anthony Reese, Reducing Digital
Copyright Infringement Without Restricting Innovation, 56 Stan. L. Rev.
1345, 1388 (2004) (discussing how the threat of liability has deterred
innovation among computer programmers); Joseph P. Liu, The DMCA and the
Regulation of Scientific Research, 18 Berkeley Tech. L.J. 501 (2003)
(discussing ways in which threat of liability under the Digital
Millennium Copyright Act deters innovation in field of encryption);
Assaf Hamdani, Who's Liable for Cyber-wrongs?, 87 Cornell L. Rev. 901
(2002) (demonstrating that threat of secondary liability has led to
over-deterrence); Matthew Fagin, Frank Pasquale & Kim Weatherall,
Beyond Napster: Using Antitrust Law to Advance and Enhance Online Music
Distribution, 8 B.U. J. Sci. & Tech. L. 451, 500 (2002) (``Innovation
in the technologies of distribution will decline markedly if potential
new innovators are chilled by a threat of legal action'').
---------------------------------------------------------------------------
Standards Proposed By Entertainment Industry Would Deter Investment And
Innovation
In their Grokster briefs before the Supreme Court, both the
petitioners and the United States asked the Court to replace Sony's
clear rule of law with malleable legal standards that would trade
certainty for legal risk. Moving from the bright-line Sony rule to any
sort of malleable standard--with its attendant loss of certainty--would
undermine investment in innovative technology.
The evolution of the business model for the VCR at issue in Sony
demonstrates the danger of predicting a future pattern of use. While
the studios predicted on the basis of early experience that the VCR
would destroy the movie business, video and DVD rentals and sales
currently generate substantially more revenue than movie theaters.\10\
When industry executives cannot accurately predict the direction of the
market, a legal standard that asks the Federal courts to engage in such
predictions has little to recommend itself.
---------------------------------------------------------------------------
\10\ See note 8, supra.
---------------------------------------------------------------------------
The iPod, which has been responsible for the resurgence of Apple,
has a similar story line. Apple first invited customers to ``rip, mix,
and burn'' their favorite music when releasing its iTunes software in
January 2001 and then embedding it on the latest version of the iMac
personal computer.\11\ The iPod followed later that year, with an
initial 5 gigabit version that could hold up to 1,000 songs. Apple was
immediately attacked by the major studios and accused of inciting
theft.\12\ But it was not until April 2003 that Apple launched its
iTunes online music store, after reaching agreements with all of the
major studios to sell the ability to download individual songs or
entire CDs. In the first quarter of 2005 alone, Apple reported licensed
online music sales of roughly $275 million, and it is now selling 1.25
million songs per day. Just as licensed video sales and rentals have
eclipsed movie theaters in revenues, it appears clear that licensed
online downloads will eclipse CDs. But neither could do so without the
protection afforded by Sony for mixed-use technologies.
---------------------------------------------------------------------------
\11\ See Dennis Sellers, Jobs: iTunes Is New, Free Jukebox Software
(Jan. 9, 2001), available at http://www.macworld.com/news/2001/01/09/
itunes/index.php. The first mp3 commercial players were developed
several years earlier, and the music industry immediately filed suit to
enjoin their sale. See Recording Indus. Ass'n of Am. v. Diamond
Multimedia Sys., Inc., 180 F.3d 1072 (9th Cir. 1999) (suit against Rio
portable mp3 music player). It is only because of the legal protection
afforded by this Court's Sony decision that the iPod could be
developed, marketed, and released.
\12\ See Brooks Boliek, Mouse Grouse: Dis Boss Lays Into Computer
Biz, The Reporter.com, Mar. 1, 2002, available at http://www.larta.org/
pl/NewsArticles/02Marc01_HR_Eisner.htm.
---------------------------------------------------------------------------
Peer-to-peer sharing is likely to provide yet another example if
permitted to develop. Thanks to a file-sharing technology called
BitTorrent, millions of users were able to quickly download and view
``lengthy amateur videos documenting the devastation of the December
tsunami in the Indian Ocean, helping to spur an outpouring of
charitable aid.'' \13\ BitTorrent's main use, however, appears to be
among those who want to trade Hollywood movies and TV shows, thus
``putting it in the cross hairs of the entertainment industry.'' \14\
The technology obviously is capable of substantial non-infringing uses;
subjecting the inventor to ruinous liability would deprive the
marketplace and consumers of the opportunity to develop a legitimate
market for those uses.\15\
---------------------------------------------------------------------------
\13\ Jonathan Krim, High-Tech Tension Over Illegal Uses, Wash.
Post, Feb. 22, 2005, at E1, available at http://www.washingtonpost.com/
wp-dyn/articles/A42401-2005Feb21.html?sub=AR.
\14\ Id.
\15\ While the United States and petitioners contend that it would
be more efficient for users seeking publicly available material to go
directly to the website that houses it than to use peer-to-peer file-
sharing software, neither has offered any evidence to support this
factual assertion. The Ninth Circuit, by contrast, found that peer-to-
peer arrangements ``significantly reduc[ed] the distribution costs of
public domain and permissively shared art and speech.'' Pet. App. 16a.
While legitimate arguments may support these competing conclusions, the
prior question that the United States fails to address is whether the
Federal courts have the institutional capabilities to weigh the
competing evidence in such complex areas as computer software and the
life sciences. The marketplace performs this same function
automatically.
---------------------------------------------------------------------------
Conclusion
The clear rule of law that the Supreme Court articulated in Sony
has provided the backdrop for an unprecedented period of technological
growth and innovation. That revolution in informational technology, in
turn, has been responsible for the creation of millions of jobs in the
United States, directly and indirectly contributing billions of dollars
to the GDP. Replacing the Sony rule with a more amorphous, fact-
specific standard, as advocated by many in the entertainment industry
in Grokster, would have placed these industries, and the nascent
businesses that are their life blood, at risk. The Supreme Court
refused to go down this path. Supreme Court Justice Stephen Breyer
along with Justices Sandra Day O'Conner and John Paul Stevens argued
that ``Sony's rule is strongly technology protecting. . . . Sony
thereby recognizes that the emergence of new technologies, including
(perhaps especially) those that help disseminate information and ideas
more broadly or more efficiently.''
The market, rather than the Federal courts, should drive investment
decisions. Unfortunately, the Supreme Court left many liability
questions unanswered in Grokster, and those issues will now have to
again be addressed by the lower courts in continuing litigation. For
venture capital firms, the additional layer of legal uncertainty--a
risk that can be neither measured nor managed--will discourage
investment in critical information technologies in the near term post
Grokster. We have now an opportunity for a breathing space, one in
which technologies can continue to emerge and further answers emerge
from the courts without a rush to judgment from any sector, whether it
is the entertainment industry, Congress or investors. However, if the
entertainment industry decides to initiate even greater volumes of
litigation against inventors and investors, Congress may need to return
its focus to this issue.
Thank you again for the opportunity to testify here today on these
critical issues. I look forward to answering any questions.

The Chairman. Thank you.
Our next witness is Dave Baker, Vice President, Law and
Public Policy, of EarthLink. EarthLink is an Internet service
provider with over five million subscribers.
Mr. Baker?

STATEMENT OF DAVID N. BAKER, VICE PRESIDENT,
LAW AND PUBLIC POLICY, EarthLink, INC.

Mr. Baker. Thank you.
Chairman Stevens, Co-Chairman Inouye, and members of the
Committee, thank you for inviting me to testify today.
I'm Dave Baker. I'm Vice President for Law and Public
Policy with EarthLink. EarthLink is one of the Nation's largest
Internet service providers, serving 5.4 million customers with
broadband, dial-up, web-hosting, wireless Internet, and voice
services.
We appreciate this committee's interest in peer-to-peer
file sharing and the issues related to the Supreme Court's
recent decision in MGM v. Grokster. You will hear from other
witnesses today about the importance of protecting copyrights.
EarthLink agrees and supports the rights of copyright owners to
protect their intellectual property and to do so in a manner
that does not compromise the ability of Internet providers to
deliver broadband and other Internet services to as many
Americans as possible.
Indeed, if we are to realize the promise of the emerging
broadband future, we should all want to develop means to make
online music, movies, and video more widely available to
consumers while protecting the copyrights of those who create
such content.
In studying the issues of peer-to-peer file sharing, I
would like to offer the Committee some insights from our
experience with the Digital Millennium Copyright Act. The goal
of the DMCA is to give copyright owners a mechanism to protect
their intellectual property from online infringement while
creating counter-notification safeguards for website owners and
a safe-harbor provision for ISPs. The DMCA affirms the
longstanding principle that ISPs are but conduits for
information. As such, they are not liable for the content that
travels over their networks.
Having said that, EarthLink, as other ISPs, does not
tolerate activities which violate copyrights. Where ISPs host
websites which contain infringing content, we can, and do, play
a part in protecting copyrights.
Under the DMCA's notice and takedown provisions, an ISP
will disable or block access to a website it hosts if it
receives a notification of a good-faith belief that such
website infringes a party's copyrights. The website owner has a
similar opportunity to file a counter-notification to get his
website restored. The DMCA's notice and takedown procedure has
worked well for over 6 years. ISPs like EarthLink handle DMCA
notices almost every day. Copyright owners are given reasonable
opportunity to protect their intellectual property. website
owners are given reasonable opportunity to protect their
content. And ISPs are given reasonable opportunity to aid
copyright owners without themselves becoming liable for content
they host.
However, ISPs faced challenges a few years ago when
copyright owners tried to stretch the use of the DMCA to
include peer-to-peer file sharing. The RIAA tried to use the
subpoena power of Section 512(h) to require ISPs to divulge the
identity of Internet users who were alleged to have transmitted
copyrighted materials across the ISP's network. Using the DMCA
in this fashion allowed administrative subpoenas to be issued
in blank, with no judicial oversight.
Compounding this problem were the use of bots, automated
programs which scour the web looking for files which contain
names of copyrighted materials. But bots are indiscriminate.
For instance, a notice sent in 2001 to UUNet sought to cutoff
Internet access to all users who had downloaded files
containing ``Harry Potter.'' One of these files was titled
harry_potter_book_report.rft and was, in fact, just what it
purported to be, a child's book report on Harry Potter, yet the
notice, if enforced, would have cutoff all Internet access, not
just for this child, but for his or her entire family.
Unlike websites, which ISPs host and can, therefore,
control access to, peer-to-peer files reside on the computers
of individual Internet users. Short of canceling the accounts
of all of these users, which would work in undue hardship, ISPs
cannot control this. What's more, attempts to force ISPs to
disclose the identity of individuals upon a mere allegation of
copyright infringement unnecessarily compromises the privacy of
all Internet users.
As EarthLink has stated many times before, we support the
rights of the RIAA and other copyright owners to protect their
intellectual property. We just must do so in a way that
protects the privacy of legitimate users and which does not
shoot the messenger, the ISP, which makes online communications
possible in the first place.
In the Grokster case at hand, the Supreme Court unanimously
held that Grokster and StreamCast are potentially liable for
copyright infringement by their users. The court focused on the
element of intent to induce infringement.
Further, the court held that Grokster and StreamCast did
not meet the Sony standard of commercially significant non-
infringing use, and the overwhelming evidence of an intent to
induce infringement could not be disregarded. The Supreme Court
went on to say that the Sony standard remains, but it also said
that you cannot use the Sony safe harbor if you are clearly
inducing others to infringe copyrights.
As the Supreme Court noted, peer-to-peer is an immensely
useful technology. The lesson from the Grokster case is not to
limit the technology, but to use it in a way that does not
intentionally infringe on copyrights.
As I noted in the foreword I wrote to the Giga Law Guide to
Internet Law regarding Grokster's predecessor, Napster, Napster
provides a great example of a killer app, killed by its failure
to address legal realities. A brilliantly simple application,
it took full advantage of the Internet's very nature as an
information service to create a means of distributing music far
more efficiently than the conventional process of pressing and
shipping CDs. But as good as its technology was, Napster failed
to address vital legal issues. Rock stars, songwriters, and
music publishers are entitled to be paid for their work, as
Federal courts in the Napster lawsuit repeatedly ruled.
Napster, and now Grokster, will always serve as a reminder that
just because you can do something online doesn't mean you can
ignore existing laws.
I thank the Committee, again, for inviting me here today,
and I look forward to any questions you may have.
[The prepared statement of Mr. Baker follows:]

Prepared Statement of David N. Baker, Vice President,
Law and Public Policy, EarthLink, Inc.

Chairman Stevens, Co-Chairman Inouye and members of the Committee,
thank you for inviting me to testify today. My name is Dave Baker and I
am Vice President for Law and Public Policy with EarthLink.
Headquartered in Atlanta, EarthLink is one of the Nation's largest
Internet Service Providers (ISPs), serving approximately 5.5 million
customers with broadband, dial-up, web hosting, wireless Internet and
voice services.
We appreciate this committee's interest in peer-to-peer file
sharing and the issues related to the Supreme Court's recent decision
in MGM v. Grokster. You will hear from other witnesses today about the
importance of protecting copyrights. EarthLink supports the rights of
copyright owners to protect their intellectual property and to do so in
a manner that does not compromise the ability of Internet providers to
deliver broadband and other Internet services to as many Americans as
possible. Indeed, if we are to realize the promise of the emerging
broadband future, we should all want to develop means to make online
music, movies and video more widely available to consumers while
reasonably protecting the copyrights of those who create such content.
In studying the issue of peer-to-peer file sharing, I would like to
offer the Committee some insights from our experience with Federal
copyright legislation. In 1998, Congress passed the Digital Millennium
Copyright Act (DMCA). The goal of the DMCA is to give copyright owners
a mechanism to protect their intellectual property from online
infringement while creating safeguards such as counter-notification
procedures for website owners and a safe harbor provision for ISPs.
The DMCA affirms the long-standing principle that ISPs are but
conduits for information. As such, they are not liable for the content
that travels over their networks. Having said that, EarthLink, as other
ISPs, does not tolerate activities which violate copyrights. Where ISPs
host websites which contain infringing content, they can and do play a
part in protecting copyrights.
Under the DMCA's notice and takedown provisions, an ISP will
disable or block access to a website it hosts if it receives a
notification of a good-faith belief that such website infringes a
party's copyright(s). The website owner has a similar opportunity to
file a counter-notification to get his website restored.
The DMCA's notice and takedown procedure has worked well for over 6
years now. ISPs like EarthLink handle DMCA notices almost every day.
Copyright owners are given reasonable opportunity to protect their
intellectual property, website owners are given reasonable opportunity
to protect their content, and ISPs are given reasonable opportunity to
aid copyright owners without themselves becoming liable for content
they host.
However, ISPs faced challenges a few years ago when copyright
owners tried to stretch the use of the DMCA beyond notice and takedown
of hosted websites to include peer-to-peer file sharing. The RIAA tried
to extend the subpoena power of Sec. 512(h) of the DMCA to require ISPs
to divulge the identity of Internet users (not necessarily even
customers) whom the RIAA alleged to have transmitted copyrighted
materials across the ISP's network.
Using the DMCA in this fashion allowed administrative subpoenas to
be issued in blank with no judicial oversight. Compounding this problem
was the use of ``bots'', automated programs, which scour the web
looking for files which contain names of copyrighted materials. But
these bots are indiscriminate in both the breadth and specificity of
the information they seek. For instance, a subpoena sent by
copyright.net to UUNet on January 2, 2001 sought personally identifying
information for 2,635 individual subscribers. And in another example,
notices sent by Mediaforce to UUNet on December 3, 2001 sought to
cutoff Internet access to all users who had downloaded files containing
``Harry Potter.'' One of these files was titled
harry_potter_book_report.rtf and was 1k in size. Not only was this
magnitudes smaller than even the legal clips of the movie, much less
the megabytes needed for bootleg copies of the whole film, but closer
inspection showed it to be just what it purported to be, a child's book
report on Harry Potter. Yet the notice, if enforced, would have cutoff
all Internet access not just for this child, but for his or her entire
family.
Unlike websites which ISPs host, and can therefore control access
to, peer-to-peer files reside on the computers of individual Internet
users. Short of canceling the accounts of all these users, which would
work an undue hardship, ISPs can not control this. What's more,
attempts to use the ministerial subpoena power of the DMCA to force
ISPs to disclose the identity of individuals upon a mere allegation of
copyright infringement unnecessarily compromises the privacy of all
Internet users.
As EarthLink has stated many times before, we support the rights of
RIAA, the MPAA and other copyright owners to protect their intellectual
property. But the DMCA must not be used in ways that compromise the
privacy of Internet users more than it would protect copyrights.
In sum, we have to balance protecting the intellectual property of
copyright owners while protecting the privacy of Internet users, all
while not shooting the messenger (ISPs) that provide the very access
that makes online communications possible.
In the Grokster case at hand, the Supreme Court unanimously held
that Grokster and StreamCast are potentially liable for copyright
infringement by their users. The Court focused on the element of
intent, holding that ``one who distributes a device with the object of
promoting its use to infringe copyright, as shown by clear expression
or other affirmative steps taken to foster infringement, is liable for
the resulting acts of infringement by third parties.''
Further, the Supreme Court held that Grokster and StreamCast did
not meet the Sony standard of ``commercially significant non-infringing
use'' and the overwhelming evidence of intent to induce infringement
could not be disregarded. Said the Court, ``Here, evidence of the
distributors' words and deeds going beyond distribution as such shows a
purpose to cause and profit from third-party acts of copyright
infringement.'' The Supreme Court went on to state that the Sony
standard of ``substantial non-infringing use'' remains. But it also
stated that one cannot use the Sony safe harbor if they are clearly
inducing others to infringe copyrights.
Peer-to peer is an immensely useful technology. As the Supreme
Court noted in Grokster, there are several advantages to peer-to-peer
networks. Because they need no central computer server for users to
exchange information, they don't need the high bandwidth communications
capacity a central server would require. Similarly, the need for costly
server storage space is eliminated. Since copies of a file
(particularly a popular one) are available on many users' computers,
file retrievals may be faster than on other types of networks. And
since file exchanges do not travel through a server, communications can
take place between any computers that remain connected to the network
without risk that a glitch in the server will disable the whole
network. Given these benefits in security, cost, and efficiency, peer-
to-peer networks are used by universities, government agencies,
corporations, and libraries, as well as by millions of individual
users.\1\ The lesson from the Grokster case is not to limit the
technology, but to use it in a way that does not intentionally infringe
on copyrights.
---------------------------------------------------------------------------
\1\ MGM v. Grokster, 545 U.S. _____ (2005) at 1-2.
---------------------------------------------------------------------------
As I noted in my foreword to the Giga Law Guide to Internet Law
regarding Grokster and StreamCast's predecessor, Napster:

Napster provides a great example of a ``killer app'' killed by
its failure to address legal realities. A brilliantly simple
application, it took full advantage of the Internet's very
nature as an information service to create a means of
distributing music far more efficiently than the conventional
process of pressing a CD, wrapping it, boxing it, shipping it,
unloading it, and displaying it in a store just so a customer
could drive to that store, buy the CD, take it home, and put it
in a player to decode the CD's digital information in order to
finally hear music. But as good as its peer-to-peer file-
sharing technology was, Napster failed to address vital legal
issues such as copyrights, licenses, and royalty payments. Rock
stars, songwriters, and music publishers are entitled to be
paid for their work, as the Federal courts in the Napster
lawsuits repeatedly ruled. Napster will always serve as a
reminder that just because you can do something online doesn't
mean you can ignore existing laws. \2\
---------------------------------------------------------------------------
\2\ The Giga Law Guide to Internet Law by Doug Isenberg. Random
House Trade Paperbacks 2002 at xi.

I again thank the Committee for inviting me here today and I look
---------------------------------------------------------------------------
forward to any questions you may have.

The Chairman. Well, thank you very much.
The next witness, Mitch Bainwol, Chairman and CEO of the
Recording Industry Association of America. This is a trade
group representing the U.S. recording industry and its members.
They're responsible for approximately 90 percent of all
legitimate sound recording produced and sold in the United
States.
Mr. Bainwol?

STATEMENT OF MITCH BAINWOL, CHAIRMAN AND CEO, RECORDING
INDUSTRY ASSOCIATION OF AMERICA

Mr. Bainwol. Thank you, Mr. Chairman, Mr. Co-Chairman,
Senator Smith, Senator Kerry, and Senator Pryor. I appreciate
the opportunity to testify here today.
I am the CEO of the RIAA. Sometimes I think we should be
called the MVCA, instead, the Music Venture Capital
Association, because that's what record companies do. We invest
in music. We put the proceeds from the sale of recorded music
back in to new art. It's a risky business, and it doesn't pay
off all the time, but, when it does, it's a great experience,
and we're able to generate this wonderful music for fans across
the globe.
Two things make all of this work. First, there is no
substitute for quality music. The product has to sell. Second,
you have to be able to do just that: sell. An investment-based
business that cannot reap the value of its investment is a
business that cannot sustain itself. It's that simple. That's
why these past few years have been tough and why we're hopeful
about the coming years. In 1999, the domestic sale of music
reached nearly $15 billion. By 2003, that figure had plummeted
to under $12 billion. 2004 was pretty much flat, and 2005 is
down again, another 7 percent. Much, but not all, of the
problem is due to Internet piracy. Piracy sounds romantic, but
if you work in the music business, it's anything but. Piracy is
a job killer, it's a culture killer, it's a lesson learned by a
generation that stealing is OK.
Our beef, though, is not with the Internet, and it sure
isn't with technology. Our beef is with the conduct--the
conduct of bad actors who built a business by giving away our
property for free and then making money from spyware and from
advertising. That's precisely what Grokster is all about. The
case centered on whether these bad actors could pull what I
call the Sergeant Schultz defense, ``see nothing, do nothing,''
but profit all along from the infringement that they encourage.
It's a business model predicated on theft.
We felt good about the oral arguments in March. We had 40--
40 state attorneys general with us. We had the Solicitor
General speaking for the U.S. Government on our side. We had
property-rights groups, technology groups, family groups,
artists, and broad editorial support. Our mainstream position
won out, as the Vice President once said, big time. With a
nine-zero ruling by a court that can't agree on what to have
for lunch, a clear message was sent, ``Thou shalt not steal,
and businesses that profit by encouraging others can't evade
liability.'' It was stunning. From Ginsburg to Scalia, from
Stevens to Rehnquist, from Thomas to the most tech-savvy guy on
the bench, Breyer, everyone--everyone agreed.
The majority opinion, written by Souter, said it all, ``The
unlawful objective is unmistakable. This case is significantly
different from Sony. Sony dealt with a claim of liability based
solely on distributing a product with an alternative lawful and
unlawful uses. Here, evidence of the distributor's words and
deeds going beyond distribution shows a purpose to cause and to
profit from third-party acts.''
When confronted with a tension between two important
values, creativity and innovation, the court struck a perfect
balance. Tech voices like Apple, HP, and even Mark Cuban, who
funded the Grokster defense, applauded the decision. So did we.
Editorials echo that praise. Imagine, The New York Times and
The Wall Street Journal singing together. The Washington Times
and The Washington Post hitting the same note, more rare than
even a nine-zero decision. As my fellow panelist Mark Heesen
properly observed, only those players who willfully promote
copyright infringement will be subject to potential liability.
So, what does the decision mean? It means that similarly
situated businesses that encourage infringement need to do some
serious reflection, and they need to do that fast, and reach
the obvious conclusion that it's time to go straight or face
the consequences. It means venture capital will flow to
technology companies, like Mr. Kerber's, that respect property
and reward the future of music. It means nascent technologies
that operate within the law will have a chance to get traction,
attract investors, and appeal to fans. It means that we
increasingly will be able to sell and invest in new artists and
more music. And that's why we're optimistic about the future.
Two years ago, there was no legitimate digital marketplace.
We're watching the rapid emergence of a quintessentially
American dynamic competition in this space--iTunes, Real,
Napster, Wal-Mart, and others competing for the download
segment of the market; Yahoo!, Rhapsody, Napster, and others
competing for the subscription segment of the market; Wurld,
iMesh, Mashboxx, P2P Revolution, and others competing for the
important legitimate peer-to-peer market.
And the wireless market, already advanced around the world,
is poised to take off here, as well. Grokster plays into this
dynamic in a very big way, legally and culturally. Legally,
those who don't play by the rules know that the Sergeant
Schultz defense won't fly any more. If it walks like a duck and
quacks like a duck, you know you've got a turkey. And,
culturally, we've pierced the nonsensical notion that somehow
the taking of property is OK when it comes to music.
All we want is a chance to compete. No one thinks that our
road to recovery is easy or automatic. But a chance for our
investment to earn a return is a pretty darn good first step.
Thank you for listening.
[The prepared statement of Mr. Bainwol follows:]

Prepared Statement of Mitch Bainwol, Chairman and CEO,
Recording Industry Association of America

Mr. Chairman, Co-Chairman Inouye, I appreciate the opportunity to
testify today on the Supreme Court's Grokster decision.
One month ago, the Court took a major step toward safeguarding and
advancing one of this country's greatest resources--intellectual
property. In a rare 9-0 decision, the Justices held unanimously in
Grokster that those who encourage others to steal may be held liable
themselves. The resulting message is straightforward and simple: theft,
in any medium, is unacceptable.
Grokster is a peer-to-peer (P2P) file-sharing network that allows
members to copy songs, movies, software, and other creative works over
the Internet without paying for them. The result has been, in the words
of the Supreme Court, ``infringement on a gigantic scale.'' These
illicit networks have enabled the illegal copying of millions upon
millions of exact duplicates of valuable works with the click of a
mouse. Every day.
This massive theft has been particularly devastating for the music
industry. In 1999, the domestic sale of music reached $14.5 billion. By
2003, that figure had plummeted to $11.8 billion. 2004 was virtually
flat, and 2005 is down again, another 7 percent. Record companies are
essentially venture capitalists, investing proceeds from the sale of
recorded music back into new artists. It's a risky business, with only
about a 10 percent success rate. Yet, releases from the most popular
artists (which make up most of that successful 10 percent) are often
the ones most heavily pirated on illegal file-sharing networks.
According to Soundscan, the top 10 albums sold 54.7 million units in
1999, compared to 37.4 million units in 2004. The top 100 albums sold
194.9 million units in 1999, compared to 153.3 million units in 2004.
The result is less money to invest in new artists and new music.
A handful of studies have shown the direct correlation between
illegal file-sharing and this decline in sales. David Blackburn of
Harvard University found that ``file sharing has had large, negative
impacts on industry sales.'' \1\ Stanley Liebowitz of the University of
Texas at Dallas concluded that, ``there is strong evidence that the
impact of file-sharing has been to bring significant harm to the
recording industry.'' \2\ Other researchers have echoed similar
findings.
---------------------------------------------------------------------------
\1\ ``On-line Piracy and Recorded Music Sales,'' David Blackburn
(2004).
\2\ ``File Sharing: Creative Destruction or Just Plain
Destruction?'' Stanley Liebowitz (2005).
---------------------------------------------------------------------------
Piracy sounds romantic, but not if you work in the music business.
It's a job killer. In addition to the decline in artist rosters, there
have been thousands of layoffs of industry employees, and hundreds of
shuttered music store doors. The effect of illegal file-sharing has
been felt by songwriters, technicians, artists, and musicians, not to
mention filmmakers, programmers, and scores of others who make their
living from the creation and lawful sale of their products. The U.S.
economy and the industries that employ over 5 million Americans have
taken a massive hit from the billions of dollars lost annually through
illegal file-sharing. Further, piracy on these networks is teaching an
entire generation that stealing is acceptable.
It's not. Unfortunately, standing against theft in the digital
world has provoked some to label us anti-technology or against
innovation. Such claims may make for good soundbites, but they are far
from the truth. Technology is making the music experience better and
better. From iTunes to ringtones, the music industry is continuously
looking for new ways to get music to fans and is embracing new
technology that allows for the widest lawful distribution of creative
works.
The problem is with the behavior of bad actors who have used this
amazing P2P technology to build businesses predicated on theft. They
have reaped millions--and, indeed, stayed in business--by giving away
our property and the property of thousands of others for free,
receiving revenue from third party spyware and advertising aimed at
those looking to steal. It has been estimated that over 90 percent of
the file-sharing on Grokster and similar services is illegal copyright
infringement. This is no accident. The more songs, movies, computer
games, and other creative works that are stolen through their network,
the more money these services make. As the Court noted, ``the unlawful
objective is unmistakable.'' Without this illegal downloading, these
services go broke. This is an unacceptable business model.
And that's precisely what the Grokster case was all about. The
Court recognized that companies, like Grokster, that provide the tools
and promote massive online infringement must be held responsible. As
Senator Patrick Leahy observed, ``This decision means that companies
can no longer, with a wink and a nod, absolve themselves from any
responsibility for what their products do. Just as consumers bear a
responsibility for using these products to illegally download files,
the companies that fashion and promote these tools must share in that
obligation.''
The Court also noted the need for legitimate technological
innovation and creativity, saying that their ruling ``does nothing to
compromise legitimate commerce or discourage innovation having a lawful
purpose.'' This is not about technology. The decision of the Court was
technology-neutral, focusing instead on behavior and separating the
good actors from the bad actors. It put the emphasis exactly where it
should be--on those who ``encourage infringement'' while looking the
other way as they reap the rewards.
The Court did not alter the standard established in its 1984 Sony
case. In its own words, ``nothing in Sony requires courts to ignore
evidence of intent if there is such evidence, and the case was never
meant to foreclose rules of fault-based liability derived from the
common law.'' Grokster and other bad actors can be held liable without
threatening legitimate technological innovation or the Sony standard
that has served creators and consumers so well.
Our position in this case was bolstered by incredibly wide-ranging
support. The coalition against Grokster's enabling of intellectual
property theft includes the creative community, the law enforcement
community, the family values community, and the technology community.
During the Sony case in the 1980s, 20 Attorneys General from around the
country were with the other side; this time, 40 were with us. The U.S.
Government filed on our side with a compelling brief by the Solicitor
General. Key Members of Congress, property rights groups, family
groups, artists, technology companies, and others also filed in support
of protecting property rights. There was enormous editorial support,
from The New York Times and The Wall Street Journal to the Washington
Times and The Washington Post. Broad consensus, capped off with a
unanimous Court decision.
Those who still claim that the law is not clear are few and far
outside the mainstream. This is now a settled question. File-sharing
copyrighted works without permission is illegal; encouraging it is also
illegal. Sony is not a ``get out of jail free'' card. It will not
protect you if you encourage theft. Grokster and similarly situated
businesses that enable infringement need to realize that it's time to
go straight or face the consequences.
The turn of the new millennium, and the emergence of file-sharing,
marked the first stage of P2P--an era of lawlessness where the
excitement of a new medium and a lack of viable legal online
alternatives paved the way for massive online theft. The second stage
brought ambiguity, as education and enforcement of copyright by content
owners was continuously thwarted by the misinformation and lure of free
goods from Grokster and others. Now, with the decision of the Supreme
Court, we have entered the third stage--and the bright future--of
legal, responsible P2P file-sharing.
The legal and moral clarity provided by the Grokster decision is a
shot of adrenaline for the legitimate marketplace. Capital will now
naturally flow to technology companies that respect property and reward
the future of music--companies such as iMesh, Snocap, Mashboxx, and
Passalong, as well as Wurld Media, who is represented at this hearing
today. In other words, the purpose of intellectual property protection
as an investment lure is being met. Nascent technologies that operate
within the law will have a chance to gain traction, attract investors,
and appeal to fans. And we can increasingly sell, and thus invest, in
new art, benefiting creators and consumers alike.
We are optimistic about the future. Two years ago, there was no
legitimate digital marketplace to speak of. Today, we are watching the
rapid emergence of quintessentially American competition for this new
marketplace. iTunes, BuyMusic, Wal-Mart, Sony Connect and others are
battling it out for the download segment of the market. The result: in
March 2005, 26 million songs were purchased from digital music stores
in the United States.\3\ Yahoo!, Rhapsody, Napster, MSNMusic and others
are battling it out for the subscription segment of the market. Many of
the above and others offer both. Forty-three percent of music
downloaders in 2005 have tried legitimate online music services \4\ and
34 percent of current music downloaders say they now use paid
services.\5\ On college and university campuses across the country--
hotbeds of illegal activity on exceedingly fast networks--
administrations and students are embracing the legitimate offerings of
these services and others.
---------------------------------------------------------------------------
\3\ NPD MusicWatch Digital Service.
\4\ Pew Internet and American Life study, March 2005.
\5\ Pew, March 2005.
---------------------------------------------------------------------------
More than 50 schools have entered into deals with companies like
Ruckus Networks. Just last week, the University of California and
California State networks signed with Cdigix, potentially providing
hundreds of thousands of new students with the opportunity to legally
obtain music and movies on campus. And, of course, the wireless market,
already advanced elsewhere around the world, is poised to take off here
as well.
But these legitimate businesses are able to thrive only by
controlling the illicit services that directly compete with them.
Grokster plays into this dynamic--legally and culturally. Legally,
those who don't play by the rules know that it is no longer acceptable
to reap ill-gotten gains while burying their head in the sand. And,
culturally, we've pierced the nonsensical notion that somehow the
taking of property is acceptable when it's music. All we want is a
chance to compete, a chance for our investment to earn a return, and a
chance to make great music for fans everywhere.
Thank you.

The Chairman. Thank you.
Last witness, Fritz Attaway, Executive Vice President,
Motion Picture Association of America, serving as the voice and
advocate of the American motion picture, home video, and
television industries.
Thank you. Mr. Attaway?

STATEMENT OF FRITZ E. ATTAWAY, EXECUTIVE VICE

PRESIDENT AND WASHINGTON GENERAL COUNSEL,

MOTION PICTURE ASSOCIATION OF AMERICA

Mr. Attaway. Thank you, Mr. Chairman, Co-Chairman Inouye,
Senator Snowe, Senator Smith, Senator Kerry, Senator Pryor. I'm
very pleased to be here today to represent myself, Dan
Glickman, the members of the Motion Picture Association and
present our views on this landmark decision.
I wish I would have brought my kiddie seat, but I'm very
pleased to be here today.
It should be of particular interest to this committee that
the best way I know of to characterize this Supreme Court
decision is that it is good for commerce and it is good for
consumers. The Court's unanimous decision, like the adoption of
the Digital Millennium Copyright Act, establishes a rational
and balanced basis for the evolving digital environment which
will remove uncertainty and spur investment in creative content
and the technology with which it is created, delivered, and
displayed. As a result, consumers will have more and better
viewing choices. It is a win-win-win decision.
And, contrary to what Mr. Eisgrau suggested, there is no
need to bring the parties together in the wake of this
decision. The legitimate content distributors and the content
creators are talking, as Mr. Kerber will attest to. What was
needed is to get the free-riders out of the way, which this
Supreme Court decision will go a long ways in doing, and allow
the legitimate business interests to proceed with new viewing
choices for consumers.
In its Grokster decision, the Court declined to revisit the
Sony case decided almost a decade earlier, but did provide very
important clarification. It said, as it did in Sony, that the
mere manufacture and distribution of a device with knowledge
that it may be used to infringe does not create liability;
however, it went on to say that where there is evidence of
purposeful, culpable conduct directed at promoting
infringement, liability does attach. In the case at hand, the
Court found that defendants had marketed their services to an
audience likely to commit infringing acts, had taken no steps
to prevent infringement, and had profited from the infringing
acts of their customers. The court struck a careful balance
between the need to foster creative content and the need to
encourage technological innovation. Its rational balance has
been recognized both by the content and the technology
communities, receiving praise not just from MPAA and RIAA, but
also from the Information Technology Industry Council and the
Business Software Alliance, organizations that represent many
of the major high-tech companies in the United States.
In clarifying its Sony decision, the Grokster court
stressed the importance of secondary liability to meaningful
application of the copyright law. The Court said that, in the
digital environment, rights against direct infringers may be
impossible to enforce, and that remedies for secondary
liability may be the only practical means to protect copyrights
against massive infringement.
The Court, in Grokster, sent a resounding message to users
of the Internet, as Senator Inouye pointed out earlier: theft
of intellectual property is wrong, whether it takes place by
stealing a physical copy of a movie or by stealing a movie in
cyberspace, and those who encourage such theft will be held
liable.
The Internet provides great opportunities, but the Internet
is not, and should not be, an environment immune to the rules
of a civil society. The distribution of child pornography is no
less vile on the Internet than it is anywhere else. The
invasion of personal privacy is no less objectionable on the
Internet than elsewhere. And the theft of property is no more
acceptable on the Internet than it is offline.
Content owners look to the Grokster decision to usher in a
new age of cooperation among content providers, technology
providers, and ISPs aimed at providing consumers with safe,
legal, flexible, and convenient choices for entertainment and
information.
Again, I thank you for affording me this opportunity to
appear before you, and I look forward to answering your
questions.
[The prepared statement of Mr. Attaway follows:]

Prepared Statement of Fritz E. Attaway, Executive Vice President and
Washington General Counsel, Motion Picture Association of America

Chairman Stevens, Co-Chairman Inouye, members of the Committee,
thank you for giving me this opportunity to appear before you today on
behalf of Dan Glickman and the Motion Picture Association of America.
The decision of the Supreme Court in MGM v. Grokster, 125 S. Ct.
2764 (2005)., like Congressional enactment of the Digital Millennium
Copyright Act, establishes rational and balanced rules for the evolving
digital environment which will encourage creativity and technological
innovation, and result in more and better choices for consumers.
The DMCA provided content owners tools to maintain the integrity of
technological measures essential for the secure delivery of high value
content to consumers. It contributed mightily to the market launch of
the DVD, which has been the most successful consumer electronics device
in history, providing a vast new market for content creators and for
consumer electronics device and computer manufacturers, and providing
consumers with a new, technologically superior, more convenient option
for viewing movies.
The Supreme Court's landmark decision in MGM v. Grokster will have
a similar effect by providing incentives for constructive innovation
and a more secure environment in which to deliver movies, music and
other content to consumers over the Internet. It will spur investment
in new, legitimate delivery services, which in turn will provide a new
source of revenue to content creators and encourage the sale of
consumer electronics devices and broadband access. And most
importantly, it will stimulate new, easy-to-use consumer options for
accessing entertainment and information in a variety of formats through
a host of new delivery platforms.
In its Grokster decision, a unanimous Supreme Court declined
invitations to revisit its narrowly decided, five-to-four decision in
the Sony case a decade earlier. It made clear, however, that the Sony
decision does not preclude liability where the conduct at issue goes
beyond the mere manufacture and distribution of a device with knowledge
that it may be used to infringe. The Grokster Court said liability DOES
attach when there is evidence of purposeful, culpable conduct directed
at promoting infringement. In the Court's words, ``one who distributes
a device with the object of promoting its use to infringe copyright, as
shown by clear expression or other affirmative steps taken to foster
infringement, is liable for the resulting acts of infringement by third
parties.'' 125 S. Ct. 2764 at 2780 (2005). Such a ruling is neither
extraordinary, nor at odds with long-established rules of fault-based
liability derived from the common law. And as the Court made explicit,
such a rule ``does nothing to compromise legitimate commerce or
discourage innovation having a lawful promise.'' Id. at 2780.
In other words, the Court stated, as it had in its Sony decision,
that technology capable of substantial non-infringing uses is not
inherently bad, but those who traffic in such a technology with the
intent of inducing others to infringe are bad actors and subject to
remedies for contributory infringement. It found in the case before it
that the defendants had intentionally marketed their software to former
users of the Napster ``file sharing'' service which had been found to
be in violation of the copyright laws; had made no effort to limit the
infringing activities of their customers; \1\ and had established a
business model whose success was directly tied to the infringements of
their customers. Under these circumstances, the Court said there was a
clear basis for a finding of contributory infringement.
---------------------------------------------------------------------------
\1\ ``[T]here is no evidence that either company made an effort to
filter copyrighted material from users' downloads or otherwise impede
the sharing of copyrighted files.'' Id. at 2774.
---------------------------------------------------------------------------
In crafting its decision, the Court was sensitive to any possible
impact on technological innovation and carefully distinguished between
simply knowing that a device could be used to infringe and culpable
conduct.\2\ The Court's careful articulation of what is, and what is
not, permissible will remove uncertainty in the marketplace and
stimulate capital investment in the technology sector as well as the
distribution marketplace. Its success in reaching an appropriate
balance that protects both creative and technological innovation is
evidenced by the fact that its decision has been overwhelmingly praised
by the technology community.\3\
---------------------------------------------------------------------------
\2\ ``We are, of course, mindful of the need to keep from trenching
on regular commerce or discouraging the development of technologies
with lawful and unlawful potential. Accordingly, . . . mere knowledge
of infringing potential or of actual infringing uses would not be
enough here to subject a distributor to liability. Nor would ordinary
acts incident to product distribution, such as offering customers
technical support or product updates, support liability in themselves.
The inducement rule, instead, premises liability on purposeful,
culpable expression and conduct, and thus does nothing to compromise
legitimate commerce or discourage innovation having a lawful promise.''
Id. at 2780.
\3\ ``This decision strikes a balance between encouraging
innovation and discouraging piracy.'' Statement of Rhett Dawson,
President of the Information Technology Industry Council, June 27,
2005. ``The application of this new standard should make a real and
positive difference in combating online piracy.'' Statement of Robert
Holleyman, President and CEO of The Business Software Alliance, June
27, 2005.
---------------------------------------------------------------------------
The standard set by the Court is very similar to the standard set
by the Congress in the DMCA, where Congress prohibited trafficking in
devices with the purpose of enabling the circumvention of technical
measures used to prevent copyright infringements. In drafting the DMCA
Congress was careful not to discourage technological innovation or the
exercise of ``fair use'' by consumers, while enabling content owners to
use technology to protect their rights. And in the period since
enactment of the DMCA there has been no evidence that technological
innovation has been suppressed, or that consumers have not been able to
engage in fair uses of copyrighted works. Indeed, the Copyright Office
has undertaken two exhaustive inquiries into the impact of the DMCA on
the exercise of fair use, and has twice concluded that the ability of
consumers to exercise fair use has not been impinged.
In clarifying its decision in Sony, the Court stressed the
importance of theories of secondary liability to ensuring meaningful
application of the copyright law. Indeed, the Court recognized that in
the environment of cyberspace effective enforcement of rights against
direct infringers may be impossible, and the application of remedies
for secondary liability may be the only practical means to protect
copyrights against massive infringement.\4\
---------------------------------------------------------------------------
\4\ ``The argument for imposing indirect liability in this case is,
however, a powerful one, given the number of infringing downloads that
occur every day using StreamCast's and Grokster's software. When a
widely shared service or product is used to commit infringement, it may
be impossible to enforce rights in the protected work effectively
against all direct infringers, the only practical alternative being to
go against the distributor of the copying device for secondary
liability on a theory of contributory or vicarious infringement.'' 125
S. Ct. 2764 at 2776 (2005).
---------------------------------------------------------------------------
The Court in Grokster not only clarified its Sony decision, it
voiced a very clear message to users of the Internet: theft of
intellectual property is wrong, whether it takes place by stealing a
physical copy of a movie from a video store or by stealing a movie in
cyberspace. As Justice Breyer said in his concurring opinion,
``deliberate unlawful copying is no less an unlawful taking of property
than garden-variety theft.'' 125 S. Ct. 2764 at 2793 (2005).
The Internet has opened up heretofore unimagined opportunities for
consumers to communicate and access information. It has dramatically
changed our lives. But the Internet is not, and should not be, an
environment immune to the rules of a civil society. The distribution of
child pornography is no less vile on the Internet than anywhere else.
The invasion of personal privacy is no less objectionable on the
Internet than elsewhere. And the theft of property is no more
acceptable on the Internet than it is off-line.
In Grokster the Court made a clear and forceful statement that
theft on the Internet is wrong and the law provides remedies against
both those who engage in Internet theft and those who entice others to
steal copyrighted works. Content owners hope that Grokster will usher
in a new age of cooperation among content providers, consumer
electronics manufacturers, information technology providers and ISP's,
all aimed at providing consumers with legal, flexible and convenient
choices for entertainment and information.

The Chairman. Yes, we have a vote on, gentlemen,
unfortunately. We'll stand in recess for about 10-15 minutes,
until we get back, please. Thank you.
[Recess.]
The Chairman. I'm sorry for the delay.
Mr. Kerber, you mentioned there could be appropriate
initiatives to follow up on the Supreme Court decision that
would solve some of the problems. What do you mean?
Mr. Kerber. I think what gets mixed up in the whole concept
of this--and, as I said, I'm a business person, the problem has
never been technology, in our experience with the entertainment
industry. When we went to the--I'm going to just use this as an
example--when we went to the entertainment industry, we are
as--about--far out on the outside of the--I wouldn't know a
record executive if I fell over the top of him at that point
when we had gone to the entertainment industry, and the labels.
And what we did was, we went in with a demonstrated business
model that we thought would make money within the industry. We
thought that if you do certain things, this model will work on
the consumer basis it's compelling to give the consumer.
Now--then what we did was, we went and said, ``This is the
technology we're going to put underneath this business model in
order to enable it.'' And it was received with every major
label in most of the indies and moving on to all of the other
digital media opportunities we have.
I think a lot of times what is mistaken here, and I say the
appropriate--I think you have to go in--these people are
business people, they run publicly traded companies, they have
responsibilities to their shareholders. They have to be sure
that the folks that they're doing business with will succeed.
If you're in business, you want your partners to succeed. And I
think that there's just a lot of misconception out there. So
when I say the appropriate--being appropriate about it is
following the right protocol in order to gather up these folks
and become partners in the distribution of digital media.
The Chairman. I'm really looking for the question of
whether any of you at the table will seek to have Congress
address this decision and alter the course of events in any
way. Any of you seek to have a change, following this court
decision, of the way Congress addresses the issue of privacy on
the Internet?
Mr. Bainwol?
Mr. Bainwol. No. We believe the Court struck the right
balance, and Congress should leave well enough alone. As Mr.
Baker suggested, if we live life a little bit and see that
there are issues down the road--but right now it's very clear
that you have a very broad consensus. Tech companies are happy.
Content's happy. The Court did the right thing, and they found
the right balance, so let's let it go and see how it works.
The Chairman. But if you own some of those rights,
copyrights, would you be happy?
Mr. Bainwol. We are happy with this outcome. Yes, sir. I
mean, that's the point.
The Chairman. I said if you owned the copyrights, would you
be happy?
Mr. Bainwol. Yes, sir. No, as we--we are companies that
have copyrights, and we believe that the right balance was
struck here. Our view is that we want to be able to engage in
business in the digital space with responsible partners, and
those are folks like Greg Kerber, from Wurld Media, who believe
that we ought to be compensated for our property. So, there is
a way to have a bright future for peer-to-peer that provides
music for fans and also provides compensation for creators.
Mr. Eisgrau. Mr. Chairman?
The Chairman. Yes, sir, Mr. Eisgrau?
Mr. Eisgrau. Thank you, sir.
I would simply note, for the Committee's consideration,
that the collective--the voluntary collective licensing model
that we're suggesting--which would not require legislation, to
answer your question, but probably would require some committee
encouragement in order to explore more fully--has the potential
to provide revenue to copyright holders, by the millions, who
are not presently within the large record-label system. There
are many--I can't quantify it for you exactly, Mr. Chairman,
but I have to believe there are many songwriters, there are
many performers who are out there waiting on tables and working
other jobs, perhaps hoping for a record contract, and who are
using peer-to-peer to a good degree to get their music out
there, but presently, without a voluntary collective licensing
setup, there is no way for them to receive compensation. So, to
the extent that there is a role for the Committee to play, I
suppose the good news for the moment is, it is not legislative
with respect to copyrights, but exploration, we believe, of a
collective--voluntary collective license of this kind has the
potential to maximize peer-to-peer technology not just for the
major record labels and companies, of which there are four,
soon to be three, but literally for thousands and thousands of
individuals. And we hope that's of interest to all of the
appropriate committees of jurisdiction, perhaps even small
business, that I note a number of members of this committee
also sit on, sir.
The Chairman. Mr.--Heesen?
Mr. Heesen. Correct, thank you.
As I said in my statement. We are not coming to Congress to
look for any legislative changes here, but we would urge
Congress to continue to look at the suits that are filed as a
result of this decision, and the numbers that are filed, and,
at the appropriate time, if it becomes to the point of another
area where the entertainment industry continues to sue and sue
and sue, then I think we may have to come back and look at
that. But, at this point, we think, as we stated, that there
should be some breathing room here and everyone, kind of, look
at the decision and let the courts and the marketplace work
things out.
The Chairman. Well, do you believe--do you all believe that
we should just, sort of, accept the fact that there's going to
be illegal file-sharing, and it will increase over the years?
Mr. Bainwol?
Mr. Bainwol. Yes--no, sir. We--illegal file-sharing is
wrong. It needs to be contained. And we need to----
The Chairman. How do you----
Mr. Bainwol.--help foster----
The Chairman.--propose to do that? How do you propose to do
that?
Mr. Bainwol. Well, with Grokster--the Grokster decision was
a good first step, because it provided moral clarity, and it
tells the world and it tells parents and teachers that there's
a right way and a wrong way. What we've got to do is de-
mythologize this whole question. And you've got companies, like
those that my fellow panelist represents, who basically are the
equivalent of Jesse James robbing the bank and then coming back
to the bank and saying, ``we want the franchise to provide
security for that bank.'' They take our property, and then say
they want to be licensed. If--there are legitimate players out
in the marketplace. They are doing fine with licenses.
Now, what we can do to protect and to move toward a world
that is more legitimate is simply to use--we've got to enforce
the laws that are on the books. We do that--self-help--we
engage in our own litigation to make sure that there's a
deterrent. The Government is stepping up in a huge way. The
Department of Justice has done a great job in going after these
networks. And that's really the secret. We've got to create a
society, foster society, where the value of IP is recognized
and appreciated and kids are taught that there's a right way to
do this, and you ought to pay for it.
Mr. Eisgrau. Mr. Chairman, may I respond? The people I
represent were just impugned to a pretty serious degree.
The Chairman. I'm out of time, but go ahead.
Mr. Eisgrau. Thank you, I appreciate that.
Very briefly, these are very complicated issues, and I have
to make a respectful plea for precision in language.
The companies that were at issue in the Supreme Court's
decisions, the other companies who are members of Peer-to-Peer
United, do not take anybody's property. They are software
developers, sir. They have developed pipes, pipes in the way
that the Internet is a pipe and broadband connectivity is a
pipe. They have created a product that people do, in fact,
misuse--and do, in fact, significantly misuse--to infringe the
copyrights of the companies Mr. Bainwol represents. But there
are no thieves in P2P United, sir. There are companies who have
attempted, over years, to work with the labels, going back to
2003. This committee heard evidence a year ago, in the
Competition Subcommittee, of potential blacklisting by the
labels in the form of a deal between RealNetworks and
StreamCast, one of the cases--one of the parties to the Supreme
Court's case.
So, my point is simply, Mr. Chairman, that we need to be
very focused on exactly what this technology is, what kind of
actions parties in this space are pursuing. And if we're going
to maximize the potential of this technology, then I would
respectfully suggest to Mr. Bainwol that his hope--and Mr.
Goldring, the Hollywood music lawyer, backs me on up on this--I
would hope that we would look at the realities of the
marketplace, not just as we hope they might be, but as they
are, and maximize the potential for all copyright holders, not
just the institutional ones Mr. Bainwol represents.
The Chairman. I'm out of time, but I'm really concerned
that the Internet service providers seem to be telling us,
``Look, we provide this service, but we can't control what goes
on, on it.'' It reminds me of the old story about the piano
player in the gambling hall, or the house of you-know-what, not
knowing what was going on. Now, you know, somewhere there's a
responsibility here to look at the Supreme Court opinion and
say that there's a way to move forward and say, ``We're not
going to condone the illegal use of intellectual property.''
Now, I don't know where it is, but I hope we can find some
response to that.
Senator----
Mr. Eisgrau. You will find that, exactly, on our website,
for starters, Mr. Chairman.
The Chairman. Senator Inouye?
Senator Inouye. Thank you, Mr. Chairman.
Mr. Bainwol, Mr. Attaway, Mr. Eisgrau suggested that this
decision will have no practical effect or impact on our
marketplace. What are your thoughts?
Mr. Attaway. Senator, I think he is wrong. I think it will
have a huge impact on the way that the parties behave and on--
ultimately, on the amount of piracy on the Internet. I think
this case, even though it was a compromise between the various
interests, creates strong incentives for all of the parties,
including the ISPs, to work together to address the problem of
piracy.
And, to respond to the Chairman's earlier question, I think
right now that's good enough. If, ultimately, this decision
does not create the appropriate atmosphere to deal with the
piracy problem, then I think maybe the Congress does need to
act. But, for right now, this decision, I think, provides what
we need to deal with--with piracy on the Internet today.
Mr. Bainwol. Let me just simply add, there are a lot of
numbers flying around about usage, and it gets very confusing,
because you have files that are spoofed, you've got users that
are not real. The best set of numbers that I've seen come from
an outfit called MPD, because it's not attitudinal, it's
actually a monitor of 10,000 households, so the data's fairly
reliable. And what that tells us is, over the past 2 years, the
P2P illegal use has gone up just a touch, but has basically
been flat, as broadband has gone up by--Mr. Baker, what, by
about 50-55 percent in the last couple of years? So, broadband
has been soaring, but P2P use has been relatively constant in
the very best measure that we can identify.
Two years ago, if you looked at the percent of households
that engaged in the legal acquisition of music over the
Internet, it was zero, basically zero. That's about 4 percent
today. Those lines are going to cross. The illegal household
numbers, 9 or 10 percent, that's going to hold flat. With the
Grokster decision, that will probably even come down. The legal
marketplace is going to go up, and shoot up toward 25-30
percent over time. And the question is how fast those lines
intersect.
But Grokster provides the societal message that there's a
right way and there's a wrong way. Those lines are going to
cross sooner as a consequence, and that means we'll be able to
invest more in new art.
Senator Inouye. Then your predecessor was wrong, in your
mind, as to her comments?
Mr. Bainwol. I think my predecessor may have been
mischaracterized. She has told me that. We believe that, in the
end, this is about the marketplace. There's no question. But
the question here is whether it's a legitimate marketplace or
an illegitimate marketplace. And this decision will help create
a day where the legitimate marketplace can take off. That's why
it was so important that Mr. Kerber said that, after this
decision, venture capitalists started calling him with a
greater level of interest. Capital will flow. Once we respect
property, then the basis of our great system has a chance to
take off.
Senator Inouye. Thank you.
Mr. Kerber, in your testimony, you suggested that your
technology will enable you to download--customers to download
and share every kind of digital media without viruses, without
child pornography, unauthorized content, et cetera, et cetera.
You really believe that you can have a pristine environment
like that?
Mr. Kerber. Absolutely. We--it's built, and it has been in
beta for 7 months, and it's about to go out to the public on
Friday of next week.
The bottom line with this, in our minds, from a business
standpoint, technology is not the equivalent of anarchy. The
thing that is so dynamic and great about technology is--I mean,
if you could imagine eBay, and if you could imagine Wal-Mart
for that instance, where they lose control of their supply
chain and how they would service their customer, the
scalability of a peer-to-peer is--there's nothing equivalent to
it in the distribution of content. In a centrally controlled
peer-to-peer, with what we call traffic cop that knows what's
out on the network, and that allows consumers a centralized
search with decentralized distribution, meaning that the
consumer participates in the distribution, is absolutely
doable, and we have succeeded in building that system.
Senator Inouye. Mr. Heesen, you commented that this
decision will have an impact upon your investors. It makes no
difference what the technology is?
Mr. Heesen. Venture capitalists invest in those
technologies that they believe, at the end of the day, will
give them a significant return on investment for pension funds
and colleges' endowments, while, at the same time, making sure
that the technologies that they are investing in have as few
roadblocks to success as possible. You lower the roadblocks,
the more likely the venture capitalist is going to invest in
that particular technology.
So, right now we have invested heavily in the life-science
area. If suddenly Congress decides to change healthcare policy,
you could very easily see that money leave the life-science
area and go into another area that has fewer roadblocks.
So, when you have certainty and fewer roadblocks, you are
going to have a venture capitalist looking much more seriously
at that particular technology, particularly in an area where
they think, at the end of the day, there is, once again, a
destructive technology out there that can change the way we
live, while, at the same time, making a very handsome return
for its investors.
Senator Inouye. Would your investors believe that
technology to prevent illegal downloading will make money or
lose money?
Mr. Heesen. You know, frankly, I couldn't tell you what a
venture capitalist would be thinking in that mind. I would
think that they would be looking at it from the point of view
as there is probably thousands of companies trying to do that
today, and the venture capitalist would look at it and say, of
those thousands of companies, which two or three have the
potential to take control of that market and then try to work
specifically with those companies to make those companies
successful.
Senator Inouye. What are the benefits, Mr. Eisgrau, of
this--convening this convention of relevant stakeholders? What
would you--what would be the outcome of that now----
Mr. Eisgrau. I appreciate that question.
Senator Inouye.--that people like Mr. Bainwol and Mr.
Attaway say it won't work?
Mr. Eisgrau. I think the outcome, first and foremost,
Senator, will be knowledge. It will be a group of people
convened by the Committee with substantive technical knowledge,
with experience in the marketplace, who, with no disrespect to
my fellow advocate, Mr. Bainwol, are not simply advocates, but
folks who actually understand, in great detail, how the systems
might work.
If I might share with you, Senator, in the event that that
process somehow did manage to produce a voluntary collective
licensing system to serve alongside with every new technology,
such as that of Wurld Media, that might come along, no
contradiction between that, sir. Let me share just a couple of
quick bullet points of what might come about with that sort of
a system:
Artists and rights-holders will get paid for what are now
literally billions of noncompensable music downloads.
Government intervention in the market will be limited,
because it's a voluntary system.
Broadband technology will get a very significant boost,
because the so-called ``killer application'' of broadband--
namely, Internet file-sharing--will be lawful and enabled.
Investment dollars, one might presume, will pour into the
newly legitimized system.
Music fans will finally have completely legal access to an
essentially unlimited selection of music, whether it's offered
from a major label or not.
The distribution bottleneck, as I alluded to earlier, that
has limited opportunities for independent artists, will be
removed.
And payment will come only from those persons who choose to
participate in the system.
I can't promise you, Senator, that all of those things will
come to pass. I think the potential that they might warrant at
least serious discussion, and, conversely, should not entitle
any individual stakeholder to say, ``We're simply not coming.''
Senator Inouye. Thank you. My time is up.
Mr. Eisgrau. Thank you, sir.
The Chairman. Senator Pryor?

STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS

Senator Pryor. Thank you, Mr. Chairman.
Mr. Eisgrau, if I may start with you, just--and I may have
missed this, because I had to step out for the vote, and I may
have missed what you said in your opening statement, but just
give us, if you can, the bottom-line impact that the Grokster
decision has on your industry.
Mr. Eisgrau. Litigation. The----
Senator Pryor. Does it create uncertainty for you?
Mr. Eisgrau. It certainly does, sir. The one certain thing
is that there will be additional litigation regarding the
parties to that specific case. There is much that remains
uncertain about the law of secondary liability and how this new
inducement test the court articulated will play out.
Senator Pryor. Do you see that the growth in the industry
that you've had in the last several years, which has been
fairly phenomenal----
Mr. Eisgrau. Yes, sir.
Senator Pryor.--has it not? Do you think that growth will
be sustained, or do you see steady growth, or what do you see?
Mr. Eisgrau. We certainly do see steady growth. The Rolling
Stone article I alluded to in my testimony also reported that
the current level of peer-to-peer usage would be about nine
million uses per month, Senator.
Senator Pryor. Are you--if you can speak for the industry,
is your industry happy with the decision, or not?
Mr. Eisgrau. I'd have to say that, based on the statements
of the parties to the case, the public statements that were
made, that they were certainly disappointed in the Court's
focus on what the court believed to have been established facts
in the record. They are hopeful and confident that when this
goes back to the District Court, that some of those
misunderstandings may be clarified. I think they were also
disturbed, as many technologists, the Consumer Electronics
Association among them, noted, with the uncertainties in the
secondary liability standards that we're now living with that
will have to be played out in the courts.
Senator Pryor. All right. Let me ask about Grokster in
terms of domestic versus international considerations there,
particularly with offshore peer-to-peer companies. What does
Grokster do with domestic versus offshore?
Mr. Eisgrau. If I understand your question, Senator--please
interrupt me if I don't--Grokster, itself, is incorporated in
Nevis, West Indies. That did not stop them from voluntarily
fully participating, quite clearly, all the way to the Supreme
Court in this litigation. One other member of Peer-to-Peer
United is based in Spain, and the others are absolutely born-
and-bred U.S. companies from the State of Oregon, the State of
Florida, and the State of New York.
Senator Pryor. So, you don't see any differentiation
depending on what nation they're----
Mr. Eisgrau. Doesn't appear to be, sir. What I can tell you
is, there is a big difference between the companies that
founded P2P United two years ago and the companies that said,
``You know what? We can hide in the shadows. We don't have to
deal with anybody. We don't have to try to negotiate licenses
with the recording industry, only to have the plug pulled on
the deal as a result of a black list.'' What we do find is that
this problem that scholars have referred to as the imminent
``Darknet'' is a very significant danger. And the continuing
attitudes that the members of my association have are, that
they not to be dealt with because they're pirates, or worse, we
believe, with respect, is highly counterproductive.
Senator Pryor. Well, just for the whole panel, I'd like to,
after the hearing or whenever it's convenient, if you all ever
want to talk about the Darknet and some of the issues that he's
referred to, I'd enjoy doing that.
Let me ask, if I can, Mr. Kerber, what impact does Grokster
have on your business, in your industry?
Mr. Kerber. I think what it has done, coming from the
financial world, in my background, certainty is a good thing
for the financial world. So, what it has done for investment
is, it's made a clear path for those venture capitalists, any
type of investor--equity investors, hedge funds--that would
come in and invest in the potential of a small company that can
flourish in the potential growth that digital media offers. It
allows that to occur now. I think that from what we can see in
the marketplace, just based on our own experience, that what
it's enabled and what it has done is, it's made the equity
investor, who has a fiduciary responsibility to their
investors, to--comfortable with investing in what was a rogue
technology for a very long time.
Senator Pryor. OK. Mr. Heesen, we've been talking about the
changes that Grokster has brought to all of you. Let me ask you
this question. I assume, with the changes that we've all talked
about, there could be new business opportunities. Do you see
some new business opportunities, or do you see a--what do you
see for the future, in light of Grokster?
Mr. Heesen. Well, I agree that I think there is a bit more
certainty. There are some issues regarding secondary liability
that we continue to be concerned about. Frankly, if I were
going to tell you what technologies are going to come out as a
result of Grokster, I would not be representing my membership
well, because they're the ones who want to be finding those
technologies and creating those jobs and finding those good
companies out there to invest in. So, all of that is being
worked on, frankly, in garages all across the country by
entrepreneurs right now, and they're not going to tell me that
answer, and they certainly aren't going to tell you, Senator.
Senator Pryor. OK. If I may, Mr. Bainwol, flip over to you
very quickly, because I know we're--the clock is running here.
But, as we all know, throughout the course of the music
industry, there have been technologies out there, things like
cassette tapes and even people pressing unauthorized vinyl
copies, et cetera. I know that, like back in the 1960s and
1970s, you had the basement tapes, you know, from various
groups, including Bob Dylan and a bunch of others. But how--as
a--in comparison with that type of piracy, you know, where
people were copying albums and distributing to friends or sold
them, kind of, black market--compare that sort of regime to
what we're looking at with the peer-to-peer. Compare that.
Mr. Bainwol. Yes, there are two huge differences. One is
quality. When you taped off the radio, you had a degradation of
quality. Now you can get perfect digital copies. And, two, your
ability to share exponentially with millions of people around
the world is immediate and automatic. So, that's the challenge.
The nature of the piracy is far more virulent, and the velocity
of the piracy is far faster.
I'd like to take a second, if I could, on a point that Mr.
Eisgrau raised. We have licensed, happily, lots of legitimate
players throughout the digital space, including the peer-to-
peer world. Licensing's not a problem. There are songwriters
who have lost their livelihoods--and artists and musicians--not
because of that--some of these illegitimate folks in the P2P
space have not been licensed. They have lost it precisely
because they have set up systems that are predicated on theft.
The Supreme Court said the objective is unmistakable.
The fix here is for these companies to say, ``We're going
to embrace legitimate commerce. We're going to go straight.
We're going to convert. And we're going to shut down our
systems and go straight.'' That's the answer.
Senator Pryor. Mr. Attaway, last question, and that is,
pirating movies is a growing phenomenon. We know that. We see
that all over the world. Are there any differences in--from
your standpoint, in the illegal sharing of music files versus
video files? And I guess what I'm asking is, if there is, tell
us what they are and tell us whether you think Congress should
be involved in that in any way.
Mr. Attaway. Well----
Senator Pryor. That's it.
Mr. Attaway. There are no legal differences. Fortunately
for the motion picture industry, there are technical
differences, in that it takes a much bigger pipe to download a
full-length motion picture than it does a musical work. But,
either way, it is theft, it is piracy, and it needs to be dealt
with. As I said earlier, I think the Supreme Court decision, in
Grokster, has given us tools to deal with that issue, and I
don't think that there are major things that Congress needs to
do right now to help us. If the tools we have turn out to be
inadequate, we very well may be back up here asking you to help
us deal with this problem.
Senator Pryor. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Ensign?

STATEMENT OF HON. JOHN ENSIGN,
U.S. SENATOR FROM NEVADA

Senator Ensign. Thank you, Mr. Chairman. And thank you for
holding what I consider to be a very important hearing on a
difficult issue, as we're seeing here at the table.
Intellectual property is one of our biggest exports from
America. Intellectual property is very valuable, and I agree
with those who think that intellectual property rights need to
be protected. Whether you are a recording artist or a motion
picture producer or software developer or whatever it is,
somebody who has created something--just like somebody who has
a patent--must have adequate protection for his or her
intellectual property.
Having said that, if we could explore this idea of
disruptive technologies--not just with the idea of peer-to-
peer, but disruptive technologies from an investing standpoint.
From venture capitalist perspective, Mr. Heesen, can you
address how tertiary liability could potentially affect
investing in disruptive technologies in the future. Such
disruptive technologies have the potential to foster huge
breakthroughs in healthcare that could save lives. Similarly,
disruptive technologies can impact the economy in ways that
extend beyond what we're just talking about today.
Mr. Heesen. It's an absolute major issue. If the venture-
capital firm, itself, and the individuals of that venture-
capital firm, can be sued because they invested in a technology
that is perfectly legal, but that somebody other than--and that
technology move forward, and they invested in that company, and
that company was doing perfectly legal things, and somebody
else comes along and starts doing illegal things as a result of
that new technology, and we are sued because of that, that
would shut down our interest in that area. I mean, it's just--
it would very quickly dissipate. And venture capitalists are
very agile in shutting down companies and moving on to
something else. I mean, it's something that we don't like to
do, but it's done very quickly. And so----
Senator Ensign. Can you----
Mr. Heesen.--we would move into another area of technology,
absolutely.
Senator Ensign. Along those lines, can you give me your
thoughts on the distinctions between being a passive investor
as a venture capitalist, versus an active investor with
management responsibilities or the appearance of management
responsibilities.
Mr. Heesen. Well, venture capitalists will take an active
role in the overall operation of a company, in the respect that
they are putting money in, and it's very often substantial
amounts of money, and they're saying, you know, ``We want to
see this company go in this direction over the next 10 years.''
It's--we don't care about what's happening in a--frankly, in a
day-to-day operation, but from a 5- to 10-year perspective, we
want to see that company grow to the point where it can be
acquired by a larger company or it can go public. And so,
anything that comes along that is going to change that outcome,
we want to know about, and we're going to take an active role
in making sure that the long-range goals of that company remain
the way we'd like to see them. We don't always have a majority
stake in companies. Most of the time we might have 10 to 15
percent, and there might be a couple of venture-capital firms
that, together, may have a majority ownership of a company. But
it depends on the technology, actually, very often.
Senator Ensign. Mr. Bainwol, I want to be fair to your
industry in this regard, and I know you have a different
opinion about this. If you could address the concern that I
just raised about disruptive technologies, the idea of things
that could tremendously change people's lives for the better,
and the fear of venture capitalists that if there is tertiary
liability it could shut down the investment necessary to
develop disruptive technologies.
Mr. Bainwol. Right.
Senator Ensign. Please discuss this issue from your
industry's perspective.
Mr. Bainwol. Sure. I think the key thing is--I guess there
are two points. One is to distinguish technology from conduct.
Grokster is not about technology. Grokster, the decision,
itself, is tech neutral. The decision is about conduct. They
said the objective of these entrepreneurs was unmistakable,
which was basically to perpetrate a fraud, it was to induce
second--to induce illegal behavior; and, therefore, they said,
they're responsible for it. So, the question here is conduct,
not technology.
I'm not an attorney, so I can't speak to questions of
tertiary liability. But if you engage in that conduct, then
that's probably not tertiary. And that's really the relevant
question. When you get involved, and you actively manage and
you make choices, and you are responsible for that conduct,
then it's not tertiary. And then you're, I think, well within
the grasp of this decision.
Senator Ensign. Mr. Eisgrau, you wanted to comment?
Mr. Eisgrau. Just a brief word, sir. I don't disagree with
Mr. Bainwol's characterization about what the court said about
the potential culpability of conduct after further judicial
proceedings. I would take respectful issue, however, to say
that the uncertainty that is left in the wake of the Supreme
Court's recent ruling with respect to exactly what the
parameters of secondary and, as you point out, tertiary
liability for investors might be, ought to be of some concern.
And certainly P2P United and the Electronic Frontier
Foundation, with which we co-prepared our testimony, would
concur with that of the National Venture Capital Association in
flagging this for the Committee and urging it to, kind of, keep
a weather eye out for potential disincentives to invest based
on the uncertainty of those legal standards.
Senator Ensign. To finish out on this, is this something
that needs to be clarified in law?
Mr. Heesen. At this point, we would say that it's best
for--as I said, to have some breathing room here. We would not
be run--we do not believe that we should be running to Congress
at this point to have any changes made. I think that the courts
have a responsibility right now, and we were--take a wait and
see attitude at this point.
Mr. Eisgrau. Senator, if I may, again, very briefly, we
would agree with that, insofar as the standards of liability
are concerned. But both the Venture Capitalist Association and
our testimony points out that potentially crushing an
astronomical statutory-damage liability may no longer have a
place in this now-uncertain environment, and that is something
that could be statutorily reformed and, we think, merits
discussion both in this committee and other committees of
jurisdiction.
Senator Ensign. I want to ask Mr. Kerber a question.
Mr. Kerber. Yes, I--if I could respond----
Senator Ensign. Hold on. Maybe in your response----
Mr. Kerber. OK.
Senator Ensign. Let me get my question in first, because my
time is about to run out.
Mr. Kerber. OK. Go ahead.
Senator Ensign. In your testimony, you state that the
Grokster decision clearly illustrates that our system of
government is working to achieve the correct balance between
protecting the creators of intellectual property and advancing
technology. Do you believe that the inducement standard
provided in the Grokster decision is clear enough to guide your
future activities as a peer-to-peer company?
Mr. Kerber. Yes, I do. And I also would add, the protection
of the consumer in that statement, also. It's very clear how
you get investment. The rules are there. We're a P2P. We're a
real peer-to-peer. It's centrally controlled. We can control
that and put out on it. We can respect the copyright holder's
wants during--through a contractual process. And the way that
investors realize that is when they--when we go out and get
deals with the record labels, movie studios, and they do their
due diligence, the venture capitals do their due diligence,
they call, and they find out that, yes, these guys--in our
minds, the content owners of these assets, yes, we will allow
this to be transferred and distributed and sold on the network.
So, you know, going back to the clarity issue, there is
one. It's very, very clear. If you have a contract from a major
label, indie label, movie studio, publisher, what they have
said is, ``We will allow the content to be sold in this manner
across our network.'' So, I'm a little confused by--there's an
absolute clear path for an investor to understand what's right
and wrong in the process.
Senator Ensign. Well, Mr. Chairman, this hearing is very
important, because it also illustrates--and this is something
Mr. Bainwol talked about--that we have a generation of kids who
grew up thinking it's OK to steal music, it's OK to steal
movies, it's OK to steal video games, whatever the intellectual
property is. And I think that the Grokster decision could be a
turning point, as far as morality is concerned in this country.
The Grokster decision may help to teach the next generation to
respect private property--the same as it's wrong to break into
somebody's home, it's wrong to break into an artist's library
and steal their content. I think that is an important lesson to
teach the next generation as it matures. I don't know how much
we can do about the generation that just grew up and is in its
20s now. But certainly--you know, I've got a 13-year-old at
home, and younger, and they are actually talking about it now
differently than kids were talking about it even 5 years ago.
They're understanding that they need to purchase music and the
like if they're going to download it legally. And I think that
that's a dramatic change that we need to continue to enforce
and look for ways that we can encourage that type of behavior
in this country.
And I thank you, again, for holding this hearing.
The Chairman. Well, the Senator's--you're right, but the
real problem that I have--we were informed that--there was a
discussion here this last week about the European Commission
and what they're trying to do and bring about a gradual
response to--from the providers, themselves, to illegal file-
sharing. It doesn't sound to me like there's any motivation
here for a mechanism to bring about some standards for the
future, as far as these organizations are concerned, some type
of body that would come into being by mutual desire to sort of
set standards that will look toward copyright protection. Am I
wrong? Is there any motivation here in the industry to do
something, because of Grokster, that will give us a concept of
pushing back a little bit and saying, ``Look, this is not
right, and we're not going to condone it, we're not going to
deal with people who do encourage this type of activity''?
Mr. Baker. If I may, Mr. Chairman, I don't think that a
European Commission-style impetus is necessary here. I think
we're all in agreement that we don't condone it, and I think
that the Court was abundantly clear that one may not induce
others to infringe on copyrights. And so, I think that this is
being dealt with----
The Chairman. Well, I'm informed that the commission has
taken the position that they want to bring about a situation
where the ISPs notify their clients that they're going to be
watching to see whether they, in fact, condone illegal
activity. Am I wrong?
Mr. Baker. That--I'll agree with your characterization of
what the European Commission said. But, again, here, we've all
made abundantly clear to all of our members--and not just our
company, but Internet providers, across the board, whether
they're independent Internet providers, phone companies, cable
companies, whoever--that we don't condone this. But the problem
is that you can't take the provider of the pipe and make them a
policeman. We transmit literally terabytes of information every
hour. It would be absolutely--I mean, it's physically
impossible to monitor all of the traffic that crosses our
network. I mean, we do monitor--we're able to filter out
viruses, we're able to filter out spam, we're able to filter
out spyware, things like this, but there's no way, when there's
just a music file or something that's just coming across the
network, number one, to readily identify what those bits of
information are, number two, to know whether a--whether there
is a copyright on that, whether somebody's downloading it
legally, illegally, et cetera.
The Chairman. Wait a minute. Do you mean to tell me the
provider won't know that--if there's constant illegal activity
going on in its system?
Mr. Baker. That's what I'm saying, Mr. Chairman. Trillions
of bits of information every hour transmit across our network,
and----
The Chairman. But--you're telling me they don't know? Is
that what you're saying?
Mr. Baker. I'm saying that, as an Internet provider, we
don't know when just these bits of information flow across our
servers and routers and off to other carriers and across
backbones that--to know what that content is, much less if it
is a--if it is, say, a music file, whether that's been paid for
by a legal service, or illegal. Now, some products, such as
Apple iTunes, for instance, have a different format; and so,
are readily identifiable. And so, there's a pretty high level
of confidence that those have been paid for. But if it's just
something like an mp3 file, it's just a generic format. There
are, again, just by looking at those bits of information,
though, you can't tell whether a fee has been paid on that or
whether that was pirated.
The Chairman. Well, I've got to yield to the Senator from
California, but one of the reasons that this hearing is being
conducted is, we want to, sort of, send a notice, we are going
to be watching. We want to know, What are you going to do to
follow up on this to take the path the Court seems to think
could be taken to give greater protection to this copyrighted
material? And I don't hear much, myself, that indicates that
there's going to be any attempt to find some ways to set some
standards and to do what the Senator from Nevada suggests, to
bring into the new generations a concept that we do not condone
stealing property. Now, I hope that we're being heard. I do
hope we're being heard, because there are people in the Senate
who want us to move now, and we're holding a hearing to try to
see what is going on in these industries to see what might be
done to terminate this illegal activity.
The Senator from California?

STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA

Senator Boxer. Thank you, Mr. Chairman.
I want to associate myself with the remarks that you just
made. And I just want to take a minute to talk about the way I
see the Grokster decision. And if I get something wrong, I'd
appreciate if any of the members of the panel, our
distinguished panel, will let me know if I'm not interpreting
it right. And then I have a question of Mr. Eisgrau.
Grokster was a unanimous decision, and that's very rare,
that the court's justices, who represent a range of judicial
philosophies and personal perspectives come together in
agreement. And, to me, it's easy to see why, notwithstanding
Mr. Eisgrau's comments--but I have disagreements with Mr.
Eisgrau on a number of issues.
Fundamentally, the Court was simply saying that theft is
wrong, no matter how you dress it up. And I would agree with
Senator Ensign that we do have a generation out there that
says, ``The best things in life are free, and it's mine.'' But
I think they are learning. Even that generation is beginning to
see the light, because of the work of companies like Apple, for
example, who's now making money doing something right. They
help us understand that property is property. If somebody
steals a bike in front of your house, they're a thief, and if
they steal your music, they're a thief. And that's just as
simple as it gets. And especially theft of intellectual
property, which is the strongest commodity that we have. Mr.
Chairman, at this point what makes America so great is our
intellectual property.
Companies that create a business based on promoting the
theft of intellectual property, and advertise their technology
for such illegal uses, should be held accountable. And I don't
think venture capital should go to them. It's ridiculous. And I
appreciate Mr. Heesen's comments, that he doesn't think we
should have, legislation at this particular point. That he is
not that worried, because venture capitalists don't want to put
their money in something that's involved in thievery or that
will, in fact, result in pornography getting to our children,
which is the most despicable thing I've ever seen in my life.
You know what I'm talking about, Mr. Eisgrau. You've seen
the problem there. You have kids thinking that they're going to
get somebody's music, and they click on a link, and what do
they get? They get something horrific that could damage them
forever. It's a disgrace. And it has to be stopped.
I sent you a letter, along with a bipartisan group--it was
Senators Durbin, Gordon Smith, Feinstein, Lindsey Graham, and
John Cornyn. That's the range of Senators around here. And what
we basically asked is, ``what are you doing to prevent or
reduce copyright infringement and illegal access to
pornography? '' We've written you on more than one occasion.
When I say ``you,'' let me say exactly who it was--the letter
was to the owner of Grokster, the president of BearShare, the
president of eDonkey 2000--I don't like that name, as a
Democrat--president, Lime Wire, president StreamCast Network's
Peer-to-Peer United. And it was delivered to Ms. Nicki Hemming,
CEO, Sharman Networks. We don't have an answer from you. We're
very concerned about this.
Now, the court distinguished between situations where a
company produces a technology that can be used to violate
copyright laws but has other legitimate uses and a situation
like Grokster's, where a company actively encourages
infringement of copyright through the use of its technology.
It's kind of like the intended use and the side-label use. What
is the intended use? That's what the Court was getting at.
And it's important to remember that the Court merely
clarified the legal situation. The Court didn't find Grokster
or anyone else liable. The case was remanded for further
consideration by a lower court.
A true understanding of the issue will not be known until
the lower courts have had time to interpret and apply the
decision in different cases. In a year or so, the content
industry will have a better idea of whether the ruling has
decreased illegal file-sharing, and the technology industry
will be able to assess whether innovation and funding has been
impacted.
So, it seems to me this next year is key, but, I agree with
the Chairman. In a year's time, if you don't move to protect
copyright, if you don't move to protect our children, it's not
going to sit well, regardless of what the court has said.
I think the whole world is watching now, after the Grokster
decision, and, in that post-Grokster world, I hope both
industries flourish. Look, for me, it's like choosing between
children. In my state, I've got Hollywood, I've got Silicon
Valley. This is a nightmare for me. I've got the venture
capitalists. I've got everybody.
So, what do I want? I want everybody to come out of this in
good shape. But there is a right and wrong here. That would be
the end of my comments.
But I do have a question, to Mr. Eisgrau. Can you tell me
what steps you're taking to respond to my letter, the letter of
the six of us? In light of the case, how can companies such as
BearShare and LimeWire continue to promote infringement?
Shouldn't they take active steps now to stop infringement, even
though the Court, kind of, said, ``Well, figure it out.''
Shouldn't they be moving now? And, if they are, what are they
doing?
Mr. Eisgrau. Thank you, Senator. There are a number of
parts to that question. Let me see if I may respond to them in
turn.
First, with regard to your invitation to make a minor point
with respect to the characterization of the Grokster opinion,
itself, the Court did not find--it's my understanding--that if
a technology does not have--that it must demonstrate legitimate
use to a broadscale degree. In other words, it left the initial
Sony fundamental premise intact. What I can tell you, Senator,
with respect to the technologies of P2P United--which do not
include, regrettably, LimeWare and Sharman, so I can't speak
for them--on a number of the issues you've raised, starting
with pornography, first of all, the individuals, many of whom
are parents and grandparents, that run the companies that are
members of P2P United, believe that the people who prey on our
children and who perpetrate child pornography belong in prison,
or worse. And that's why we've been cooperating with law
enforcement, to an extensive degree, to try to deal with that
problem. We mounted a parent-to-parent resource center on our
own website, which is linked to from every website of the
members, which provides resources, including how to report
suspected child pornography, including links to outside
resources so that parents and others may find out what it is, a
number of additional resources, as well. We don't support that.
We do not run computers that house child pornography. We do not
run computer networks that have servers that, for that matter,
house copyrighted information, Senator.
So, the question, if I understood it correctly, that you
were posing is--in the sense of, What are we doing?--is, How
might we modify the technology--which, as I said earlier,
perhaps before you arrived, is a neutral pipe, in the same way
the Internet and the phone system is a neutral pipe--how might
we modify that technology to affect what individuals do to use
it is, frankly--we cannot, and we are not. We believe that the
solution here lies--particularly with respect to copyrighted
information--in, perhaps, the kind of system of collective
voluntary licensing that we were discussing earlier.
And, if I may take just a half-minute, literally, to flesh
out what that means, in practical terms, it's a little,
perhaps, unbelievable, at first blush, to realize that what we
are proposing is a system that artists and copyright owners
would elect to participate in. That would mean that it would--
they were saying it's OK for their material to be accessed by
individuals without their advance permission, as long as those
individuals pay into a collective. That would mean that what is
now unlawful downloading activity on the part of these
individuals would, under such a system, be lawful. In the same
way that it was illegal to take a drink during Prohibition, it
would now become legal for that download to occur, because a
royalty system of compensation would be in place, administered
by something like ASCAP, and measured by companies that the
recording industry, itself, now uses, similar to Nielsen and
Arbitron, to determine what is being downloaded.
Senator Boxer. Sorry----
Mr. Eisgrau. Yes, ma'am.
Senator Boxer.--you lost me somewhere. I'm sorry. You lost
me.
[Laughter.]
Mr. Eisgrau. I apologize.
Senator Boxer. I want to follow what you----
Mr. Eisgrau. My point, Senator, is, first, with respect to
copyright infringement, there are ways to rationalize this that
do not involve modifying the technology so that the neutral
pipe is somehow outfitted with a system that allows oversight
of content. We would share many of the same difficulties in
looking--in fact, more so than content than the gentleman from
EarthLink described earlier.
Senator Boxer. OK.
Mr. Eisgrau. With respect to pornography----
Senator Boxer. Would you----
Mr. Eisgrau.--we're part of the solution, not part of the
problem. And we agree with you that it is a giant problem. But
as the General Accounting Office pointed out, it's an Internet
problem, not just a peer-to-peer problem, as well.
Senator Boxer. Well, everybody's got to fix it. This is
damaging, number one. So, let's not say, ``It's not mine.''
Yes, it's part mine, it's part theirs, it's part--you know
what? It's over, here, with this. This has got to end. I don't
care that you don't like pornography. I don't like--I believe
that. You're a dad. I'm a grandmother. This is good. But, you
know what? We're here talking about the public. There's a lot
of people who make cars who are wonderful, and, you know, they
don't want to be in a dangerous car, but maybe they're not
doing their best. And that's why we have standards. So, let's
just--this isn't about us, personally. When I talk to you, I
don't mean it personally.
Mr. Eisgrau. Not taken that way, Senator. Thank you.
Senator Boxer. But just answer this question. Would you
agree with this, that several developments have taken place
which highlight the technological capacity to filter? Would you
agree that that has happened?
The Chairman. We have to wind this up, Senator.
Senator Boxer. I'll wind it up.
Well, do you agree with that?
Mr. Eisgrau. No. And if I may drop a very----
Senator Boxer. OK. Well, then if----
Mr. Eisgrau.--brief footnote, Senator----
Senator Boxer.--you don't agree with it----
Mr. Eisgrau.--it's important.
Senator Boxer. I have asked you to look at--Wurld Media,
Mashboxx, and P2P Revolution which have announced licensed
legitimate direct-to-consumer P2P distribution services that
will filter for unauthorized works. My time is up. My Chairman
has been patient. I think we're moving along, and I sense a
resistance here. Maybe I'm missing it, but that's what I sense.
The Chairman. Senator Inouye?
Senator Inouye. Mr. Chairman, I'll try to follow up with
you and Senator Boxer.
In the decision, I believe the Supreme Court made it rather
clear that the P2P activity occurring online is illegal and
amounts to theft, much of it.
Mr. Eisgrau. Yes, sir.
Senator Inouye. Now, you have responded to Senator Boxer
that you were suggesting a summit meeting to resolve this
question. My question is, what have you done with your clients
to discourage them or to prevent your clients from engaging
further in illegal activity?
Mr. Eisgrau. Thank you, Senator.
The illegal activity that might be applicable in this case,
according to the Supreme Court, would be activity by the
software developer to encourage users of that software to use
it in order to infringe copyright. That's the inducement
language in the Supreme Court's opinion, sir. The members of
P2P United do not now--and since I have been involved with
them, I would respectfully submit, do not induce anybody to
commit copyright infringement.
With respect to StreamCast, the makers of Morpheus and
Grokster, the two pieces of software at issue with the Supreme
Court's case, the Senator from California is correct, that will
be going back to the trial level to see whether, years ago, an
earlier version of their software was marketed under past
practices that might subject them to liability under the
Supreme Court's new test. But the bottom line, Senator, despite
what you may hear from elsewhere, we do not induce, we do not
encourage or condone, copyright infringement. Indeed, if you go
to our website, there is an unmistakable, very large ``C'' in a
circle, with a very stern copyright warning, smack in the
middle of the page, sir.
With respect to whether we can or--modify, technologically,
the software in order to somehow filter copyrighted material,
the systems that Senator Boxer just alluded to, and the
gentleman from Wurld Media produces, are essentially closed
systems, as just described here before you. They are not
traditional open peer-to-peer architecture. That's a
significant distinction. There would be very serious social,
scientific, educational, all kinds of ramifications if, in
fact, Congress were to require or suggest that only so-called
``closed'' peer-to-peer operating systems were now lawful.
Mr. Attaway. Senator Inouye, we agree with Senator Boxer,
and are just as frustrated, that it's not enough simply to say
that infringement or pornography is bad. There has to be
something done about it. And that's one of the good things
about the Supreme Court decision. The Supreme Court looked at a
number of factors. One of them was the fact that the defendants
in this case took no action to prevent the massive infringing
activity that was taking place. We hope that, as a result of
the Supreme Court decision, there will be incentives for all
players on the Internet to not just condemn pornography and
infringement, but to do something about it. And we look forward
to that happening.
Mr. Eisgrau. Senator, may I call your attention to
footnote----
Mr. Bainwol. I think it's my turn, Adam, if I may. And let
me just add a precision to your comments. Adam's laid out a
very elaborate, kind of, scheme to dodge the fundamental
reality that his companies have not accepted what's gone on
here. These companies have the ability to shut this illegal-
taking down right now. They're choosing not to. Let's be clear.
He then goes to this notion of this, kind of, fancy collective,
which sounds good, but it's less filling. It doesn't work. I
mean, what he's really saying, at the end, to make it work,
he's talking about a compulsory license. He's saying,
``Congress, pass a compulsory license, and let's go ahead and
take revenue from a mandatory tax on ISPs, and let's take it
and give it to music rights-holders.'' But--oh, but there's a
problem. What do you do about movies and software and games?
You've talked about the size of the intellectual property
segment of this economy. There is no real practical way to
follow that suggestion. That's a dodge. It is a failure to
accept responsibility for the fundamental fact that his
companies have a business model predicated on theft. They need
to deal with that fundamental question.
Mr. Eisgrau. If I may, Senator Inouye, you've been
affirmatively misled in two respects that are important to
clarify.
First, as emphasized in my testimony, a voluntary
collective licensing system--there is substantial scholarship
on this--a voluntary collective licensing system is inherently
different than a compulsory license. The principal difference
being, one requires legislation, one requires simply having a
series of good-faith discussions to see if we can get there. We
are not, absolutely, for the record, calling for legislation or
a compulsory license of the kind to which Mr. Bainwol
responded.
Second, the claim that there is a technological magic
bullet that a peer-to-peer software developer that makes its
product available to the public can engage in that creates a
watertight copyright protection system is simply false, and I
would urge you and this committee not to take the word of any
advocate for that, but, rather, convene technical experts who
can tell you the truth.
Third and finally, very quickly, footnote 12 of the Supreme
Court's opinion is important to emphasize. What it says--and
it's brief--is as follows: In the absence of other evidence of
intent, a court would be unable to find contributory
infringement liability merely based on a failure to take
affirmative steps to prevent infringement if the device was
otherwise capable of substantial non-infringing use. Such a
holding would tread too close to the Sony safe harbor.
The standard for liability in this instance, although it's
been suggested otherwise at this panel, is not that Company X
fails to install a filter that meets the approval of an
entertainment company. If that were the standard, we would
seriously threaten innovation and capital investment. And that
ought to be of enormous concern to this committee, sir.
Senator Inouye. Obviously, I know very little about
technology, but Mr. Bainwol said that you could stop it right
now. Is that realistic?
Mr. Eisgrau. No, sir. That is not. That is not. And Mr.
Goldring, the entertainment lawyer in the editorial in the
record, says as much.
Senator Inouye. Mr. Bainwol?
The Chairman. Wait, wait, wait. Now, let's take our time
here, please.
Are you finished, sir?
Well, we've got to wind this up sometime, because we've
been in session here now 5 hours, almost 6 hours, in this
Committee today alone.
I do want to say this. Senator Boxer and I rarely agree,
but when we do I think people ought to listen a little bit.
[Laughter.]
The Chairman. We're going to have a hearing this fall about
the pornography aspect of this. We're talking right now about
the business models of trying to contain illegal activity. But
we've got--we're going to get specific about this pornography
over the Internet. People tell me we can't do anything about
it. I don't believe that. So, we'll see that this fall.
But we are also told that, on peer-to-peer, for promotional
activities, the provider puts out a display and tells people
what they can see if they watch it. And there are ways of
demonstrating to the public why they should watch--what they
should use, a portion of the Internet, as opposed to another
one. I do think that--if that's the case, that your Supreme
Court footnote has been met, because there's affirmative action
on the part of the provider to tell people to look at
something, and, if they provide a list, and on that list are
some items that they know are not protected--that ought to be
protected, and they're not, they're participating in this
activity.
Now, I hope--again, I'm back to the point where I said, I
hope you're listening. Senator Boxer has just provided me a
good example of the comments I've gotten in the room about,
``Why don't you do something, Mr. Chairman? Why don't you
follow up on this Supreme Court case?'' Well, all we held this
hearing for was to say--to listen to you to see if there is any
indication that the industry is going to do that. And I, again,
say to you, the difference between this--I hope that you do it,
because, if you don't do it, I'm going to move over and be with
Senator Boxer on this. And I think the whole committee will.
We've got to find some way to meet this concept of protecting
our intellectual property. We can hardly accuse the people
abroad of stealing our intellectual property if we can't
protect it at home.
Now, that's the message we've got to give you. And,
unfortunately, I have to adjourn this hearing right now. Thank
you very much.
[Whereupon, at 4:40 p.m., the hearing was adjourned.]

A P P E N D I X

Prepared Statement of Marty Lafferty, CEO,
Distributed Computing Industry Association (DCIA)

Dear Chairman Stevens and Ranking Member Inouye:
Thank you for holding this important and timely hearing on issues
related to MGM v. Grokster and the appropriate balance between
copyright protection and technology innovation. We greatly appreciate
your leadership and that of your Commerce Committee colleagues. We are
grateful for this opportunity to share the Distributed Computing
Industry Association's (www.DCIA.info) perspective on this critical
industry and consumer issue.
Long-Term Benefits of the Supreme Court Ruling
The DCIA welcomed the Supreme Court's refusal to rework the Betamax
decision, and remains optimistic that the grounds for secondary
liability it defined will prove in the fullness of time to be fair and
workable.
As the case works its way back through the lower courts, we
anticipate clarification of the rules of engagement between content
providers and technology suppliers in the digital realm generally, and
with respect to peer-to-peer (P2P) file sharing in particular.
We are confident that the Court's decision in the MGM v. Grokster
case will ultimately lead to the continued expansion of our industry.
We should clarify that our vision for that expansion does not
center on filtering copyrighted works out of the P2P environment, but
rather on deploying commercial and technical solutions, which the vast
majority of rights holders will find attractive, for secure licensed
and profitable redistribution of such works via file sharing.
Given the pace of broadband deployment and Internet-based software
development, it is far preferable to focus on achieving the full
potential of highly efficient P2P technologies for revenue generation--
rather than on shortchanging that potential.
In the file-sharing environment that we are working to establish,
rights holders will have the digital rights management (DRM) tools and
support services to manage key aspects of every transaction--and to
monetize them through such means as advertising support, sponsorships,
cross promotion, packaging, subscriptions, and a la carte sales--
whether their works are initially entered into redistribution by
themselves or by others--including consumers.
We have already urged all affected parties to focus on deploying
new business models for content distribution that are non-infringing
and expand the marketplace for digital content, and not to pursue
legislative intervention at this time, which would only be counter-
productive. The private sector, with added clarity that will result
from pending lower court outcomes, should manage the process from here,
until we reach a later stage as described below.
The MGM v. Grokster ruling provides impetus for the P2P
distribution channel to grow and flourish. P2P DRM technologies and
micro-payment services have been proven with computer games, software,
and independent music and films. Major labels and studios can avail
themselves of these tools to develop marketplace solutions--starting
today.
To quote Justice Breyer:

``The record reveals a significant future market for non-
infringing uses of Grokster-type peer-to-peer software. Such
software permits the exchange of any sort of digital file--
whether that file does, or does not, contain copyrighted
material . . .

Such legitimate non-infringing uses are coming to include the
swapping of: research information (the initial purpose of many
peer-to-peer networks); public domain films (e.g., those owned
by the Prelinger Archives); historical recordings and digital
educational materials (e.g., those stored on the Internet
Archive); digital photos (OurPictures, for example, is starting
a P2P photo-swapping service); `shareware' and `freeware'
(e.g., Linux and certain Windows software); secure licensed
music and movie files (INTENT MediaWorks, for example, protects
licensed content sent across P2P networks); news broadcasts
past and present (the BBC Creative Archive lets users ``rip,
mix and share the BBC''); user-created audio and video files
(including ``podcasts'' that may be distributed through P2P
software); and all manner of free ``open content'' works
collected by Creative Commons (one can search for Creative
Commons material on StreamCast) . . .

I can find nothing in the record that suggests that this course
of events will not continue to flow naturally as a consequence
of the character of the software taken together with the
foreseeable development of the Internet and of information
technology. There may be other now-unforeseen non-infringing
uses that develop for peer-to-peer software, just as the home-
video rental industry (unmentioned in Sony) developed for the
VCR.''

We hope the Court's decision will lead to a shift away from
conflict and toward commerce, and we encourage everyone to come to the
table and develop new business partnerships. The MPAA and RIAA and
their powerful members control ninety percent (90%) of popular
entertainment content distribution and can now move forward to license
responsible P2P companies using this highly efficient and extremely
popular channel for the distribution of their copyrighted works to
create new markets and revenue opportunities.
P2P file-sharing technologies are part of the larger movement to an
increasingly distributed computing environment. As the Court affirmed,
this kind of technological progress is inevitable--embracing it to
harness its capabilities will prove to be much more gainful than
resisting or trying to stop it.
While it is regrettable that the earliest outcome of the Supreme
Court's ruling likely will be additional backward-looking litigation--
and even more unfortunate because parties on both sides over time have
implemented changes in business practices paving the way for them to
work together--we can now also engage in more constructive activities
without the uncertainty as to what the Court's decision will be.
Specifically, the DCIA has embarked on three areas of activity
comprising development of: (1) a comprehensive best practices regime
based on analysis of the Supreme Court opinion and concurrences; (2) a
promotional program highlighting licensed content P2P distribution,
appropriate software usage, and protection of children online; and (3)
a technology solution initiative that emphasizes a combination of
``offensive'' tactics (e.g., placement of DRM-protected and other
licensed files at top of search results) with ``defensive'' tactics
(e.g., conversion of unauthorized files into licensed quality-
controlled versions) that have long-term viability.
While some either cynically or naively propose forcing a migration
to provisional closed P2P systems and/or continuing to use lawsuits and
smear campaigns to express their opposition to real industry progress,
it is right at this moment that we demonstrate our commitment to more
positive alternatives.
Trying to drive global Internet users to abandon an ever-increasing
abundance of open and inter-operable software applications, which
facilitate the instantaneous transfer of files with greater and greater
efficiency, ignores marketplace realities, and particularly the effects
of an ongoing evolution to low-cost open-source program development.
It makes much more sense to put resources into projects
concentrating on the third area of activity outlined above, which are
distinguished by an emphasis on equipping individual files to carry the
means of their protection and monetization with them as they are
transported over public networks.
DCIA Members have relevant experience that can be applied in this
initiative along with their expertise and capabilities to benefit not
only legitimate business interests, but also consumers.
It is clear that certain of our industry's opponents are trying to
leverage the courts and Congress to perpetuate entrenched but no longer
optimal business models, temporarily curtail or slow down technological
advances, and maintain hegemony of now outdated processes for content
exploitation.
Our opponents blame others for their own failures to exercise
responsible stewardship in protecting copyrights during a more than
two-decades-long conversion to digital content origination and
distribution. They seek to compel third parties to pay for solutions to
problems arising from their own neglect, and buttress their campaign
with intimidation. Instead, we need to come together to complete the
tasks that must be done for all affected parties to move ahead.
It is important that those who oppose the growth of the distributed
computing industry realize that our determination to continue
developing P2P technologies for legitimate purposes is greater than
their determination to restrain, obstruct, or suppress these efforts.

Short-Term Concerns About the Ruling
The divisiveness of what has become a protracted conflict between
major entertainment conglomerates and current-generation P2P software
distributors has unfortunately been exacerbated by the Supreme Court's
decision--indeed the immediate result of the high Court's ruling will
be renewed litigation among these parties in the lower courts. More
disturbingly, consumer lawsuits by music and movie industry interests
are also continuing unabated. None of the entertainment industry's
prospective new sanctioned P2P applications has yet to launch, and
reportedly, P2P copyright infringement levels continue steadily to
increase.
To make matters worse, the business models and technology solutions
put forth by the DCIA's now more than fifty (50) Member companies and
other qualified independent entities, to provide copyright protection
while also promoting continued technology innovation, have not yet
received the major entertainment sector support or the media attention
that they merit. This despite the fact that they are squarely grounded
in marketplace realities rather than wishful thinking, are focused on
commercial development that will benefit all affected parties rather
than just certain entrenched interests, and are gaining traction as
clearly demonstrated by their promising initial consumer acceptance.
The DCIA firmly believes that P2P copyright infringement can not
only be dramatically reduced, but that P2P has the potential to serve
as a more robust and efficient distribution channel than its
predecessors for a greater diversity of content offered in a larger
variety of ways. But to do so will require leading entertainment
companies, P2P software distributors, and technology solutions
providers to collaborate rather than litigate or retreat from
participating in fear of litigation. Service-and-support firms need to
be allowed to demonstrate that they can provide adequate safeguards
through such techniques as P2P DRM and micro-payment solutions, and
entertainment content rights holders need to license their works for
P2P distribution. Beyond that, P2P can also become an advanced
communications medium and collaboration platform.
Fully addressing the P2P copyright infringement problem for the
long-run will require a coordinated, multi-faceted approach that
includes content and technology sector collaboration, cross-industry
self-regulation, and targeted enforcement. But first, appropriate
activities for companies and consumers alike to use P2P in authorized
ways for redistribution of copyrighted works need to be established.
Users need clearly to be shown appropriate ways to utilize P2P to
access and share popular entertainment content. It should be deemed
unacceptable, for example, that not a single major label track is yet
available in a licensed format in today's P2P environment.
Our view is that it is essential for any proposed solution's
viability that it be agnostic in terms of working with current and
foreseeable P2P applications, including open source clients and
swarming transfer protocols. To be fully effective, it should address
both the intentional authorized introduction by rights holders and
their agents of secured files of copyrighted works--and their continued
protection as they are redistributed from user-to-user no matter what
software program(s) are being used; as well as the unauthorized
introduction of unsecured files of such works by third parties
including end-users--and their continued prevention from being
redistributed in unauthorized form.
Not to oversimplify this matter, but it seems to us that two
fundamental tasks with respect to securely redistributing copyrighted
works via P2P can be defined as:

(A) To apply P2P DRM to a file (permitting rights-holder[s] to
set price, usage terms, etc.), then create multiple variations
of the secured licensed version of the file (supporting robust
viral redistribution), and finally seed these initial
authorized copies into the file-sharing environment in such a
way that they will appear at the top of search results on major
P2P software programs (using algorithms unique to each
protocol) and other search engines; and

(B) To support a system that essentially mirrors the
decentralized architecture of P2P applications, extended to
include torrent technologies which break files into smaller
pieces, that blocks redistribution of unauthorized files of
registered copyrighted works (without comprising consumer
privacy or interfering with redistribution of other files),
that reconstitutes usable quality-controlled portions of
copyrighted-works files into licensed versions (to optimize the
efficiency of a distributed computing environment), and that
provides detailed specific measurement data regarding P2P
traffic.

To date, DCIA Members have developed and deployed solutions needed
for task ``A'' for major P2P software programs including BearShare,
eDonkey, Grokster, Kazaa, Morpheus, TrustyFiles, etc. as well as some
search engines and websites, despite being hampered by a very limited
amount of test content. Examples of companies actively engaged in
this--and their solutions, include Altnet--TopSearch; INTENT
MediaWorks--myPeer; Shared Media Licensing--Weed; Trymedia Systems--
ActiveMark; and Unity Tunes--Unified DRIV. P2P DRM, e-commerce, payment
services, and related solutions providers now include an impressive
roster of highly qualified firms such as Clickshare, Digital
Containers, Digital Rivers, Javien, KlikVU, P2P Cash, Predixis,
Relatable, RightsLine, Softwrap, SVC Financial, and Telcordia.
Their models work well mechanically and these companies are poised
for enormous growth as the P2P channel matures. In terms of sales
volume, which is obviously the more important issue, it is too early to
draw conclusions, however, and results-to-date are skewed by not yet
having licenses for major label or studio content and not yet having
``B'' deployed. New solutions providers are now proposing credible
approaches to accomplish ``B,'' which augur especially well for P2P's
future. With these in place, delivery of licensed digital media
content, such as through methodologies developed by Unity Tunes, will
evolve into a secure user-friendly model for super-distribution by
means of most P2P networks. More than anything, the private sector
needs time and encouragement for ``B'' to be adopted and implemented,
and for ``A'' to be fully developed with the participation of major
entertainment rights holders.
In terms of business models and technology support to realize them,
DCIA Members are committed to providing the best solutions possible,
and engaging on every level to find new and better commercial and
technical means to secure and promote licensed content so that it will
be possible for every P2P transaction to be monetized with terms and
conditions established by rights holders, whether the subject content
is initially entered into redistribution by rights holders or by
consumers.
The distributed computing industry is actively exploring innovative
business models for monetizing copyrighted works in the file-sharing
marketplace through advertising support, sponsorships, cross promotion,
packaging, subscriptions, and a la carte sales. The industry is
building better DRM and payment solutions every day, and is investing
in research and development to open the door to greater innovation. We
acknowledge the need for solutions that are more user-friendly,
transparent, and supportive of fair-use provisions expected by
consumers. But most of all what has been missing has been major label
and studio involvement as content licensors.
While DCIA Members and others have made significant advances in
commercially developing P2P, we also recognize there is still much work
to be done beyond attracting the major labels and studios. But these
efforts are not the only answers. Effective and complementary self-
regulation efforts by the content and technology industries are
crucial.

Industry Self-Regulatory Efforts
Specifically, we advocate the establishment of independently
coordinated authorities around the globe to help establish P2P file-
sharing best practices, and then to serve as an ongoing resource for
industry participant certification and dispute resolution. In short,
these authorities should provide mechanisms for registering copyrighted
works, supporting inter-operability of DRM and payment service
solutions, plus monitoring and reporting progress to participants in
reducing instances of copyright infringement as a percentage of the
universe of P2P transactions. Of course, any technology approved for
adoption should be based on open standards and developed with broad
input from the affected industries.
As a preliminary step toward achieving this objective, interested
parties are now invited to join the MGM v. Grokster Response Working
Group (MGRWG), which the DCIA established within weeks of the Supreme
Court ruling.
We are especially interested in recruiting additional content
rights holders, peer-to-peer (P2P) software distributors, and delivery
solutions providers.
The principal goal of MGRWG is to recommend a set of best practices
for the distribution of P2P software with the object of promoting its
use in ways that do not infringe copyright through affirmative steps
taken to foster non-infringement.
Our purposes are to enhance and not diminish benefits in security,
cost, and efficiency of P2P software for storing and transmitting
electronic files, and to encourage further commercial development of
beneficial distributed computing technologies. We intend for end-users
to be able to prominently employ ad hoc P2P networks for sharing
copyrighted music and video files--with proper authorization.
The proposed structure for defining these best practices, subject
to full discussion by MGRWG, will have four parts: (1) Advertising
Guidelines; (2) Protection Mechanisms; (3) Business Models; and (4)
Tracking Studies.
Questions to be answered by MGRWG include:

What kinds of consumer communications are recommended to
promote non-infringing usage of P2P software;

What types of P2P digital rights management (DRM) solutions
are recommended so that each transaction of a copyrighted
work's P2P redistribution can take place on terms-and-
conditions determined by its rights holder(s);

What revenue sharing opportunities are recommended for
content rights holders to fully exploit the possibilities of
P2P for licensed content redistribution (e.g., advertising
support, sponsorships, cross promotion, packaging,
subscriptions, a la carte sales, etc.) plus what kinds of
disclosures, if any, are recommended for non-copyrighted-
content related P2P revenue generation (e.g., behavioral
marketing, VoIP services, paid search, travel applications,
collaborative research, blogging, etc.); and

What industry-wide measurements using such methods as test-
cell extrapolation are recommended to track growth trends of
authorized copyrighted works transactions as a percentage of
all P2P transactions, as well as other key metrics.

Copyright holders should expect that a balance will be struck
between their legitimate demands for effective--not merely symbolic--
protection of their statutory monopoly, and the rights of P2P software
distributors and others to freely engage in substantially unrelated
areas of commerce.
Users should be able to continue to search for, retrieve, and store
files without involvement of P2P application providers, who should not
be expected to monitor or control use of their software with respect to
actual knowledge of specific content transactions. Involvement of other
members of the distribution chain, however, should provide the
requisite controls to enable secure P2P dissemination of registered
works globally.
Decentralized P2P software applications should not be expected to
reveal which files are being copied and when, but rather related
technology solutions should be supported for affiliated third parties
to equip individual files to accomplish this as they are redistributed
across public networks using P2P protocols. Filtering copyrighted
material out of P2P users' downloads or otherwise impeding
redistribution by such methods as blocking usage should not be
advocated as impositions on P2P software suppliers. Advanced
alternatives will more effectively accomplish the underlying goals that
previously have led some to suggest these approaches.JLW
Distributors of P2P programs should be able to clearly voice the
objective that recipients use their applications to download licensed
copyrighted works, and take steps to encourage them to do so, because
the file-sharing environment supports secure redistribution. These and
other P2P content-reselling entities should be able to competitively
market their offerings to prospective users.
P2P distributors should be able to advertise and instruct consumers
on how to engage in authorized usage of their software to download and
redistribute licensed copyrighted works and to recommend and directly
encourage such usage. They should be able to overtly and aggressively
take steps to respond to consumer demand for online access to
copyrighted material through highly efficient and very popular P2P
software.
As with other DCIA-sponsored working groups, participation in MGRWG
is voluntary and open to DCIA Members and qualified non-members.
Confidentiality of MGRWG participation will be maintained unless
express written authorization for disclosure is given by an individual
company in advance. Once the work product, in this case, an outline of
best practices, is completed and publicized by MGRWG, adoption and
compliance with its recommendations, whether in full or in part, will
be a separate voluntary action to be independently decided upon by
MGRWG participants (and others) individually.
As the step beyond MGRWG, the DCIA would be willing to serve as
coordinator of a multi-industry group constituted with broad relevant
multi-industry representation, working in consultation with the Federal
Trade Commission (FTC) to help codify best practices.
But in order for self-regulation, business model exploration, and
technology development efforts to be successful, ultimately they may
well need to be supported by strong Federal legislation to prohibit
unacceptable practices and empower consumers without threatening the
vitality of legitimate P2P usage.

Ultimate Role for the Federal Government
It is our view that business and technical solutions should be
encouraged in the private sector, and that a request for any necessary
enabling legislation should come only as a last resort and only based
on a consensus among affected parties, in this case primarily content
rights holders and P2P software providers, but also closely related
telecommunications and technology firms, once traction for a particular
solution(s) has clearly been established.
Global decentralization of the Internet has reached the point that
it would be virtually impossible to stop the proliferation of P2P file-
sharing technology or prevent its continuing evolution to higher levels
of efficiency.
The channel has already been proven to be a highly efficient medium
for marketing copyrighted works. The availability of licensed
copyrighted material is assured by the software, which automatically
makes copies of works available to millions of other users, who each in
turn are required to acquire a license under rights-holder stipulated
terms, including usage and price.
The key issue that has perpetuated copyright infringement by means
of P2P software continues to be a collusive refusal-to-deal by a
handful of large, multi-national, very profitable entertainment rights
aggregators, who by their own admission control more than ninety
percent (90%) of pop-culture content.
If this continues, what may ultimately be called for is an
injunction against ``intentional withholding of licensed content from a
distribution channel that happens not to be fully controlled by major
rights holders.''
Copyright infringement is the natural and inevitable by-product of
the failure to take necessary steps to protect content from
unauthorized duplication and distribution in the digital realm, and
then to refuse to license it to willing distributors with proven
solutions to problems certain rights holders essentially have created
for themselves.
This argument carries through to the fact that these large
entertainment copyright aggregators knowingly continue to distribute
unprotected CDs and DVDs by the millions, with their only tactics to
respond to the massive adoption by consumers of file-sharing
technologies being to sue hundreds of users per month for alleged acts
of infringement and to sue small P2P software distributors. They
themselves are the ones in fact driving consumers to become
distributors of infringing copies by not licensing a single music track
or video under their control for authorized distribution by means of
currently distributed P2P software, as well as failing to take
reasonable technical precautions to prevent the free and facile
replication and redistribution of their works.
It would seem, in these circumstances, that responsible behavior by
the major rights holders would be to follow the example of more
progressive independents and license their content for the P2P
distribution channel, now that the success of such efforts has been
demonstrated.
The true problem in the context of P2P software, where program
developers and distributors and solutions providers have sought to
negotiate with major rights holders, is that they have been met with a
refusal to do business or to even engage in technical tests or market
trials.
Despite this, these innovative software companies and solutions
providers have succeeded in ``competing with free'' by licensing and
successfully facilitating the marketing of lesser known, less popular
entertainment content offered by an increasing number of small
independents.
This condition has scrambled the venerable structure of copyright-
based businesses. There is a growing need to bring the major rights
holders to the table with such willing intermediaries, rather than
allowing their litigation against consumers and small P2P developers to
continue.
To achieve a more comprehensive solution, Congress may eventually
want to consider legislative approaches.
Specifically, Federal legislation should create incentives for P2P
distribution channel participants to adopt best practices. One way to
encourage companies to adopt best practices is to provide a ``safe
harbor'' for those who are members of an FTC-approved self-regulatory
organization. Under this approach, safe harbor participants would be
entitled to avoid the burden of additional requirements, based upon
their compliance with specific guidelines.
Thus, Federal legislation should identify the basic components that
industry guidelines must address, but permit the industry to take the
lead in developing the specific guidelines within these parameters.
Here is an outline of what can tentatively be called The Peer-to-
Peer Distribution of Copyrighted Works Development Act of 2006:
First Provision: Copyright owners and rights holders, who desire to
monetize their copyrighted works by means of digital distribution over
discovery and transport protocols, shall register digital files of such
works, in a manner that permits their efficient identification during
Internet transport, with the Copyright Office, which shall stipulate
the technical specifications for such file identification, as may be
reasonably updated from time-to-time.
Second Provision: Owners and operators of broadband ISP services
and computer hardware and software manufacturers and distributors,
shall cause to be deployed, within twelve (12) months of enactment of
this bill into law, and to maintain, systems to accurately track the
delivery of files identified in Provision I to individual consumers, in
a way that will ensure timely billing for registered copyrighted works
by means of distribution via transport protocols designed to discover
and deliver digital assets.
Third Provision: Copyright holders in Provision I and technology
and telecommunications providers in Provision II shall be entitled to
establish pricing and revenue-sharing through private negotiations, to
recover their costs for registering, tracking, billing, collecting,
etc. and to earn a profit, provided that prices charged to consumers
for copyrighted works through distribution via transport protocols are
competitive with alternative distribution channels for such works.
Please do not interpret this proposal as a recommendation for
compulsory licensing or a derivative of that type of regime. Rights
holders would be able to voluntarily license their content or to
withhold it, to set rates and to determine usage parameters, and
otherwise to exert control over their copyrighted works, just as they
do in other distribution channels.
As a strong proponent of the still nascent distributed computing
industry, the DCIA is committed to using its resources to help address
the P2P copyright infringement problem from every perspective: business
models, technology solutions, self-regulation, legislation, and
enforcement. We have started to see progress on all fronts, but much
more work clearly needs to be done.
We pledge our support to your ongoing legislative efforts, and look
forward to sharing our proposals and working with others toward viable
solutions. The DCIA offers whatever assistance this Committee would
need with respect to such efforts.